Above, watch the introduction to the discussion about Illinois’ first-in-the-nation experience to enable automatic investment of retirement savings.
Maybe you’ve heard of a “nudge” — the idea that a well-designed product or service can change behavior for the better, made famous in the book “Nudge: Improving Decisions About Health, Wealth, and Happiness” by renowned University of Chicago economist Richard Thaler and former White House Advisor Cass Sunstein. But what about “sludge”?
Recently coined by Thaler, “sludge” is the burdensome red tape or confusing fine print that undermines government programs or financial products, deterring people from accessing benefits or making the best choices. That long line at the DMV? The paperwork to buy a house? The density of the US tax code? The torturous student loan process? Sludge.
Thaler recently explained the sludge concept and how it negatively impacts consumers, as well as other key findings from a trailblazing career in behavioral economics, during an Aspen Institute Financial Security Program (FSP) forum on the Illinois Secure Choice Program in Chicago.
The Illinois Secure Choice Program is a bold first-in-the-nation experiment that will enable automatic investment of retirement savings by private sector workers who lack employer-based retirement plans. It is projected to improve retirement security for 1.2 million Illinois workers when it goes live next year.
States across the nation, and the federal government, are closely watching Illinois as a promising model to help the 68 million American workers who cannot save for retirement through the workplace. But before it’s rolled-out, the Secure Choice Board — which is chaired by the Illinois State Treasurer and includes six other members, including retirement experts, employer and enrollee representatives, and state budget officials — must make key implementation decisions. According to Thaler, its biggest challenge may well be eradicating sludge. Not doing so could result in confusion for employers and employees alike, raising the following questions:
- How will employers know if they’re required to enroll employees?
- How will firms transmit their workers’ contributions to the state investment fund?
- What happens to the account when a worker changes jobs or moves out of the state?
- Who will savers turn to when they have questions?
Thaler’s advice to the Board: “make it easy” to understand — for employers and for workers. Remove the barriers that have historically stymied small businesses from offering retirement benefits; offer clear and simple choices, set smart defaults, and work closely with actors already in the space such as asset managers and payroll service providers.
But “making it easy” to interact with the state program will require scrupulous planning before the program launches in 2017. Thankfully, the program already embraces the most important behavioral design feature: automatic enrollment through the workplace, meaning employees must opt-out if they don’t want to participate. But there are a host of other details to get right, including smoothly functioning IT systems, a user-friendly website (for employers and workers), and great customer service.
Event participants offered other key takeaways about how to effectively provide retirement benefits to workers without employer-based plans:
- David Madland, Center for American Progress senior fellow, stressed the importance of offering savers low-fee investment options and explained why the federal government’s Thrift Savings Plan is a model worth emulating.
- Martin Noven, senior director for government markets at TIAA, made suggestions based on TIAA’s deep experience in the market, including easing new, risk-averse savers into the world of retirement investing by enrolling them in a low-yield, guaranteed-return fund for their first 90 days in the program.
- Pete Isberg, ADP vice president of government affairs, highlighted the importance of getting the “plumbing” right, to ensure that funds move securely and efficiently from thousands of employers to the right employee accounts. Getting this right, while not sexy, will be critical for program success.
- Lucy Mullany, who leads the Financial Empowerment Policy Project for the Heartland Alliance – one of the advocacy organizations that helped shepherd the Secure Choice bill through the legislature in 2014 – reminded the Board that many of the workers who will be eligible for Secure Choice are asset poor, unbanked, and hold volatile jobs, making it all the more important that their Secure Choice accounts be flexible, engaging, and portable.
With so much at stake for Illinois workers, and millions of others across the nation, FSP hopes to serve as a resource to the Illinois Board as it embarks on its ambitious plan. We continue to engage with other cutting edge states, such as California, that are tackling this issue in innovative ways. And we will be in Portland next month with a series of panels for the Oregon Retirement Savings Board. Visit our program page to learn more about our upcoming events on this topic.