I've always felt like the most interesting aspect of investing and finance is the wealth of data it generates on human behavior. Securities markets and investor sentiment shed a lot of light on behavioral patterns long before the internet, social media, and Big Data.
One of the most interesting facets of personal finance is the savings decision—the cognitive exercise of time-shifting wealth and income. As human longevity increases, this has only become more fascinating and rife with logical error.
Vanguard released a lengthy report, "How Americans Save," describing recent trends in the behavior of defined contribution plan participants (e.g. people with 401(k)s). The data in the report highlight one of the most important findings (in my opinion) in the field of behavioral economics: the tendency to rely on default choices.
From page 22 of the Vanguard's report:
Faced with a complex choice and unsure what to do, many individuals often take the default or “no decision” choice. In the case of a voluntary savings plan, which requires that a participant take action in order to sign up, the “no decision” choice is a decision not to contribute to the plan.
The way most plans mitigate this error in human judgment is to make the decision for participants:
With an autopilot design, individuals are automatically enrolled into the plan, their deferral rates are automatically increased each year, and their contributions are automatically invested in a balanced investment strategy. Under an autopilot plan, the decision to save is framed negatively: “Quit the plan if you like.” In such a design, “doing nothing” leads to participation in the plan and investment of assets in a long-term retirement portfolio.
These are powerful implications if you think about it. Just scale it up for millions of Americans and billions of dollars in retirement accounts. And consider the fact that when companies opt employees into savings accounts, they're also setting a default savings rate:
High-level metrics of participant savings behavior remained steady in 2014. The plan participation rate was 77% in 2014. The average deferral rate was 6.9% and the median was unchanged at 6.0%. However, average deferral rates have declined slightly from their peak of 7.3% in 2007. The decline in average contribution rates is attributable to increased adoption of automatic enrollment. While automatic enrollment increases participation rates, it also leads to lower contribution rates when default deferral rates are set at low levels, such as 3% or lower. (p. 4)
Key takeaway: if you have a 401(k), the current balance is more likely a function of explicit or implicit decisions someone else made for you rather than decisions you made yourself. It's worth spending a little time pondering the degree to which you're allowing someone else to plan your future. Don't be too human if you can help it.