O’Neill, B. (2007) Overcoming Inertia: Do Automated Saving and Investing Strategies Work? Journal of Family and Economic Issues 28(2), 321-335. http://www.springerlink.com/content/wt1653190x010357/
Brief Description: Various automated strategies have been implemented by employers with the objective of increasing retirement plan participation. Automatic strategies work by proactively arranging some type of action (e.g., plan enrollment) to occur unless people specifically opt out. This article examines and synthesizes previous empirical research about five automatic savings and investing strategies: (a) automatic retirement savings plan enrollment, (b) automatic contribution increases, (c) automatic portfolio rebalancing, (d) automatic rollovers, and (e) automatic investment plans. Advantages and disadvantages of each strategy are discussed, along with implications for financial educators.
Implications: Automated saving programs can have a powerful impact upon workers’ future financial security, because the default option is for participants to stay in the plan once enrolled. However, default options in automatic savings plans need to be selected carefully. Because many workers stay with the plans initially chosen for long periods of time, they are adopting the defaults as a de facto asset allocation model. Employees also need to be cautioned about “familiarity bias” and the dangers of default and/or elective contributions to company stock that can lead to inadequate diversification and increased investment risk.