Making It Easy: How Defaults and Design Can Improve Retirement Savings Outcomes



By Brigitte C. Madrian

Brigitte C. Madrian
Brigitte C. Madrian

Individuals have more choices today than ever before for how to save and prepare for retirement, but the complexity and array of options can cause confusion that leads to inaction. As the United States has moved from a retirement system based on pension-style defined benefit (DB) plans to one that relies on defined contribution (DC) programs, workers have assumed the responsibility for making their own savings and investments decisions.

Social Security, workplace retirement plans, and personal savings currently form the three-legged stool that individuals depend upon for their golden years. Instead of showering employees and retirees with lots of possible decisions, we need to create an environment that encourages more decisive action through simpler choices.

People tend to learn to make better choices by trying things, making mistakes, and then adapting their behavior. Unfortunately, there’s only one shot at achieving retirement security. You can’t turn 65, look at your account balance, and then request a do-over. It doesn’t work that way; it’s a one-shot deal. Even if you realize you got it wrong before you hit retirement, it can be very difficult to course-correct successfully.

When faced with complexity, individuals often procrastinate. Worse, people suffer from what’s known as “present bias.” That means that we focus on those things that are most likely to happen soon rather than understanding the consequences that may exist decades into the future. The longer the time horizon, the more uncertainty exists which further complicates human decision-making.

That’s why leaders need to create a structure that is more conducive to good choices that prepare individuals for a successful retirement. The concept of choice architecture can be leveraged to build just such a context for workers by making it easier to do the right thing.

These key elements can help create an environment that encourages individuals to make smarter choices that result in better retirement outcomes.

Default Choices and Automatic Enrollment

Perhaps no environmental change matters more than establishing default options for retirement savings. That means automatically enrolling workers in savings programs and directing those funds to a well-diversified investment portfolio that balances risk and returns. Individuals can always opt out of these defaults, but research demonstrates that they increase retirement savings rates and result in higher account balances.

Automatic enrollment has a dramatic impact on participation rates in employer-sponsored retirement savings plans. If an employee does nothing, a percentage of their pay will be directed into a 401(k) plan. In one company, 37% of employees with less than one year of tenure were voluntarily participating in the employer’s plan. After switching to automatic enrollment, the participation rate more than doubled to 86%. That dramatic improvement illustrates just how much of an impact a simple change like automatic enrollment can have on outcomes.

For plans that don’t incorporate automatic enrollment, short deadlines — 30 to 60 days — should be used to force employees to make an active choice to participate or not. Removing the ability to procrastinate has been demonstrated to increase program participation.

Research shows that most people want to save for retirement, so removing obstacles and complexity will align the outcomes more accurately with the individual’s interests.

Default Contribution Amounts

Default options don’t just affect whether an individual sets aside funds for retirement. They also help determine how much a worker saves. The plan designer has tremendous influence over that amount through the choice of the default contribution rate. If you set a higher default, workers will tend to save at the higher default level.

When left to their own devices, individuals tend to think in multiples of 5, so they tend to save 5%, 10%, or 15% of their salaries. The exception is for employers who provide a match, in which case the distribution of choices tends to align closely with the matching amount. For example, if an employer matches employee savings up to 6% of their pay, then most workers will end up saving 6%.

By establishing default savings amounts, the plan environment can have a dramatic effect on total savings.

Default Investment Allocations

In addition, default options affect the actual investment choices that individuals make for their retirement savings. A couple of decades ago, most retirement savings plans defaulted to very conservative investment options, like money market funds, that avoided most risk. After the Pension Protection Act of 2006 took effect and encouraged more-diversified asset allocation, plans could incorporate greater exposure to stocks and equities with a higher potential rate of return.

The adoption of Target Date Funds (TDFs) and other similar vehicles help to ensure that individuals can have default choices that are more likely to reflect their needs and deliver the types of returns with the level of risk needed to match their retirement timelines.

Financial Education Alone Is Not Enough

A significant percentage of the population is not financially literate, so financial education plays an important role in improving retirement outcomes. Unfortunately, people have a tendency to ignore a lot of the information that is delivered to them. While it is still valuable to communicate essential facts, we have to think about how we present that information.

Ultimately, reshaping the environment has more impact than education. Using choice architecture to help employees make the right choices will be more successful than focusing on financial literacy alone.

