How Behavioral Science Ultimately Fails Retirement Savers: A Noble Experiment

Abstract

Behavioral scientists boast that their insights have increased savings in 401(k) plans. Evidence shows that careful use of default decision settings and nudges can prevent decisional errors and encourage behavior that aligns with public policy while retaining individual power of choice. Indeed, even the Swedish National Academy of Sciences highlighted the effect of his behavioral science work on retirement savings when it awarded the 2017 Nobel Prize in economics to Professor Richard Thaler. This article shows, though, that, unlike the three plan default settings attributed to behavioral science insights, the default setting that I term automatic retention fails. That failure means too many savers take affirmative actions to move (rollover) assets from their 401(k) plans to individual retirement accounts (IRAs). Primarily because of rollovers, IRAs hold more than 11.5% of U.S. household financial assets. However, usually the decision to roll over is not an optimal choice for the saver. This last mile problem undermines the goal of the first three default settings to help employees build long-term retirement savings. This article examines research on what causes default settings to be slippery, as is the case for automatic retention, instead of sticky, as is the case for the other 401(k) default settings. It then evaluates three categories of potential interventions to mitigate the popularity of rollovers: aggressive regulation, expansion of fiduciary obligation, and use of incremental impeding altering rules. It concludes that adoption of incremental impeding altering rules would be both politically feasible and effective in increasing the stickiness of the automatic retention default setting.