Enactment of the Pension Protection Act shows that the U.S. Congress implicitly endorsed the use of behavioural economics to lead individuals to make better decisions about retirement planning, according to a report by the Employee Benefit Research Institute.
Workers tend to follow the path of least resistance when it comes to retirement planning. They’ll make decisions that are contrary to their best interests, such as not participating in an employer-sponsored retirement plan when one is available.
“Loss aversion and decision-making biases often lead to unfortunate outcomes, including a poorly funded retirement,” says Jodi DiCenzo, author of the report.
The Act contains a number of provisions, based on behavioral economic research, that are designed to change the equation and overcome worker inertia, the report says. These include automatic enrollment of new workers in 401(k)plans and default contribution and automatic deferral increase provisions.
Instead of workers passively deciding not to participate they must actively opt out, which could produce better retirement outcomes.
Workers might benefit from having some decisions taken out of their hands. Among other things, she says the PPA’s automatic enrollment provision may increase retirement plan participation rates and contribution rates may increase as workers’ pay rises.
To read the report, click here.
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