Nobel Laureate Richard Thaler, a renowned behavioral economist, has observed that humans are predictably irrational and consistently make choices that are not in their best interests. For example, research shows that only half of workers in the U.S. participate in a workplace retirement plan, even though saving for retirement is the beneficial outcome. Thaler, through years of studying human behavior and economic theory, found that people only save money if it’s automatic. This led him to identify the pillars of a solid 401(k) offering: automatic enrollment, automatic escalation, good default low-cost investment options and helping individuals roll their 401(k) into an IRA when they switch jobs. The formula seems basic, yet it isn’t widely adopted. To managers and executives he says, “If the employees at your firm are not saving enough for retirement, realize that it is your fault. And that is because we know how to make saving for retirement much easier and more successful.” The lesson for HR managers and senior executives is to make employer-sponsored retirement plan participation automatic. In addition, automatic contribution escalations allow employees to increase their savings rate while making it a gradual process. Managers should also make sure to provide employees with solid low-cost investment options. Low-cost target date funds and diversified index funds are the popular choices. Finally, companies need to step up their game when it comes to helping departing employees roll over their 401(k) into an IRA. Thaler calls this transition the largest leakage in the system, and it results in many people vastly undersaving for retirement.
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