Behavioral economics works for retirement saving; let’s try it in the states

How to get people to save for retirement? There are two schools of thought: cajole and educate, or give people a little push in the right direction.

Pushing has been ascendant over the past decade for a simple reason: it works. Fueled by “behavioral economics” – which focuses on the psychological and emotional factors in people’s economic decision-making – this approach holds people will save if the process is easy and if they are given a gentle nudge.

Workplace retirement plans have successfully boosted participation and saving rates with features like default auto-enrollment for new workers and auto-escalation of contribution rates. They have also added popular target date funds, which automatically maintain an age-appropriate investment balance between equities and fixed income.

State governments have drawn on these behavioral economics lessons as they target a different problem: roughly half the U.S. workforce lacks access to any kind of workplace retirement plan. The largest coverage gaps can be found at small employers, who do not want to deal with the cost or regulatory burden of administering 401(k) plans.

Seven states have passed legislation authorizing the launch of government-sponsored, low-cost savings programs for these workers, and many will include the automated features that have worked well in private sector plans. Most of the state programs require employers without their own plans to set up payroll deductions for automatic contributions to a publicly run IRA account. And most of the plans will use “gentle push” structures, auto-enrolling workers, but giving the option to opt out if they choose.

So this idea makes clear sense. Yet the state auto-IRA plans hit a roadblock last week when the U.S. Senate voted to eliminate regulatory support for them. Why? Learn more in my Reuters Money column.

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