Opt Out
In 2009, Richard H. Thaler and Cass R. Sunstein published Nudge: Improving Decisions About Health, Wealth, and Happiness. Nudge, as used by the authors, references anything that moves us closer to making decisions. A wealth-related example the authors describe is an employer’s automatic post-tax salary deduction program, in which a worker’s future savings are debited by the employer and sent to the bank or institution of choice; that way, the authors argue, almost all impediments to taking the action are removed, and that’s a nudge.
Their example, while not technically a retirement plan, could just as easily be one. And anything that nudges an individual toward a decision, if it’s for the good, is to be celebrated and used, the book argues. The nudge could be removing a barrier to action or, alternatively, creating one.
A barrier to an individual’s even participating in a retirement plan is the fact that several actions first have to be taken or initiated by the employee. This requires both knowing the action is needed, and taking it. When it comes to employee inertia, very little rates higher than a worker’s fullest participation (proper investments and “push” deferral limits) in a retirement plan.
The most encompassing nudge in this case would be for the employer to automatically enroll all eligible employees in the plan and set “stretch” deferral rates—say, from the typical 3% to 5% or more.
Studies show differing results when opt out retirement plan participation is in place, but typically the difference is substantial, often double that of opt in, where the employee must take affirmative action to participate in the plan.
The numbers are compelling. As a result, over 50% of 401(k) plans with greater than 5,000 participants contain various opt out provisions.
It is likely that with increased emphasis on employee advice, opt out provisions may grow to cover the specifics—not just in generalities—of how, and in what, a participant actually invests in the retirement plan.
Another retirement plan nudge is the Klein Decisions K4 Plan Goals “On Track” report. Strategy-complete and signature ready, the “On Track” report allows the participant to execute a likely more successful retirement strategy than currently exists, and without needing to supply data of any time to any one or to an online tool.
Tags: chance of success, k4 plan goals, klein, klein decisions, plan goals, retire well, retirement advice, retirement guidance, retirement solutions
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