Practice Management
What could a restaurant menu possibly have to do with retirement savings? A recent blog entry finds a connection.
Think about it. A menu presents a finite set of options at a fixed price. One knows roughly what one will get if one orders a particular dish, but how exactly it will turn out when it comes to the table is a bit of an unknown. Similarly, most retirement plans incorporate a menu of a set number of options; each entails certain costs and fees, and exactly what the return will be is not entirely certain.
In “How Restaurant Menus Can Impact Retirement Savings Rates,” a recent entry in Greenspring Advisors’ blog, Joshua P. Itzoe argues that creating a set of curated enrollment options from which plan participants can choose, “much like a prix fixe menu at a restaurant,” is a good way to help participants to enroll through a streamlined process.
Itzoe acknowledges the merits of automatic enrollment, but writes that one of its downsides is that it can cause average deferral rates to drop depending on the default rate that is set. He cites research which he notes “has shown people who enroll on their own tend to select higher deferral percentages than when automatically enrolled.”
Itzoe acknowledges the merits of automatic enrollment, but writes that one of its downsides is that it can cause average deferral rates to drop depending on the default rate that is set. He cites research which he notes “has shown people who enroll on their own tend to select higher deferral percentages than when automatically enrolled.”
“Traditional economics assumes that people rationally analyze all factors before they make decisions or determine the value of something,” says Itzoe, adding that “it’s certainly an elegant idea, but, in the real world, the decision-making process is rarely that simple.”
Itzoe continues that “by presenting actively enrolled participants with three options to choose from that are higher than the default rate, you can almost guarantee they will enter the plan at a much higher percentage.” He adds that research has found this to be the case regardless of what percentages are presented to participants. “This is because people have all sorts of cognitive biases that impact how they make decisions,” he argues.
And herein lies the similarity with a restaurant menu, says Itzoe, arguing that if percentages at enrollment are set at three levels—for instance, 8%, 10% and 12%—a majority is likely to enroll at 10%, avoiding the “high priced” option.
“The key is that they are choosing between the retirement savings options presented, not percentages that are not shown,” writes Itzoe. And even if they do choose the “middle” option, they still are enrolling at a rate higher than the default rate and will be financially ready for retirement.
Itzoe notes that while plan sponsors choose all curated options offered, participants can choose a different one. However, he adds, most will not and will “simply progress through each screen and select from the options that are shown to them.” He writes that offering curated options “is a particularly effective strategy to increase deferral rates if the options are chosen wisely.”
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