Saving Incentives: How 401(k)s Get Us to Do the Right Thing

NEW YORK — More and more workers are taking the advice of experts when it comes to saving for retirement, even when finances seem precarious. This happens because 401(k) plans use a simple human trait to guide us: our tendency to do nothing.

More and more workers are putting more money into their 401(k) accounts, and they are putting it more often in a reasonable mix of investments. That’s according to Vanguard’s latest look at the nearly 5 million 401(k) accounts and similar plans it keeps records on.

Even amid high uncertainty about the economy last year, retirement savers pocketed an average of 7.3% of their salary, not including correspondence with employers, according to Vanguard. This is the same level as a year earlier, when the pandemic first hit and threw everything into question. And that’s up from 6.9% in 2012. Vanguard recommends workers save 12% to 15% of their salary, including any employer matching.

More than four in five workers eligible to contribute to their 401(k) did so last year, at 81%. This also remained stable compared to the previous year, and it was up from 74% in 2012.

The reason for the resilience? In many cases, it was because employers had done the legwork for them.

Over the years, employers have become more inclined to automatically enroll workers in the 401(k) plan. Employers also encouraged workers to contribute higher amounts, again automatically. And over the years, the plans are set up to automatically increase the percentage of those contributions. Last year, a quarter of all Vanguard 401(k) accounts saw their contributions increase due to an automatic increase.

Workers can opt out of these measures, but they must now take an extra step out of retirement savings rather than into them. And in the field of study known as behavioral finance, it can lead to better results. In other words, inertia wins.

“I really see the value in these unusual years, these years that have a lot of stress and uncertainty where you might expect reversals of a positive trend, and in fact you don’t see it,” said David Stinnett, head of Vanguard’s Strategic Retirement Advisory Group.

Many workers also avoid investment mixes that are too risky or too conservative because their savings sit in a target-date retirement fund that supports those decisions — again because that’s the automatic choice in many diets.

Partly because of this, the median 401(k) balance rose to $35,345 last year. That’s up from a median of $33,472 the previous year and $27,843 in 2012.

To see how powerful inertia can be, consider the difference in participation rates for plans where employers automatically enroll workers in 401(k) versus those where employees must enroll themselves. Auto-enrollment programs saw 93% of eligible workers save in the 401(k) last year. The participation rate was only 66% in plans where workers had to volunteer.

A challenge for the future may hinge on whether or not the “great resignation” that has taken hold across the economy continues.

When workers leave their jobs to change jobs or to retire, they can cash out their 401(k) balances. Experts advise against this practice, calling it “escape” in retirement.

Not only can a withdrawal result in taxes and penalties, but it also means that workers miss out on the magic of building up their savings over the years.

Such withdrawals often occur among lower-income workers with smaller balances, said Amber Brestowski, head of advice and customer experience for Vanguard Institutional Investor Group.

With millions of workers quitting their jobs every month, the potential for such leaks increases.

Brestowski said Vanguard is working with employers in hopes of keeping withdrawals low. The industry is also working on ways to transfer workers’ 401(k) plan savings from their old employer to their new one to stem the leaks, again automatically.