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Procrastinating retirement away?

Procrastination-that foe of workplace productivity-is also the enemy of employees' 401(k) plans, resulting in lower contribution rates, poorly thought-out fund allocation, and, ultimately, lower long-term returns. So says Brigitte C. Madrian, an associate professor of economics at the Graduate School of Business who studies the effects of automatic enrollment on 401(k) savings and whether financial education changes savings behavior.

Although automatically enrolling new employees more than doubles their participation, it doesn't eliminate procrastination. Indeed, many new employees don't bother to choose a contribution rate or allocate their funds, sticking instead with automatic defaults.

"These new participants are what I would call passive savers-they are reluctant to make savings decisions on their own," says Madrian, whose working paper "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior" recently appeared in the GSB's Capital Ideas research quarterly. Passive savers are the same employees who are less likely to participate in 401(k) in the absence of automatic enrollment: the young, the low- paid, and black and Hispanic employees.

Madrian gives the example of Minneapolis-based UnitedHealth Group, where the average employee 401(k) contribution rate was 6.4 percent of compensation. Employees hired under automatic enrollment, however, contributed only 4.4 percent. Why the lower rate? Madrian says 76 percent of automatic enrollees contributed the default: 3 percent.

UnitedHealth's automatic enrollees also allocated their funds differently than other participants. For example, 15 months after they were enrolled, three-quarters of automatic enrollees still had their entire 401(k) balances invested in a money market fund-the default option-despite eight other choices. After two years, one-third of participants were still at the automatic default. By contrast, other employees spread out their investments. Less than 25 percent had their 401(k) balances invested in just one fund. Other employees also generally allocated more than 70 percent of their contributions to stocks, with under 10 percent going into the money market.

Madrian suggests several ways for employers to encourage employees to save: a higher default contribution rate or one that increases over time and a less conservative default fund. Simplifying investment choices and offering investment education may also help.

"Some employees feel very comfortable making retirement-savings and investment decisions," she says, "but many are overwhelmed when they face too many options. These are the folks who end up procrastinating."
-Kimberly Sweet


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