The Savings Crisis: 1 Answer to Help Stop It
The savings crisis is not waving the little white flag anytime soon. Americans face a barrage of financial obstacles in today’s economy: stagnant wages, low interest rates, and a painful absence of financial literacy. The situation is so dire many Americans believe they won’t ever be able to leave the workforce. They survive paycheck to paycheck. However, all hope is not lost. One simple maneuver is helping millions of working Americans save for their futures.
In a perfect world, parents and the education system would teach personal finance to every boy and girl. Our children would grow up being taught good savings habits, applying those lessons throughout life to improve their financial situations. Unfortunately, reality is quite different. Many parents are afraid to talk about money, and while some schools are now teaching personal finance, bureaucracy hinders a more national impact. As a result, we’re left with a country filled of financial illiterates — where nearly half of Americans save virtually nothing.
What’s the solution? Make saving money the default decision. When faced with a choice on a seemingly complex subject such as money, many individuals often take the default or “no decision” choice. In the case of voluntary savings plans, which requires participants to take action in order to save money, the “no decision” choice is a decision not to save. 401(k) plans are the most popular example. One quarter of employees don’t even save enough to receive the employer match, missing out on $24 billion of practically free money every year.
To receive an employer match, workers need to take time and sign up for the company’s plan. This is evidently too much trouble for some, which is why companies are moving toward automatic enrollment. The default decision with automatic enrollment is to save money — albeit at a low savings rate. In other words, workers are more likely to place money aside from each paycheck since action is needed to stop the process. Research shows this kind of laziness can be effective.
The number of eligible employees participating in Wells Fargo-administered 401(k) plans rose 13% between 2011 and 2015. The rise is largely credited to the increasing popularity of automatic enrollment, which is now used in 40% of the plans. Furthermore, 55% of millennials are participating in the plans compared to 45% in 2011, while employees in a pay range of $20,000 to $40,000 in salary are participating at a rate of 59% versus 47% four years ago.
Forcing workers to save money may seem a bit oppressive, but they still have the freedom to opt out of the plans. Automatic enrollment merely seeks to get workers started on the path to savings. Benefits include: more savings, increased happiness, and a boost in sex appeal. Although issues like stagnant wages and low interest rates remain alive and well in our economy, it’s easier to save money by automatically paying yourself first.
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