Decisions, Decisions

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Will Obama's automatic savings plans save the day?

Automatic IRAs for the people?
Timothy A Pychyl, Ph.D.
This post is a response to Feelings Trump Reasons: Irrationality and Procrastination by Timothy A. Pychyl, Ph.D.

The New York Times has an interesting article called Savings Accounts for All: Simple but not Easy, which talks of the Obama administration's plans to set up an automatic IRAs (Individual Retirement Accounts) for workers in the USA. This is clearly policy in the behavioral economics / Nudge tradition, which is no surprise as Nudge author Cass Sunstein will be named head of the Office of Information and Regulatory Affairs in the present administration. The article even mentions research on the effects of autoenrollment, though it would have been nice had the NYT named the academics who carried out the research. Since the article does not, I'll provide some citation love here:

  • Brigitte C Madrian & Dennis F Shea. (2001). The Power of Suggestion: Inertia in 401 (k) Participation and Savings Behavior. The Quarterly Journal of Economics, 116(4), 1149-1187.
  • Richard H. Thaler & Shlomo Benartzi (2004) Save More Tomorrow Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112 (1, pt. 2), S164-S187.

(On a sidenote, the article mentions that in the proposed plan "There would be a standardized default investment, probably some kind of mutual fund with a mix of stocks and bonds that gets more conservative over time." Did you know that among Finance scholars there isn't universal agreement that portfolios should get more conservative with age? Some think one ought to pick the right asset allocation and stick with it throughout life. See this clearly-written article for a review.)

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What do you think? Will auto-enrolling people in IRAs help more than it hurts? Will the Obama administration be able to overcome all the roadblocks to making it happen?

Dan Goldstein is Assistant Professor at London Business School and Principal Research Scientist at Yahoo! Research.

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