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Working Americans, by their own admission, struggle to save for retirement. Only  say they’re banking enough.

��ɫ���� economist Gopi Shah Goda, through her analyses of 401(k)s and other employer-sponsored retirement plans, has been unearthing roots of inertia in saving decisions and shining a light on what can be done about it.

In a  published recently by the National Bureau of Economic Research, Goda and her coauthors focus on a key question: Do people avoid making saving decisions because of who they are — maybe they are prone to procrastinate or lack financial mastery — or does the inertia have something to do with how retirement plans are structured and the choices they ask people to make?

The answer, according to Goda’s latest research, is both. She finds that a combination of individual traits and the choices people are given when they contribute to a plan influence how they save.

For example, she shows that workers with a deeper understanding of personal finance are likely to save more and be more proactive about participating in the plan when enrollment in an employer-sponsored plan is optional. This happens even for people who tend to procrastinate and would otherwise put off making a decision about their retirement savings.

By contrast, Goda finds no evidence that financial literacy is associated with saving decisions among employees under a plan that automatically enrolls its workers. Here instead, procrastination takes over: Employees who tend to postpone decisions make lower contributions under automatic enrollment. They may conclude the automatic contribution amount under the plan is “good enough,” setting them up to save less overall.

 “This dispels the notion that people are either passive or active savers because of their fixed traits,” says Goda, a senior fellow and deputy director at SIEPR. “I might be an active saver in an opt-in retirement plan, but a passive saver in an auto-enrollment plan.”

Her findings have important implications for efforts to spur workers to be more proactive about their nest eggs. With the knowledge that different types of retirement plans can trigger different behaviors in people, companies and policymakers can implement strategies that better help them to achieve their goals.

“As more people rely on employer-sponsored plans like 401(k)s for their retirement income, it’s becoming increasingly important that we understand why some workers are more passive than others about saving and find ways to respond accordingly,” says Goda.

The problem with ‘defaults’

At the heart of Goda’s research is a feature of retirement plans known as defaults. These are the steps that kick in when an individual doesn’t actively make a choice. A default can be a particular contribution amount or a basic mutual fund where retirement money gets invested.

Defaults generally have been shown to increase retirement savings rates—and to  be beneficial in other contexts, like raising rates of organ donation or flu vaccinations. When it comes to retirement planning, opting for the default isn’t always in an individual’s best interest, according to Goda.

“Defaults should not be thought of as a one-size-fits-all solution,” she says. “For people who have high credit card debt or plan to live frugally in retirement, it may be appropriate to save less. For people who want to live lavishly, it might be appropriate for them to save more. But default options don’t necessarily take individuals’ specific circumstances into account.”

Understanding why some people stick with defaults while others are more proactive about their retirement planning is critical to addressing why some people save more and others save less.

Goda and her co-authors analyzed anonymized data covering nearly 5,500 employees at the U.S. Office of Personnel Management, which handles human resources for federal government workers, and their contributions to an employer-sponsored retirement plan. The researchers combined this data with an online survey completed by a subset of employees that allowed them to measure characteristics like a tendency to procrastinate and financial literacy.

The conditions for their experiment were ideal. The federal government changed in 2010 from a default where people had to opt in to enroll in their retirement savings plan to a default where people were automatically enrolled unless they decided to opt out. This allowed Goda to study drivers of saving behaviors in both instances.

The study comes with a few caveats. For one thing, it notes that the workers whose behaviors were analyzed are both educated and paid well. Moreover, the government workplace may differ from the private sector in important ways.

Even so, the findings suggest a few practical solutions. Goda says that companies should structure the defaults in their retirement plans with the understanding that some workers will be affected differently than others by different defaults, and some workers may end up saving less even when the default is higher.  Incidentally, the plan that Goda’s team studied recently announced an increase in the default contribution rate from 3 percent to 5 percent, starting in October 2020.

For workplaces where employees don’t know a lot about personal finance, an auto-enrollment plan might help them to contribute more.

“This said, since it’s not clear that everyone should be saving more,” said Goda, “an even better intervention may be to simplify the enrollment process or provide just-in-time support to help people navigate their particular situations.”

Krysten Crawford is a freelance writer.