Automatic 401k Savings Increases

I have Richard Thaler's new book, "Misbehaving: The Making Behavioral Economics", on my reading list. You likely don't have the desire or time to read it. So, spend a few minutes on a great piece from Time about Thaler - How a Bowl of Cashews Changed the Way You Save for Retirement.

Thaler is a big advocate of something we push clients to do every single year. Increase your 401k savings each year. It is amazing how little clients fee the "loss" of an extra 1% in their cash flow (of course, taking taxes into consideration it is less than 1%). It is also how amazing that little increase each year makes a HUGE difference in their potential retirement savings down the road. 

Thaler is actually a proponent of making these increases automatic in 401k's. We would love to see plans implement this...

In fact, you say many plans are nudging people to save too little. Most companies using auto-enrollment set the default contribution rate too low. It’s stuck at 3% of salary, which was never intended by the law. Can you get people to save more than the default? Part of the answer is to combine auto-enrollment with auto-escalation. Research I did with Shlomo Benartzi of UCLA showed that even if people think they can save only a little right now, they’re willing to accept future increases in contributions, such as when they get raises. A state-of-the-art 401(k) should start out with auto-enrollment at 6% and escalate to at least 10% or higher. The evidence shows raising the default to 6% won’t lead to a high opt-out rate.