April: Financial Literacy Month - Breaking down the 5 A's of a 401(k) plan

Applying Behavioral Economics to a 401(k) plan may increase retirement savings (Part 2)

The reality facing today's workforce is that “Social Security will not, nor was it intended to, constitute the entirety of U.S. workers' retirement income (1).”  This underscores the importance of personal financial responsibility and the role the individual plays in planning for their future financial well-being. Workers face a multitude of problems when asked to make all kinds of decisions, both simple and complex regarding saving for their retirement – and that’s where Behavioral Economics come in.

Behavioral economists tell us to eliminate “rules of thumb” and replace it with solid, well thought out advice that considers age, goals, risk tolerance and prudent decision making.  They also tell us that by offering a retirement savings plan in the workplace and selectively changing the architecture – like offering auto-enrollment options, more employees will invest, stay invested longer and increase their contribution rates.

Breaking it down: The 5 A’s of a 401(k) plan.

Roughly half of the U.S. workforce (78 million people) doesn’t have access to a retirement plan through their workplace. Making a payroll-based savings plan available like a 401(k) is the most effective way for the average person to save (2).

Automatic enrollment

Make signing up for a plan easy. Auto-enrollment is a simple way to eliminate any psychological barriers. This works because signing up is done for you and your employees, but it requires forms to be filled out to opt out of joining the plan.

Automatic investment

Not sure what to invest in? This investment option defaults people based on age into the appropriate risk-based model. It also increases the probability retirement savings goals are reached because when people choose their investment options themselves, they tend to make the wrong choices.

Automatic escalation

While automatic escalation isn’t necessary in a 401(k) plan, it eliminates the participant from making the decision on when, and how much, to increase the contribution levels. Employee contribution levels are typically increased annually, up to a cap.

Automatic alerts

A few 401(k) plan administrators go the extra mile.  Auto alerts focused on event-based messaging are sent out to participants to help them stay on track. Decisions that affect retirement are tracked and monitored, keeping participants in the know on their retirement goals. 

A flexible 401(k) plan like PAi’s CoPilot offers many of the tools that behavioral economists recommend – like automatic investment with age-appropriate risk-based models and automatic alerts. This means you can remain focused on running your business, not managing a retirement plan. It’s about you and your workers owning their own retirement readiness. Contact us online or give us a call to get your plan started: 800.236.7400.

Ryne Lambert, MBA - Financial Services Representative Team Lead - rklambert@pai.com - 800-236-7400 x3491

Ryne is a subject matter expert on 401(k), retirement savings, investments, participant advice, personal finance education and behavioral finance.


1 Knoll, M. (2010). The role of behavioral Economics and Behavioral Decision Making in Americans’ Retirement Savings Decisions.  Social Security Bulletin, Vol. 70, No. 4. Retrieved from: https://www.ssa.gov/policy/docs/ssb/v70n4/v70n4p1.html

2 www.sciencemag.org. (March 8, 2013). Behavioral economics and the retirement savings crisis. Vol. 339.