Safeguarding Retirement Savings by Reducing Leakage

The United States, unlike other countries, has made it too easy for individuals to tap their retirement savings for non-retirement purposes. While we may not want to eliminate all emergency uses of retirement savings, more can and should be done to discourage draining the nest egg during the working years.

In addition to tightening up rules on how retirement savings can be used (by blocking access to employer matching funds, for example), workers should have easier access to setting aside savings in a rainy-day fund. In one pilot program in the United Kingdom, workers set aside savings in an emergency savings account up to a certain amount, after which the excess amounts are moved into retirement savings. That helps strike a balance between the needs of the present and requirements for the future.

More to Learn About Making the Transition to Lifetime Income

Many new retirees are reluctant to take advantage of annuity options because they believe these are an all-or-nothing proposition. They’re simply not well-informed about how to convert a nest egg into a retirement income stream, and employers have thus far been largely reluctant to get involved themselves.

Educating individuals and convincing plan sponsors to act as an intermediary by vetting options for participants would help encourage greater participation. In addition, the conversation should be re-framed from one of whether you should convert your whole nest egg into an annuity to one in which the question is how much of your savings should be annuitized.

States are Filling an Important Need

In the absence of federal action to create a more accommodating national environment for simplified retirement savings, the states have begun to take action. They recognize that they can reduce the costs of government programs for a growing number of Americans retiring in poverty because they haven’t saved enough for retirement by helping individuals save more during their working years.

This state-based innovation is helping to address the half of the workforce that currently does not participate in a retirement savings plan at all. In particular, it helps those individuals who are not eligible for an existing employer-sponsored program.

The states wisely understand that the key is to make it easy and attractive for employers to set up and maintain these new programs and effectively incorporate the use of default features such as auto-enrollment and TDFs. While most of the state solutions are automatic IRAs that are not as robust as 401(k) plans, these still meet the needs of a significant portion of the population. Some of these new state programs have already begun to see success, with Oregon and Illinois alone creating more than 100,000 accounts holding more than $65 million in assets, and California – the largest state — recently launching its own program.

Questions Remain for the Future

Policymakers must evaluate three key questions as they work to continue to close the coverage gap in retirement savings:

  1. Do we want to have a voluntary or mandatory retirement savings system or maintain the hybrid approach we have today?
  2. How much do we expect employees to save?
  3. Should there be more restrictions on how individuals may access retirement funds during their working years?


While fundamental issues remain related to improving access for those who are outside the current U.S. retirement system, employers, plan managers, and policymakers all can shape an improved environment that encourages better decision-making by individuals as they prepare for retirement.

Ensuring that individuals set aside adequate savings to convert to a lifetime income stream requires a combination of improved education, better default options, effective rules, and enhanced innovation. Removing complexity and guiding more informed choices can make an important difference in creating improved outcomes.

Brigitte C. Madrian is the Marriott Distinguished Professor and Dean of the Marriott School of Business at Brigham Young University.

March 2020, 20-04

Additional Resources

Brigitte C. Madrian and Dennis F. Shea. 2001. “The Power Of Suggestion: Inertia In 401(k) Participation And Savings Behavior.” Quarterly Journal of Economics, 116(4): 1149-1187.

Brigitte C. Madrian. 2013. “Matching Contributions and Savings Outcomes: A Behavioral Economics Perspective.” In Richard Hinz, Richard Holzman, David Tuesta, and Noriyuki Takayama, editors, Matching Contributions for Pensions: A Review of International Experience, The World Bank, pp. 289–310.

Brigitte C. Madrian, “That Was Easy: The Importance of Auto Features in Promoting Retirement Savings,” AARP Public Policy Institute, Spotlight 12, October 2014.

John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian. 2008. “The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States.” In Stephen J. Kay and Tapen Sinha, editors, Lessons from Pension Reform in the Americas, New York: Oxford University Press, pp. 59–87.

John Beshears, James J. Choi, Joshua Hurwitz, David Laibson, and Brigitte C. Madrian. 2017. “Liquidity in Retirement Savings Systems: An International Comparison.” In David A. Wise, editor, Insights in the Economics of Aging, University of Chicago Press, pp. 45-75.

John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, and Stephen P. Zeldes. 2014. “What Makes Annuitization More Appealing?” Journal of Public Economics 116 (August 2014), pp. 2–16.