New saving plans tie your hands - for your benefit down road

"Precommitting" to investment strategies is one option.


Published: Sunday, January 4, 2004 at 6:01 a.m.
Last Modified: Saturday, January 3, 2004 at 9:52 p.m.

BOSTON - Resolved to improve your retirement planning in 2004? The investment industry wants to help you save more - by saving you from yourself.

With study after study warning how unprepared Americans are for their perhaps deceptively named golden years, retirement plan administrators and fund managers have begun wondering whether there's a better way than prodding and pleading with workers to set aside a higher percentage of their income.

In the coming year, look for more companies to experiment with innovative ways to help investors help themselves - by ``precommitting'' to investment strategies that tie their own hands. The idea behind precommitment devices is that we all could use a little help avoiding short-term temptations like spending money we should be saving.

Investors already use tricks like automatic payroll deductions. But increasingly, the retirement planning industry is looking for ways to not only get more workers to sign up for 401(k)s in the first place, but to increase the amount they save.

The Vanguard Group recently unveiled a plan that features several precommitment devices, the most novel of which commits investors to increase the percentage of salary they contribute when they get a pay raise.

The Save More Tomorrow (or SMarT) plan, already offered to 80 companies and 200,000 workers, targets those who want to save more but can't bring themselves to reduce the amount they take home in their paychecks. The promise isn't binding, but it requires a conscious effort to undo it, which evidence suggests makes it more likely to stick.

Experienced investors ``know they're impulsive, know they have problems with self-control, know if they let the money get out of their 401(k) they'll spend it,'' said Stephen Utkus, principal at the Vanguard Center for Retirement Research. The new plan attempts ``to take that discipline and offer it to a broader audience.''

Fidelity Investments has also been pilot-testing an increase program in the last year, and plans to roll it out in the first quarter.

Meanwhile, Malvern, Pa.-based Vanguard and Lincolnshire, Ill.-based Hewitt & Associates, a plan administrator, are also experimenting with other psychological mechanisms like adjusting the way options are presented to steer enrollees toward higher savings rates and more appropriate investments.

For decades, economists assumed people always acted in their own long-term interests. But about 30 years ago, they began to realize that short-term temptations regularly overpower the long-term goals.

Of the 10,000 employees at one firm studied in 2001, researchers found 68 percent believed they should be saving more. A third said they intended to increase their savings within a few months, but within four months only 14 percent of those who said they would had followed through.

In an article to be published in February's Journal of Political Economy, Richard Thaler, a University of Chicago Graduate School of Business professor credited with inventing the Save More Tomorrow idea, offers evidence the escalating savings mechanism can work.

In a trial run at an unidentified manufacturing company with 315 plan participants, Thaler reports 207 agreed to a Save More Tomorrow plan in which they would devote almost all of their coming pay raises to their 401(k)s.

Only three participants dropped out before the second pay raise, and 80 percent stuck with the increase through four pay raises. And even those who dropped out didn't reduce their contribution rates; they just opted out of future increases. The plan increased the company's average savings rate from 4.4 percent to 10.6 percent.

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