Reference no: EM131675136

1. Under 401(k) retirement plans, firms can send some of a worker's pay to a mutual fund or other investment, where its returns will accumulate tax free until the worker retires. Partly because of research by behavioral economists into what determines people's saving behavior, Congress included in the Pension Protection Act of 2006 a provision that made it easier for companies to automatically enroll employees in a 401(k) plan. As a result, participation rates in 401(k) plans at large companies increased from 67 percent to 85 percent.

a. Why would more people participate in a retirement plan when they are automatically enrolled than when they have to fill out a form to enroll?

b. One unintended consequence of the change in the law was a decline in the saving rate among employees in 401(k) plans. Most plans automatically enrolled employees at a saving rate of 3 percent of their salary. One study indicated, though, that 40 percent of employees would have enrolled at a higher saving rate if they hadn't been automatically enrolled at the 3 percent rate. Why wouldn't employees enrolled at the 3 percent rate who wanted to save at a higher rate simply tell their employers that they wanted to save at a higher rate (which is easy to do under the plans)?

Source: Anne Tergesen, "401K Law Suppresses Saving for Retirement," Wall Street Journal, July 7, 2011.