Chocolate Vs. Bananas

Would you agree to eat a healthier diet if the diet started next week instead of today?

Researchers at Leeds University Business School say yes, you would. They asked people what they would prefer to snack on at a meeting that would take place in a week: a banana or a chocolate bar. Most chose a banana. But, on the day of the meeting, they offered the choice again. No surprise… when facing immediate gratification, the majority of subjects chose chocolate.

But they wanted to make the right choice… tomorrow, just not today. Shlomo Benartzi, in his Save More Tomorrow concept, suggests the same psychology is behind our financial decision-making.

When it comes to making decisions about how to spend – or save – our money, it’s a battle between doing what we know we should do and the immediate gratification of doing what we want to do instead. In other words, it’s much easier to spend than it is to save.

When it comes to automating good decision-making in retirement plans, we are moving the ball down the field. Plan sponsors are increasingly willing to implement automatic enrollment and most participants follow their employer’s lead. In fact, according to Plan Sponsor Council of America, 60% of plans nationwide use automatic enrollment. Further, 85% of plan sponsors report “opt out” rates below 10% which means most participants who are automatically enrolled continue contributing.

So, isn’t this a touchdown? Well, not quite. The problem is that most of the auto enroll programs we see enroll participants at 3% as soon as the employee is eligible to contribute. But 3% won’t get you the retirement of your dreams. It may not get you retired at all.

We encourage plan sponsors to consider boosting the long-term impact of auto enroll programs by adding an auto increase feature. For example, you might enroll participants at 3% today and add 1% each year until they reach the level that results in the full employer match.

Kind of like eating a chocolate covered banana today and placing an order for a healthier snack in the future.