Will myRAs give people a false sense of security that they are saving enough for retirement? That potential problem was raised by UCLA Anderson professor and noted behavioral economist Shlomo Benartzi in a recent P&I article.
While myRAs may provide two legs of the stool for success by incorporating auto enrollment and deduction, Benartzi questions whether the absence of the third leg — auto escalation — might cause more harm than good. In the "illusion of wealth" syndrome, people overestimate how much a lump sum like $100,000 really means. Similarly, will being part of a retirement plan that provides low yield returns with no auto escalation give people a false sense of security?
According to results from the UK's NEST program, 92% of people stuck with their suggested investment. In fact, people might assume that the initial deferral is ideal, just as many defer up to the match. Leveraging this behavioral tendency, Benartzi suggests incorporating auto escalation into myRAs. Auto escalation, which has helped more than 4 million U.S. DC plan participants in larger firms to double their deferral rates, could have the same beneficial effects for workers in smaller plans.