Human beings will, on average, do what is easiest for them. They also tend to “future discount,” which means they don’t like to delay gratification. This is the story of how that knowledge was put to good use. It is timely today because the law emanating from the economist’s legislative has been extended to include regulations on 401(k) expenses just being implemented today.
In early 2006 David Laibson, an economics professor at Harvard University, testified before a congressional committee regarding his take on how to make the mushrooming retirement crisis less painful. In other words, how do you get people to save more without making them change their behavior, which they are unlikely to be able to do?
Part of Liabson’s testimony was a subject he had written about with James Choi and Brigitte C. Madrian that they called “quick enrollment” for 401(k) plans. This proposed practice was meant to overcome the confusion related to the overwhelming choices associated with 401(k)s, as well as inertia associated with selection and execution.
This “quick enrollment” automatically signed up employees; they had to opt out of enrollment, which meant they had to do something not to participate. On the other hand, to enroll they had to do nothing, which is more palatable. Additionally, several choices were combined into a single decision, which made acceptance easier.
In the study of Laibson and his co-authors at one company new employee participation tripled with “quick enrollment.” In two others, previously hired non-participating employees increased enrollment by 10% to 20% percent.
Congress paid attention. Important changes were made in the pension law called the Pension Protection Act (PPA) of 2006. As a result, there was an enormous increase in auto enrollment for pension plans. Secondly, both large and small employers collectively adopted target funds, which can benefit the employee through the automatic selection of appropriate asset allocation as they age. Additionally it can protect the employer against lawsuits by employees who might otherwise select unsuitable funds for themselves.
This legislation was based in large part on the principles demonstrated by Laibson and his group as well as others: human beings will, on average, do what is easiest for them and that they tend to “future discount,” which means they don’t like to delay gratification. This may be short sighted, but it is engrained in human biology.
The challenge, then, for lawmakers who are loosely in charge of their constituents’ well-being is to acknowledge the role of human neurobiology in decision making and executive laws that take it into account rather than disregard it.
And that is what happened. An economics professor was invited to a congressional committee to make a presentation. He made an impact. Congress voted accordingly and now we have a better pension law. Sometimes things work like they should.