Heed the Ghost of Yourself Yet to Come
Back in July of 2013, I decided to move on from the turtle-logoed pages of Get Rich Slowly in order to devote more time to other professional and familial responsibilities. However, a few months ago I managed to find time to once again join this merry band of bloggers, which gives me the opportunity to pass along the results of a survey I included in my “farewell” post from 2013.
At the time, the members of The Motley Fool 401(k) committee (of which I am a member) had recently decided to auto-enroll new employees into the plan. That decision was made after significant debate. Some committee members argued that most Americans aren't saving enough for retirement and auto-enrollment is a way to “nudge” people toward saving more. Others said it was meddling too much in our colleagues' financial lives, especially since the Fool 401(k) has an above-average participation rate. Many years ago, I would have been more inclined to side with the latter camp. However, I had since seen too many people start too late with their retirement savings, so I sided with the pro-auto-enroll camp, which eventually triumphed.
However, we then had to decide on a default savings rate. According to Deloitte, the average deferral rate for auto-enrollment plans was 3 percent in 2012 — and that is a good start, but not high enough for someone who wants to retire in her 60s. Since auto-enrollment got Uncle Sam's blessing in the 2006 Pension Protection Act, the evidence indicates that auto-enrollment has increased the number of workers contributing to their 401(k)s, but the average savings rate has gone down. That's because many of the auto-enrolled folks stick with that low deferral rate, whereas people who actively enroll in their plans tend to choose to sock away 8 percent or so of their salaries. Some of us on the Fool's 401(k) committee argued that 8 percent was a good default rate for our colleagues-to-be because the Fool matched contributions up to that point. (We have since increased the match to 9 percent.) Others thought that was way too much, arguing that we don't know enough about peoples' finances to assume they can afford to forgo that much of their income.
It was in the throes of this debate that I requested middle-aged and older readers of my “final” GRS post to answer this question: “When you began your career, do you wish your employer automatically signed you up for the 401(k) at a savings rate of 8%? You could change the savings rate or opt out at any time.”
Before I give response options in the survey, take a moment to think about how you would answer that question (free of the influence of how others responded). I'll fiddle with some of my new Christmas toys while you think.[“What does it say about me that people keep giving me whoopee cushions? And in what chair will Grandma be sitting?”]
OK, here are the choices followed by the percentage of respondents who chose each response.
1. No way! I didn't want anyone messing with my paycheck. (3 percent)
2. No, because I couldn't afford to save for retirement back then. (1 percent)
3. I wish I had been automatically enrolled, but at a savings rate less than 8 percent. (9 percent)
4. Yes, I wish I had been saving 8 percent all along. (43 percent)
5. Eight percent? How about 10 percent or higher! (44 percent)
The results may not be as jarring as the Ghost of Christmas Yet-to-Come showing Scrooge how delighted everyone will be when he's dead, but they did surprise me. Of course, it is easy to say you wish you had been saving more now without having to think about what you wouldn't have had or done in the past because you saved instead of spent. But this simple, unscientific study strongly suggests that most people wish their employers had nudged them to save more.
In the end, we on the 401(k) committee settled on a default rate of 2 percent that will gradually auto-escalate to 9 percent over a few years. We also changed the matching formula so that the first 1 percent of savings gets a two-for-one match, with additional savings matched fifty cents on the dollar up to that 9 percent. We thought this would encourage people to at least save a little, and make sure that those who couldn't save as much still got a big boost from the match.
As we move from the season of giving and receiving to the season of resolutions, spend some time envisioning your older self and how much spending vs. saving she or he would value the most. It might be just the nudge you need to save more, and will take less time than enduring a 401(k) committee meeting.