401K Choice Architecture Gone Awry?


One of the most popular examples of choice architecture – how our decisions are influenced by the way options are presented – is the 401K enrollment process. (For non-US Neuromarketing readers, most companies have replaced traditional pension plans with 401K plans. Employees have the option to contribute to an account, the employer matches some or all of the employee’s contributions, and over time the money accumulates. The money belongs to the employee and can be withdrawn at time of retirement, or earlier with penalties.)

401K plans are a great way to accumulate savings, but the problem is that many employees don’t participate. In most cases employees fail to sign up because of inertia – they don’t know how much to contribute, the plan options are full of jargon, there are too many investment choices, etc., so they do nothing. The discipline of choice architecture offered a simple solution: turn the process into an “opt out” decisions rather than “opt in.” That simple change would substantially boost participation, the data showed. US law was changed to allow automatic enrollment.

In an article in the Wall Street Journal, writer Anne Tergeson notes,

But an analysis done for The Wall Street Journal shows about 40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily, the Employee Benefit Research Institute found. The nonprofit performed a complex computer simulation of savings patterns drawing on data from more than 20 million 401(k) participants.

The news isn’t all bad, of course – more employees are indeed participating, and total amounts saved are higher than before the law was changed to permit opt-out style enrollment. But the study also shows the complexity of predicting human behavior in the real world. It’s doubtful that anyone would have predicted that so many participants would retain the lower default contribution rate vs. a higher self-selected rate.

The proposed solution is yet another tweak in choice architecture: make the default rate higher. Of course, that, too, could have unpredictable consequences. Employees who would have tolerated a lower deduction rate might find a higher rate too onerous and simply opt out rather than scaling back their contributions.

Overall, this is an interesting window into behavior in the laboratory of the real world, using not a few dozen subjects but millions.

  1. Jason says

    People staying with the default is EXACTLY what you would expect. It is a result of the same inertia that prevented people from enrolling before. Increasing the default contribution will make some people at the margins opt-out, unless the choice architecture is built so that it’s easier to reduce the rate than opt out, but will likely have exactly the desired effect overall.

  2. David Brains says

    Interesting issue; there was a similar debate going on the Netherlands with regard to organ donation. Due to the lack of organ donors and people responding to organ donation sign-up sheets (i.e. you allow your organs to be used in case of death), many people proposed a similar choice architecture in which the default option was a green light for organ donation unless specified otherwise.
    Yet this matter is very controversial in nature and as far as I know still purely hypothetical.

    1. Roger Dooley says

      Organ donation is an excellent example of how modifying choice architecture could help society and even help individuals do something that they agree with in principal. In the US, the topic has been clouded by doctors and hospitals who follow the instructions of the relatives of the recently deceased individual rather than the preference indicated on the driver’s license. I suspect that if donation became the default condition, that would further nudge doctors to ignoring the license preference in favor of the bereaved relatives demanding that no organs be removed. (Why relatives would do this isn’t clear, but apparently it is very common.)


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