401(k) Specialist Issue 1 - 2018 - 19

" Historically, the most common
default saving rate with automatic
enrollment was 3 percent. And later,
we found a study suggesting that
people can stomach 6 percent,
so why not double it actually? "
and the fact that many people in a 401(k)
plan are saving because it's on autopilot,
they're not going to change their behavior
because of some new tax code that nobody
understands. "
Which makes sense, but what are some
of the absolute " must-have " features that
401(k) sponsors should include that would
change behavior to ensure the best chance
for participant success?
Emphasizing the accumulation phase,
he says " no matter how you look at it, " it's
automating the plan through automatic enrollment,
automatic increases and automatic
portfolio choices for the participant. Offer
those and there is a very good chance " they
will reach the finish line. "
" Having said that, what we are generally
missing is that the devil is in the details. A
lot of plans implement automatic features,
but they do it the wrong way. Historically,
for example, the most common default
saving rate with automatic enrollment was
3 percent. And later, we found a study suggesting
that people can stomach 6 percent,
so why not double it actually? "
So, he did.
His recent work with Voya included testing
the suggested rate above 6 percent, even
going as high as 11 percent. He found that
a further boost could be had by increasing
defaults from 6 percent to 7 percent. But
humans being humans, the law of diminishing
returns will eventually strike.
" We're still playing [with the optimal
deferral rate]. What we find, which is
interesting, is that once you push it beyond
7 percent, people scale it down, which is
something we did not expect. It doesn't
backfire, it's not like they run away, it's not
that they push it down too low, but if you
set it up to 9 percent, you do not seem to
have any increase beyond what people do
with 7 percent. "
Which is exactly what the industry
should want, discovering the point at which
people adopt the default, but also the point
at which people engage and recognize it
might be too much for their given situation.
" In a hypothetical, crazy world, you don't
want people to set their default saving rate
to 50 percent. You don't want people to
pile on credit card debt, or [mortgage] their
house in order to save 50 percent. But the
fact that at some point they engage turns
out to be, in my opinion, very good news
because they personalize the solution to
what fits them. "
It's enough to get their attention but not
enough to turn them off or to have to make
even worse decisions?
" Correct, and it's all in the details. If people
get stuck saving 3 percent then yes, automatic
enrollment makes them start saving,
but they are going to save very little, so you
haven't really solved any of the crisis. So,
across-the-board, whether it is automating
the process of getting people into the plan,
automating the increases or automating the
investments, the devil is in the details. We've
made a lot of progress, but there is a lot
more to be done. "
Will 'Save More
Tomorrow' Save Us
from Ourselves?
In the mid-1990s, Shlomo Benartzi
and Nobel laureate Richard Thaler
launched " Save More Tomorrow, "
a retirement strategy that used
psychology and nudges to get
people to save more by gradually
increasing deferral rates over time.
How does the initiative square
with Benartzi's digital update?
" You know, the devil is in the details
there, " he says. " We have
somewhere, in order of magnitude,
15 million or 16 million Americans
that have benefited from
the program. But it is mainly large
companies, so we first have to
bring the same ideas down-market
to smaller plans. "
Repeating that the devil is in the
details, a favorite stock phrase,
Benartzi adds that the most common
annual increase is 1 percent,
" but we know that people can
stomach 2 percent. "
Why not get them to a higher
saving rate faster, he rhetorically
wonders?
Claiming the most common cap
is often 6 percent, " it's very often
not enough. Why not have a
smarter cap? So, it's really getting
the details right. "
Benartzi concludes with a stark
but effective metaphor.
" If you think about it like it's on
autopilot, autopilot could be awesome,
but if they've got the wrong
cruising altitude and the wrong
speed and the wrong path, it's not
gonna work very well. So, the details
are very important, and we
still have fine-tuning to do. We
have some projects around that in
the pipeline. "
ISSUE 1 2018 | 401kSpecialist.com
19
http://www.401kSpecialist.com
401(k) Specialist Issue 1 - 2018

Table of Contents for the Digital Edition of 401(k) Specialist Issue 1 - 2018
