Many employers now use subtle techniques to help their employees save more for retirement. These techniques are taken from behavioral economics. They shape the employees' decision-making pivots, like overvaluing the present or becoming confused when it comes to excessive options. Inertia can also guide the choices. These could be a potential game-changer when it comes to important financial and life decisions.
A better life ahead
A number of companies have developed behavioral fixes which nudge the employees to make better choices. These include saving more in future and auto-enrollment. Auto-rebalancing and target date funds can also be included. These, in practicality, take thinking out of re-balancing and personal risk assessment. It is to be noted that an increasing number of companies are adopting this route. More than 70 percent of the 349 middle-sized American companies surveyed automatically enroll new participants in the retirement plans. Not only this, about 60 percent will automatically increase the contribution of employees. These are termed auto-escalation.
Research has shown that a surfeit of choice may have the opposite effect. This may result in confusion. To keep in consonance with such findings, about 42 percent of surveyed companies have reduced options for investment. This assists in fighting decision-paralysis. This may even stop the “diversification” effects. The latter is spreading money across a number of different funds and not true asset allocation. What is noticeable is that an increasing number of employers intend to do all of these by 2020. The presence of target-date funds is now more common. About 93 percent of responding companies utilize them as a qualified default alternative. The figures tell the story- up from 64 percent in 2009 to 86 percent in 2014.
When it comes to theory, retirement planning should take the pain out of retiring and help to save more money. Such schemes help to collect more money compared to what a person could do with his or her own resources. The problem is that in real life, such solutions rarely provide the result they were supposed to give. There is another problem as well- a common retirement solution may not be the best bet for any individual as every person is a unique one. Such auto-piloting could be done at the expense of personal finance. It is thus vital to review all the plan specifics. It is vital to question what happens automatically and how important are the taxable accounts' emergency savings.