The Pension Nudge

January 16, 2013 at 9:44 AM Leave a comment

School systems and other government pension sponsors are considering the move to defined-contribution retirement plans. A simple nudge can help enrollees sustain their investment levels through the transition.

The nudge is a one-step opt-out plan in decision architecture that can help people do the right thing. Richard Thaler and Cass Sunstein wrote a book about it, citing its use in everything from cafeteria design to travel safety. Retirement savings offers a simple example.

As retirement systems convert from defined-benefit to defined-contribution plans, the easiest way to nudge enrollees toward maintenance of contributions is to offer it as the automatic choice in payroll deductions. Essentially, unless the enrollee does something to stop it, there will be an automatic continuation of the same payroll deduction for retirement. The money will go into an account supervised by the employee instead of the pension board, but the value of contributions will be the same.

Seems like a no-brainer, but the act of initiating a new contribution is an obstacle to continued savings. Making that obstacle the act of opting out of the automatic deduction will be better for employees in the future.

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Entry filed under: The Pension Trap.

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