Monkey business: Do companies help employees by investing their incomes?
Common sense might tell people they should spend more time on making important decisions than less important decisions. But, according to a survey by financial services company TIAA-CREF, people spend more time picking a restaurant than they do figuring out how to invest their money in an IRA investment.
Chris Arnold at NPR mentioned this survey recently and said that most people in the U.S. use 401(k) programs to save for retirement. So why do Americans spend so little time thinking about how to invest for retirement? Because their company automatically enrolls them in a 401(k) program.
"And all of this makes a big difference: Without it, millions of Americans don't save at all," Arnold said.
Arnold then quoted from research by Yale University that studied how monkeys make financial decisions. The researchers gave monkeys tokens they could use to "buy" different foods. But the monkeys would never save the tokens to make bigger purchases, showing that people make financial decisions like monkeys.
Luckily, companies apparently realize people save as little as monkeys do and automatically sign their employees up for retirement savings. That helps, but it can also hurt workers in setting aside enough for retirement.
"Many firms start workers off automatically saving just 3 percent of their income," Arnold said. "Ironically, that's less than what people choose at other companies when they do get around to signing up on their own."
Brian O'Connell at The Street said: "Boston-based Fidelity Investments says 401(k) plan contributions are up 9 percent from the first quarter of last year, to an average plan balance of $88,600 from $80,900."
But, according to Fidelity, "only 26 percent of U.S. companies enroll their staffers in 401(k) plans automatically when they're hired," O'Connell said. So, although automatic enrollment helps more people save for retirement, it is still a small percentage of employers that participate.
O'Connell observes that among the companies that do automatic 401(k) enrollment, the 3 percent of income being put into the accounts is lower than the 10 to 15 percent rate that Fidelity would recommend for workers.
But 3 percent is better than nothing.
Andrea Coombes at MarketWatch concurs: "On the plus side, some of these workers may never have started saving if they weren't pushed into it. On the down side, they are saving at a substantially lower rate than participants who signed up of their own volition, thanks to the low contribution rate employers commonly use in automatic-enrollment plans."
Jerry Patterson at the Huffington Post said: "Your employer made choices around the details of your auto-enrollment, but you should review to ensure that they meet your specific needs."
Patterson said employees should check if they are contributing enough and then up that percentage. He also recommended reviewing the investment options in the program.