Inertia plays a role in retirement savings


For many savers, bias could contribute to their long-term efforts to fund their retirement.

“Status quo bias,” or inertia, keeps you from taking action.

In other words, “In choosing among alternatives, individuals display a bias to stick to the status quo”, according to “Status Quo Bias in Decision Making”, published in 1988 in the Journal of Risk and Uncertainty (tinyurl.com /5n7yy4ue). Recognizing inertia as a stumbling block has led to advances in 401(k) decision-making by turning the decision into an opt-out choice instead of an opt-out choice.

The recent publication of “How America Saves 2022” (tinyurl.com/2p8cvkkv) by Vanguard, an investment management firm, found that in 2021, “retirement plan participant behaviors remained largely unchanged and, in some areas continued to improve, reflecting the growing use of automated solutions, which leverage inertia for the benefit of the participant.

Automated solutions include auto-enrollment and target date funds, the latter described by the Securities and Exchange Commission’s Investor.gov as “designed to make investing for retirement more convenient by automatically changing your asset mix.” investment or your asset allocation over time” (tinyurl.com/2xzcvj9d).

Vanguard’s analysis found that by the end of 2021, 56% of pension plans in Vanguard’s recordkeeping business had adopted auto-enrollment (compared to 46% in 2017), including 75% of schemes with at least 1,000 members. Overall, 64% of all Vanguard participants were “only invested in an automatic investment program.” This figure was up from 36% at the end of 2012.

Two-thirds of Vanguard’s self-enrolling pension plans have also automatically increased the deferral rate (the percentage of an individual’s income contributed to the plan).

Ninety-nine percent of all Vanguard auto-enrollment plans defaulted participants to a balanced investment strategy in 2021, with 98% selecting a default target date fund.

Vanguard isn’t the only investment firm to report a rise in auto options.

Fidelity’s Q1 Savings Behavior Report for 2022 (tinyurl.com/3ct3pxy7), which investigated balances in over 35 million IRAs, 401(k), and 403(b) retirement accounts , found that 85% of Gen Z savers (those born between 1997 and 2012) had all of their 401(k) savings in a target date fund.

Inertia works. Fidelity’s “Building Financial Futures” (tinyurl.com/4xpjfb69) noted that 90% of auto-enrolled employees do not opt ​​out.

Automatic registration may become mandatory. In March, the U.S. House of Representatives passed the Securing a Strong Retirement Act (tinyurl.com/mryadypb), which contains a section requiring employers who establish new defined contribution plans (with some exceptions) to automatically enroll new employees, when they are eligible. , at the level of at least 3% of the employee’s compensation, then automatically increases it annually by 1% up to at least 10%, but not more than 15%. The Senate is working on its own version of retirement legislation.

If your company’s 401(k) plan currently provides automatic increases in deferral rates and target date funds, should you choose those options — or opt out?

As for participation in the pension plan, you know my point of view — you would have to have a very good reason not to participate. The same goes for automatic carryover increases – the more the better.

As for automatic placements, that’s a personal matter. If you can’t or don’t want to spend time researching your options, target date funds will help you participate in the stock and bond markets. This is a definite advantage over simply putting your money in the “bank” by choosing a money market option.

I am grateful to 401(k) providers who have married behavioral economic theory with 401(k) enrollment. Sometimes we need to be placed in positions that have favorable outcomes despite our pursuit of the status quo.

Julie Jason, JD, LLM, personal fund manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). His awards include the 2021 Clarion Award, symbolizing excellence in clear and concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.

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