Harvard University economics Professor David Laibson told attendees at Pensions & Investments' East Coast Defined Contribution Conference March 11 that Americans are using the savings in their defined contribution plans to pay for all kinds of spending, which is greatly reducing the money they have for retirement.
Defined contribution plans are becoming the main source of savings for Americans, as participants are using their accounts for down payments on homes, college tuition, home repairs and medical bills, among others, Mr. Laibson said during the conference's first keynote speech.
The new reality explains the leakage problem facing most defined contribution plans where for every $2 put into a plan, $1 leaves the plan, according to Mr. Laibson's presentation.
In addition to talking about the new realities facing plan executives, Mr. Laibson used behavioral economics to explain why participants don't achieve retirement readiness and how to address the issue.
The behavioral problem defined contribution plans must overcome is present bias, a preference toward the present over the future which leads to procrastination, Mr. Laibson explained. Auto enrollment and auto escalation are keys to overcoming present bias and helping participants guarantee they save enough not only for retirement, but other things in life, Mr. Laibson concluded.
“The problem is the savings system is not working,” Mr. Laibson said.
