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Simplification and saving

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SIMPLIFICATION AND SAVING

1.Introduction
The paper, authored by John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian, evaluates a low-cost intervention created to simplify the retirement saving decision. Financial decisions, such as choosing a savings rate or asset allocation, are complex and individuals try to postpone confronting these difficult decisions. Even a small delay in saving for retirement can lead to considerable reductions in long-run wealth accumulation.

The authors study two firms that implemented an intervention called Quick Enrollment which gives employees the opportunity of enrolling in the savings plan by selecting into a contribution rate and asset allocation pre-selected by the employer. In addition, a similar mechanism called Easy Escalation is assessed, which allows existing participants to increase their contribution rate to a pre-selected level. Both of these interventions allow workers to psychologically reduce a complex, multidimensional savings and investment problem into a binary choice: remaining at their status quo or moving to the pre-selected alternatives.

2.Quick Enrollment and Easy Escalation Implementation
The authors study a large health services company (Company A) for Quick Enrollment implementation, wherein all employees are eligible for their employer sponsored savings plan, a 401(k) plan. Likewise, the authors examine Company B, a manufacturing firm for Quick Enrollment implementation. The data for the analysis of Quick Enrollment and Easy Escalation is taken from Hewitt Associates, a large U.S. benefits administration and consulting firm.

3.Quick Enrollment at Company A
The impact of Quick Enrollment on new-hire savings plan participation at Company A is evaluated. The authors discover how Quick Enrollment affects asset allocations. Prior to Quick Enrollment, nobody at Company A chose the pre-selected asset allocation. After Quick Enrollment’s adoption, nearly 73% of newly hired participants and 92% of new participants among previously hired employees had the Quick Enrollment pre-selected asset allocation.

4.Quick Enrollment and Easy Escalation at Company B
Similarly, the authors study the influence of Quick Enrollment and Easy Escalation at Company B. It is found that with the pre-selected Quick Enrollment asset allocation at year-end 2003, 90% retain the same asset allocation at year-end 2004, and 84% retain the pre-selected allocation at year-end 2005, as observed with the asset allocation persistence new hires under Quick  Enrollment at Company A.

5.Conclusions
The authors conclude that Quick Enrollment tripled the participation rate among new hires as compared to a standard enrollment mechanism.


Beshears, John, Choi, James J., Laibson, David I. and Madrian, Brigitte C., "Simplification and Saving" . Yale ICF Working Paper No. 08-07 Available at SSRN: http://ssrn.com/abstract=1086462

 

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