Consider the inertia of today's 401(k) plan participants the vindication of behavioral economics.
Instead of pulling out or frantically switching funds, as many as 90% of participants who were enrolled in their plans automatically — an option made possible by the Pension Protection Act of 2006 and its incorporation of behavioral-economic insights — have remained invested during the market's slump.
Even better, according to financial advisers, few participants have switched from the diversified default funds that were chosen for them automatically.
“(Investor) apathy is helping them in this case,” said Scott Pritchard, an Asheville, N.C.-based managing director of Capital Directions Investment Advisors LLC, which manages $750 million in assets. “It's helping them to not look at their accounts and stay the course, which is exactly the kind of behavior they need.”
Of the plans with which Mr. Pritchard works, about 50% offer automatic enrollment; the rest are considering it. He said he doesn't have firm data on how many participants stay in the default funds, but he thinks the figure might be as high as 95%.
Since the enactment of the PPA, fund companies have reported a rapid increase in automatic enrollment.
At Boston-based Fidelity Investments, about 15% of client companies offer automatic enrollment, up from 1% in 2006.
Investors enrolled automatically or defaulted into funds tend to stay in those funds, said Tom Corra, a senior vice president. He said that 80% of participants placed in Fidelity's Freedom Funds are still in the funds two years later.
“It's really the behavior that the plan sponsor is looking for,” Mr. Corra said. “In the past, people have damaged themselves by trying to move money at exactly the wrong time.”
At Baltimore-based T. Rowe Price Group Inc., about 49% of the 401(k) plans at client companies used automatic enrollment at the end of June, up from 29% in June 2006.
Meanwhile, over the past two years, participants have stayed in the default investment option 96% of the time.
Automatic enrollment works well because it “harnesses the power of inertia instead of (having it) work against you,” said Rachel Weker, vice president of T. Rowe Price's technology and product development group in Owings Mills, Md.
Building on the success of automatic enrollment, she said, the next step is to encourage plan executives to agree to automatic increases. Many participants are automatically enrolled at a low percentage, such as 3%, and the automatic step-ups would help them get closer to the desired 10% savings rate, Ms. Weker said.
At The Vanguard Group Inc. of Malvern, Pa., 55 plans were using automatic enrollment at the end of 2006. Today, 368 plans use auto enrollment, slightly more than 20% of the plans it administers.