Incentives to save: How 401(k)s get us to do the right thing


NEW YORK (AP) — More workers are following the advice of experts on saving for retirement, even when finances are feeling precarious. This happens because 401(k) plans use a simple human trait to guide us: our tendency to do nothing.

More workers are putting more money into their 401(k) accounts, and they’re putting it more often into a judicious mix of investments. That’s according to Vanguard’s recent look at the nearly 5 million accounts of 401(k) and similar schemes it keeps records of.

Even amidst the great uncertainty about the economy over the past year, according to Vanguard, retired savers pocketed an average of 7.3% of their salary, not counting employer grants. That’s the same level as a year earlier, when the pandemic first struck and called everything into question. And it’s up from 6.9% in 2012. Vanguard recommends employees save 12% to 15% on their salary, including any employer adjustments.

More than four out of five workers eligible to contribute to their 401(k) did so last year, 81%. This value also remained stable compared to the previous year and increased from 74% in 2012.

The reason for the resilience? In many cases it was because employers were doing the moves for them.

Over the years, it has become increasingly likely that employers will automatically enroll employees in the 401(k) plan. Employers have also employed workers to pay higher contributions, again automatically. And over the years, the percentage of these contributions is supposed to increase automatically. Over the past year, a quarter of all Vanguard 401(k) accounts have seen an increase in contributions due to an automatic increase.

Workers may opt out of such measures, but now they must take an extra step to get out of saving for retirement rather than into it. And in the field of study known as behavioral finance, it can lead to better results. In other words, laziness wins.

“I really see the value of it in these unusual years, these years of a lot of stress and uncertainty, where you might expect some reversals of a positive trend, and actually you don’t see it,” said David Stinnett. Head of Vanguard’s Strategic Pensions Advisory Group.

Many workers also avoid overly risky or overly conservative investment mixes because their savings are in a fixed-date retirement fund that handles such decisions — again, because it’s the automatic choice in many plans.

Partly because of this, the median 401(k) balance rose to $35,345 last year. That’s up from a median of $33,472 a year earlier and $27,843 in 2012.

To see how powerful inertia can be, consider the difference in participation rates between plans that require employers to automatically enroll workers in the 401(k) versus those that require workers to self-enroll. The automated enrollment programs saved 93% of eligible employees in the 401(k) program last year. For plans that required workers to volunteer, the participation rate was just 66%.

A challenge for the future may depend on whether the “great resignation” that has taken hold throughout the economy persists.

When employees leave their jobs, either to move to a new job or to retire, they can cash out their 401(k) balances. Experts advise against it, calling it “leakage” in retirement.

Not only can a payout entail taxes and penalties, it also means workers don’t benefit from the magic of compounding their savings over the years.

Such payouts are common among workers with low incomes and smaller balances, said Amber Brestowski, director of advisory and client experience at Vanguard Institutional Investor Group.

With millions of workers quitting their jobs each month, the potential for such a leak increases.

Brestowski said Vanguard is working with employers to keep payouts low. The industry is also working on ways to move workers’ savings from their old employer’s 401(k) plan to their new one to stem leaks, again automatically.


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