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And the award goes to ... automatic enrollment and escalation

The retirement industry took note when Richard H. Thaler, professor at the University of Chicago, won the 2017 Nobel Prize in Economic Sciences. Professor Thaler’s work in behavioral economics set a solid foundation for automatic enrollment and escalation features that have helped millions of workers save more for retirement.

Behavioral economics?

Simply put, behavioral economics recognizes that people don’t make rational decisions when it comes to how they spend or save money. And here’s why:

  • We make choices that give us immediate satisfaction over long-term happiness.
  • People can’t picture themselves too far into the future.

In terms of retirement savings, behavioral economics explains why workers don’t save for the future despite knowing they may spend 20 or 30 years in retirement.

A “nudge” is needed

Thaler’s research found that people can be “nudged” to make beneficial decisions. His work encouraged lawmakers to include automatic enrollment and automatic escalation features for 401(k) plans in the 2006 Pension Protection Act. A “nudge” that has added billions in overall retirement savings.

Workers say they want help

We asked employees what they thought of automatic plan features, and the results were positive. Employees say they want and need their employers to help them save more for retirement. And, they like it when the retirement plan does some of the work.1

  • 84% are okay with automatic enrollment with a starting deferral of 6%.
  • 83% are fine with automatic contribution escalation of 1% each year up to 10%.
  • 79% of nonparticipants are okay with a re-enroll feature for those who’ve opted out in the past.

Bottom line, it’s hard to argue with science

If you’d like to help your clients understand why they might want to use automatic plan design features, these resources can help:

1. Principal, Retirement Readiness Participant Survey, January 2017.

For financial professional/institutional use only.

See linked communications for additional important information.

This communication is intended to be educational in nature and is not intended to be taken as a recommendation.

Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group®, Des Moines, Iowa 50392.

©2017 Principal Financial Services, Inc.

293005-102017

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