A decade ago, the 2006 Pension Protection Act recognized theimportant behavioral finance concept of the “nudge”—the reframingof the decision-making process to subtly push the decision makertoward the optimal decision. We see this in the shift fromopting-in to opting-out in modern 401(k) plan design. No longerlimited to just the leading-edge, more plan sponsors have embracedthis approach.

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Auto-enrollment, auto-reenrollment, auto-escalation, and defaultinvestment options represent the first tip from the treasure chestof early behavioral finance research and have proven effective inincreasing retirement savings rates. But you already know this.What you might not know are the four other 401(k) plan tips recentresearch has uncovered.

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The second tip involves the concept known as “intertemporalchoice.” Research says people tend to make better decisions if theimplementation of that decision doesn't immediately occur. Onestudy found a 32 percent improvement in decision making by movingthe delay from one to two months. Many plans require a worker toaccrue a minimum number of hours before being allowed to join.Rather than wait until an employee is eligible to ask them to startsaving, why not ask them to make a decision on both their initialsalary deferral as well as their annual escalation as part of theirfirst day introduction to the firm? Actual participation in theplan may be months or longer away, but they are more likely to makethe correct choice if asked to decide today.

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The third tip involves a different type of pre-commitment. Thiscould be done as part of the first day activities, or can beintroduced at a later date. In this case, ask employees topre-commit to saving 50 percent of future pay raises into theirretirement plan. While that may sound like a lot, remember, thosepay increases amount to “found” money. Employees aren't spending ityet. If it's not spent, it won't be missed.

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The fourth tip starts pushing the envelope. Research showspeople tend to make poor decisions when stressed. One of thegreatest sources of stress is the work environment. Unfortunately,this is the precise venue where almost all 401(k) decisions aremade, because it's where most employee education meetings are held.The tip is to move all enrollment/education meetings out of thework environment and into a more comfortable setting.

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Finally, the fifth tip is to provide proper context whenpresenting retirement savings options.Don't present the option to save in isolation of alternativechoices. For example, you might also present an array of otheroptions, including working longer; dying earlier; or living withyour children for the rest of your life. Compared to those options,saving for retirement doesn't sound half bad.

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