It's not hard to find stories in the business and popular press these days about the impending "retirement crisis" in the United States created by the demise of the defined benefit plan, the increased reliance by employees on 401(k) plans as their primary source of retirement income (other than Social Security), and the inadequate level of retirement readiness of most Americans.
The last point is generally viewed as the result of certain shortcomings among American workers participating in 401(k) plans: they wait too long to start saving; they don't save enough when they start (and often leave matching employer contributions on the table); they don't invest their savings effectively; and when they change jobs, they take their money and spend it rather than keeping it in a tax-favored retirement savings account (the so-called "leakage" problem, which we will discuss in a future post).
While perfect solutions to these problems have yet to be developed, one approach on the savings and investment front that has gained traction in the last ten years—particularly following the Pension Protection Act of 2006 (PPA '06)—is the "lead the horses to water" approach. That is, automatically enrolling employees in a defined contribution plan and then defaulting those who do not otherwise make an affirmative investment election into an appropriate investment fund, subject to opt-out. This approach relies on the incredibly strong power of inertia to keep employees in these choices, and data has shown that employees largely stay in the investment fund into which they were defaulted.