Vanguard has an interesting whitepaper called Automatic Enrollment: The power of the default [pdf]. It takes effort to make a choice beyond the default setting. Doing nothing is always easier. Behavioral economics is still gaining popularity and I knew that auto-enrollment was a powerful way to increase participation in retirement plans, but I didn’t know it was this powerful. Here are a few examples.
Much higher participation: After 3+ years, 90% of auto-enrolled employees kept participating in the retirement plans.
You might think, is that really better than normal? Yes! Here is what participation looked like without auto-enrollment.
Higher contribution rates: After 3 years, 90% of employees auto-enrolled with automatic annual increases indeed kept increasing their contribution percentages. Most stayed with the gradual auto-increase, but some also increased more on their own (for example to reach the max).
More appropriate investments: After 3+ years, 94% stayed with a mix of the default and other investments and 74% stayed with solely the default investment option. This is usually a diversified Target Date Fund, whereas in the past a significant amount of participants just stuck with a money market or similar cash account.
My takeaway is that I keep underestimating the power of the default. We see the effects all around us. Why do people keep using Google as their search engine? Default. Switch to DuckDuckGo? Hassle. Why do I simply buy the newest iPhone again after a few years? Default. Switch to Android? Hassle. Buying from Amazon? Easy. Input your name, address, payment info and buy from 100 different online stores? Hassle. Why does Netflix auto-renew each month instead of asking you to opt-in? Behavioral tendencies are big component of business success.
The power of the default is also why banks will pay you $300 to open a new checking account and $500 to try out a new credit card. It takes a big fat incentive for people to move beyond their default. Car insurance companies like GEICO, Progressive, and Liberty mutual spend billions just to get you to even compare premium quotes, let alone switch. Getting over this behavioral tendency is a big component of improving your personal finances.
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The Power of the Default: 401(k) Auto-Enrollment, Auto-Increase, and Default Investment Options from My Money Blog.
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