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April 30, 2007

Incentives to save

Many economists are worried about Americans' low savings rate and what it implies for our future. But some companies have found a successful way to take advantage of, as N.C. State University economist Mike Walden puts it, human nature to encourage people to save.

"This really is very interesting to an economist … because it really is based on human nature," says Dr. Walden, a professor of agricultural and resource economics.

"I think many people know that at their company where they work or other places, they can get involved in retirement plans. At companies, they are called 401 (K) retirement plans. This is where you tell the company to retain or hold some of your salary. That money goes tax free into a savings account. And the idea is to build that up for retirement," he explains. "Previously people had to take the initiative to say, ‘Yes, withhold that money from my salary.’ Now though … some companies are saying, ‘OK, we are going to withhold the money unless you tell us not to.’

"So you start off assuming you are going to participate in the 401 (K) plan, and you have to take the initiative not to," he continues. "And what companies have found is that the participation has skyrocketed.

"For example, maybe 30 percent of workers -- when they had to make the effort to enroll in the 401 (K) plan -- … did it. Now when they are automatically enrolled and they have to make the effort to dis-enroll, 90 percent of them stay in the plan.

"So in this case, human nature, I think, is working for us in terms of getting people to save more."

Posted by deeshore at April 30, 2007 08:46 AM