NEW YORK, March 7 (Reuters) - Americans are saving more in their workplace retirement plans than a few years ago, and Shlomo Benartzi is one of the people whom they can thank.
Benartzi, professor and co-chair of the behavioral decision-making group at the UCLA Anderson School of Management, is probably best known to the general public for his much-viewed TED talk on “Saving for tomorrow, tomorrow” (see).
But the 44-year-old, who is originally from Israel, is also one of the architects of 401(k) auto-enrollment plans, along with University of Chicago professor Richard Thaler. This feature, now common at many workplaces, automatically signs up new employees to contribute to retirement savings plans when they start a job, and they have to opt out if they don’t want to save.
The academic duo also is working to get employers involved in the “Save More Tomorrow” plan, which adds an auto-escalation feature that allows employees to automatically scale up their 401(k) contributions.
In a study released on Thursday in Science magazine, Benartzi and Thaler show that 56 percent of companies have some sort of auto-enrollment plan in place, up from 19 percent in 2005. More than half have auto-escalation features, up from 9 percent in 2005, the first year tracked. Based on surveys of companies, they calculate that auto-escalation increased annual retirement savings in the United States by $7.4 billion.
Benartzi talked to Reuters about the possible future impact of behavioral economics on society.
Q: Do you think your latest study that shows savings rates are going up means we are out of the woods from the retirement crisis of the last few years? Many people stopped saving for retirement to cover other expenses.
A: I don’t want to celebrate it too fast. We’ve been at the point where the savings rate was negative, so if we go to slightly positive, is that a great thing?
Q: Given the last few years of recession, people could be saving more because they’re scared. What is fear’s role in behavioral economics in getting people to do things?
A: I think very often it paralyzes people. We’ve seen it with people who have cash to invest and don’t know what to do with it.
When you talk about fear, you talk about the perception of risk and returns. There have been studies looking at what’s the perception of how the market performs. Generally, there’s a huge disconnect between the reality and the perception.
Q: Generation Y, which came into the work force during the last downturn, gets a lot of attention. Do young adults today behave differently?
A: Absolutely. We know that the younger generation is a lot more interested in learning online and learning from others online. It’s changing completely where you get advice - it doesn’t mean it’s good advice, necessarily.
I think we’ll really have to think carefully as an industry and as a society how to really cater to the younger generations with financial products - the products and how they are being distributed.
Q: So they need their own banking products?
A: I think the 401(k) world is going to change - it’s going to be a major change. Think about the millions of people who don’t have access to a 401(k), especially in the younger generation.
They’re not going to go open up an IRA on their own, fight all the paperwork and the temptation to spend. But when you think about the fact that they are online creatures, maybe that’s the opportunity to somehow help those people save.
Maybe financial products end up the same, but how people learn about them and access them changes, or the process of getting to the product. There’s a lot of steps there.
I don’t have a specific solution, but I cannot see how we are going to have this equilibrium of millions of online creatures not having access to a 401(k) plan because they work for a small company, and not having new ways to save. I don’t think that’s a sustainable equilibrium.