Choice Architecture, 401(k) Plans and Race: The Answer to a Conundrum?

I have talked before on this blog about behavioral economics and choice architecture, which concerns the idea that how we structure retirement savings options will affect whether, and how successfully, people save for retirement. You can find a couple of my earlier posts on this issue here and here. In a provocative post - a phrase I don’t use lightly, as I suspect you, like me, are jaded from too many people in the blogosphere referring to every moderately interesting comment as “provocative”- Workplace Prof points out a potential, but not well-documented, problem with defined contribution plans as a model for retirement, which is that, at least anecdotally, African-Americans do not contribute to such plans at as a high a rate as do white employees. Now, two notes are important right off the bat. First, as the Prof points out, no industry wide study of this issue has ever been conducted, thus raising the question of whether this apparent problem is a real problem, or instead just something that a small sampling suggests exists. Second, even if evidence does bear out the existence of this problem, one should not jump to the conclusion that it means that all African-Americans participate in these plans at a lower rate than do whites. It may well be that, here, race is but a stalking horse for socio-economic status, and that the participation rates flow more directly from economic level than from race; it may well be the case that, in fact, African-Americans contribute at a comparable level as white employees when the comparison is controlled for educational status and/or salary. We just don’t know.

Either way, though, the Prof points out that the solution may be in the automatic enrollment provisions of the Pension Protection Act, which make participation in such plans a default. If this alone were to remedy such a problem, it would be a perfect example of choice architecture solving a problem: the mere structure of the retirement vehicle will have led to higher participation, the result that the authors of the Pension Protection Act presumably wanted to achieve.