The woman behind the way you save for retirement
Brigitte Madrian is the Dean and Marriott Distinguished Professor at the Brigham Young University Marriott School of Business. One of the foremost researchers into retirement policy, she has a particular focus on household saving and investment behavior. Almost 20 years ago, she and Dennis Shea published a pioneering study that showed how using automatic enrollment in retirement plans dramatically improves participation among employees. Her research was incorporated into the Pension Protection Act in 2006, enabling employers who include auto-enrollment in their plans to increase employee participation and reduce plan compliance risk from IRS non-descrimination tests.
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Guideline: You’ve been responsible for groundbreaking research into retirement plans while at the Harvard Kennedy School and now at Brigham Young University. What are the takeaways for a lay audience, especially for small businesses that sponsor plans, and for policymakers?
Madrian: If you want people to save, you have to make it very easy for them. And if you want small businesses to be facilitating retirement savings through payroll deductions, it needs to be easy for the small business as well. We know it has to be easy for the employee, but it's got to be easy for the small business as well.Big companies generally already have retirement savings plans in place, and they've got a dedicated HR staff. And they're going to be less deterred by the complexities of sponsoring a retirement plan. Small businesses may not have anyone on staff that knows anything about retirement savings or certainly about the legal requirements of offering a retirement savings plan.
Small businesses are focused on just trying to make payroll at the end of the month, or trying to grow their business and take it to the next stage.
Guideline: What’s being done in Washington to make it easier for small businesses to offer their employees a 401(k)? Do policy makers recognize the importance of small business in closing the retirement savings gap?
Madrian: What the policymakers might not appreciate is why small businesses aren't offering a plan and how public policy could change that. Policymakers are very concerned about placing too high a regulatory burden on small firms for fear that the regulatory burden will drive these firms out of business or increase their costs so that they're not really competitive. The politics is often around preserving the viability of these small businesses by not compelling them to incur the cost of having to operate a 401k plan.
Many of the state-based savings plans are trying to make it easier, like OregonSaves and CalSavers. What they’re trying to do is remove the complexities for small employers so that their employees can benefit from the ease of payroll deduction. We are also seeing innovations in the market, companies that are making it easier for small businesses to sponsor plans and for their employees to save. Guideline is an emerging leader in that category. (Note: Guideline uses auto enrollment exclusively across its almost 7,000 clients.)
What the state-based initiatives are doing is saying, "Look, we can make the cost to you as a small employer, of helping your employees save, so low by making it so simple and easy for you to do, that you can help them save without an increase in your cost of doing business. And you will be just as competitive as you were beforehand.”
Guideline: Shifting gears for a minute, there was a recent article in The New York Times about women in economics. What is it like to be a woman in this field? Your work has been groundbreaking, but have there been times you have not received credit for it?
Madrian: There have been times when I have not gotten credit for my research. I'm not sure whether that's because I'm a woman or I'm just not famous.
I wrote the first paper documenting the impact of automatic enrollment on savings plan participation. And that paper and subsequent research has become one of the poster-child examples for behavioral economics and for the “nudge” approach to changing behavior. In Dick Thaler and Cass Sunstein's book, Nudge, this is one of their primary examples of how you can use choice architecture to facilitate better outcomes.
The research was done by me and subsequent research by me and other collaborators. Thaler and Sunstein cite it, and they always cite it appropriately. But other outlets, including The New York Times, will cite Thaler and Sunstein as doing the research on automatic enrollment because they read about it in Thaler and Sunstein's book.
So they have linked it in their mind with Thaler and Sunstein, without going back to see where it originally came from. I don't know if that's a gender oversight as much as it is a “I'm not as famous as Dick Thaler and Cass Sunstein and didn't write a bestselling book trumpeting my own work (laughs).”
I let them do that for me. And I don't begrudge them one iota! Because I've benefited from their publicizing my work as much as they've benefited from publicizing my work.
Guideline: The retirement system we’ve set up, with a baseline Social Security benefit and voluntary savings on top, works very well for millions of families who save in the workplace, but many people don’t have consistent access to retirement plans. If you could do anything to change our system, what would you do?
Madrian: If I were designing the system from scratch, I would have a system where people have individual accounts, and the accounting is done centrally. And the employers are a conduit for channeling money from your paycheck and putting it into a single account, so you don't end up with money that is in several different employer-sponsored accounts.
There are employees that lose track of their money. And it is more difficult to engage in a sophisticated planning exercise when your money is spread across a lot of different accounts.
Madrian: I would also have a low mandatory savings rate, and have a voluntary piece on top of that. In countries like Singapore or Australia that have similar defined contribution systems, they don’t use automatic enrollment where you can opt out. They use automatic enrollment, and there is no opt out, everyone is saving for retirement.
The ideal system probably has a piece of both. You're going to have a piece that everyone has to contribute to, and then you could have people do additional savings on top of that. One rationale for that type of system is that Social Security is more generous for some people than it is for others. If you're a low-income employee, Social Security will replace a high fraction of your income after you retire, and you're not going to have to supplement Social Security with as much of your own savings as someone who has higher income and has a lower Social Security replacement rate.
You want to have a cushion that everyone has to contribute toward.
Guideline: You’re talking about three layers: Social Security as the foundation, a mandatory individual contribution held in individual accounts and then a voluntary contribution to those accounts.
Guideline: You’ve made a huge impact in the way people save. What are you proudest of in your work?
Madrian: Much research doesn’t leave the halls of the academy. I’m most proud of having done research that, in addition to having an academic contribution, has actually had an impact on the future financial security of individuals in retirement, hopefully for the better. Being able to interact with retirement savings plan providers, employers, and policy makers throughout the world to help improve retirement savings outcomes has been an incredibly gratifying part of my career.