SC Connecticut News

Professor James Choi, a finance scholar, has revisited his early research on automatic enrollment in retirement plans. Two decades ago, Choi found that defaulting employees into 401(k) plans significantly increased participation rates. His findings influenced the 2006 Pension Protection Act, which encouraged companies to adopt automatic enrollment and escalation practices.

“At that time, the prevailing view was that something so minor couldn’t possibly affect such a high-stakes decision as retirement savings,” Choi says. “So the fact that you did see these huge effects was a real eye-opener.”

Choi's recent study with Jordan Cammarota of the University of California, Berkeley, and David Laibson, Richard Lombardo, and John Beshears of Harvard University shows more modest results for these nudges. The researchers found that automatic enrollment and escalation increase net savings by just 0.6% and 0.3% of income per year respectively. These figures are significantly lower than earlier estimates.

“We’re in this era where automatic enrollment is quite common and legislatively encouraged, and we wanted to know, how does this thing behave in the real-life situation in which it’s been deployed?” Choi says. “Let’s take this finding that we had and try to break it. What are the limits? What are the boundaries?” Scholars, he adds, “should try to be the toughest critics of our own work, and not be advocates who are hardened into a certain position.”

The new study analyzed data from over 118,000 employees at nine firms between January 2003 and January 2011. It compared those hired after policy introductions with those hired before to assess changes in savings behavior.

The methodology differed from earlier studies by including job leavers who often cash out their savings when they leave a job. In their sample, about 4% of U.S. workers leave their jobs monthly, with many cashing out around 40% of their 401(k) balances.

Another key finding was that only 40% of workers accepted auto-escalation defaults compared to an earlier estimate of 85%.

Choi notes that while some people save without prompting, nudges mainly impact those less motivated to save initially but may later undo these nudges by withdrawing funds or opting out.

“The job transition moment is potentially a key weakness in the U.S. retirement savings system because that's when a lot of money flows out," Choi says. He also considers alternative approaches like government-administered forced savings schemes but acknowledges potential drawbacks such as financial hardship for some individuals.

Choi emphasizes looking at overall financial health rather than just retirement savings: "You need to look at the whole person...to see what the true impact of a policy is."

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