This 'deceptively minor' change got 78.7% of people to invest in target-date funds.
This truth is already widely known in fields other than retirement finance, of course. A famous example comes from Dan Ariely, a professor psychology and behavioral economics at Duke University: Participation in organ donation programs varies widely according to how the question is worded. If you ask people if they want to opt into such programs, few do so. But if you automatically sign them up and then allow them to opt out, most people end up participating.
The deceptively minor change that has such a huge consequence, the researchers found, boils in effect down to whether participants in a 401 plan are asked whether they want to opt in or opt out of a target-date fund. The researchers were able to study this change by analyzing the fund choices made in the 401 accounts managed by Vanguard. • When new entrants into a 401 program had to opt in , just 28.4% invested in a target-date fund.
This increase in retirement wealth may puzzle many of you. Why should an investor who avoids target-date funds have lower equity exposure than one who doesn’t? After all, there is nothing preventing the investor who shuns target-date funds from choosing others that are just as exposed to equities, if not more so.
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