Simplification Raises Saving Rates

Quick Enrollment substantially increases savings plan participation relative to the standard opt-in enrollment regime, although these increases are not nearly as large as those obtained by firms that automatically enroll their employees in a savings plan.

Criticisms of America's low national savings rate often hinge on the assumption that this low savings is driven by Americans' proclivity for excessive spending. But in Simplification and Saving (NBER Working Paper No. 12659), authors John Beshears, James Choi, David Laibson, and Brigitte Madrian find that the complexity of establishing a savings plan can also play a role in deterring saving.

These authors looked at two companies that greatly simplified the process of enrolling in a workplace retirement savings plan; they found that the changes dramatically boosted employee participation. They also report that making it simpler for already-enrolled employees to raise their plan contribution rates is another mechanism for increasing savings in the plan. "Many financial decisions that individuals face are complicated and daunting for those who are not financial experts," they write. "One important consequence of this complexity is that individuals procrastinate in making these decisions."

The two companies in the study -- referred to as Company A and Company B -- adopted a program called Quick Enrollment. Employees who checked a box on a Quick Enrollment card and returned it to the employer were enrolled in the retirement savings plan at a single contribution rate and asset allocation pre-selected by the employer. Company A also implemented a Web-based Quick Enrollment. Employees remained able to enroll at any of the many contribution rates and asset allocations allowed in the plan by using the previously available phone or Internet channels.

The results are powerful evidence for the ability of simplicity to accelerate savings. The program tripled participation rates among new hires at Company A. Among existing employees at Company A, 25 percent of previous non-participants opted to join the 401(k) retirement plan after being offered Quick Enrollment during a four-month period. At Company B, offering Quick Enrollment to existing employees once a year for three years caused 45 percent of non-participants to sign up.

The authors observe that "Quick Enrollment substantially increases savings plan participation relative to the standard opt-in enrollment regime, although these increases are not nearly as large as those obtained by firms that automatically enroll their employees in a savings plan." They also note that, once in the plan, few employees-no more than 4 to 5 percent of those using the Quick Enrollment option-stop participating.

Company B also implemented a program called Easy Escalation in an effort to make it simpler for employees to increase the percentage of their pay contributed to the company savings plan. Depending on company profitability, Company B matched anywhere from 50 to 125 percent of the first 6 percent of pay that employees contributed to their plan. But the Quick Enrollment pre-selected contribution rate was only 3 percent. Operating in a manner similar to Quick Enrollment, Easy Escalation allowed employees to boost their contribution to 6 percent by checking a box on a card and returning it. The program prompted about 10 to 12 percent of "low contributors" to boost their contribution to get the maximum employer match.

The authors believe that such "interventions allow workers to psychologically collapse a complex, multidimensional savings and investment problem" into clear binary choices: save or don't save, contribute more or not. In particular, they note that the addition of the Easy Escalation process can help avoid the problem of too many employees simply staying at the relatively low pre-selected contribution rate.

Once they joined a plan, participants in the Quick Enrollment process still demonstrated a reluctance to make active savings decisions. Compared to employees who joined the traditional way, Quick Enrollment participants were much more likely keep their contributions flowing to a pre-selected set of investment funds, rather than intervening and actively choosing their own asset allocation.

-- Matthew Davis