Voluntary retirement plans always had potential, in theory, if people acted rationally and joined them to save for retirement, writes Ben Steverman for Business Day.
But experience has shown that when it comes to retirement savings, people don’t always act rationally and do what’s best for them. As employers closed traditional pension plans and offered employees DC-type schemes instead, plenty of those employees opted to stay out of the schemes, often missing out on matching employer contributions and helping to drive a crisis of inadequate retirement income.
It became obvious among “adherents of behavioural economics” that people needed to be ‘nudged’ into doing what’s best for them, including joining an occupational retirement scheme. Richard Thaler, a leading proponent of the nudge theory, just won the Nobel Prize for Economics for his work along these lines.
“If you have a pension plan at work, there’s a good chance you’re saving more for retirement because of Richard Thaler,” writes Steverman. “The Nobel Prize for Economics tries to (recognize) important research with far-ranging consequences — but Thaler, awarded the prize on Monday, may be its first winner to have had an almost immediate effect on millions of people’s pay slips.”
Thaler, among others, “pointed out that workers saving for retirement can be their own worst enemies. Without help, Thaler argued, they’ll never retire,” he continues.
“Probably, [behavioural economics’] biggest impact is changing the way retirement plans are run,” Thaler is quoted saying in a speech at the CFA Institute annual conference in May.
More: Thaler championed the notion of auto-enrolment in work schemes.

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