Question

A 2006 law designed to boost employees' retirement-savings is having the opposite effect for some people. Read 401(k) Law Suppresses Saving for Retirement by: Anne Tergesen (pdf).

1) Is it rational for a person to not increase a savings rate over time that was initially set too low?

2) Why do people succumb to this irrational behavior?

https://bbaddins.schoolcraft.edu/addins/econ202v2/docs/mod01401k.pdf

Answer 1

1) As a part of the 401(k) law, the companies must automatically enroll workers in their 401(k) plans, rather than require employees to sign up on their own and this popped out to be a questionable thing. Because it has been observed that than two-thirds of companies has got to set contribution rates at 3% of salary or less, unless an employee chooses otherwise and this is 5% to 10% below what it used to be before. Therefore it is quite irrational to many of the employees on the whole.

2) People fail to witstand with this particular rule because at a particular point of time what happens is that the people might be exposed to the real truths where they are getting a less return which is totally unfair on the whole.