Opt-in or Opt-out Pension Plans

Respondents in Denmark saved too much, putting away 13 percent of their income, on average, compared to the 12 percent they feel they need to contribute. Chileans are also saving 13 percent, on average, but they feel they’ll need to put away 19 percent of their income. Canadians’ disparity is just two percentage points, with respondents saying they’re saving an average of 12 percent of their income, while they feel they’ll need to put away 14 percent for a comfortable retirement.

Globally, survey participants also underestimated how much of their retirement income they’ll spend on basic living expenses. Overall, they said they’d spend 34 percent, but in reality, they’ll likely need nearly 50 percent, according to the survey.

Canadian respondents said they’d need 42 percent, whereas the survey found they’d actually need 59 percent. The biggest gap in expectation versus reality is in South Africa, at 34 percent and 59 percent, respectively, while Indians are much more in tune with reality, at 26 percent and 25 percent, respectively.

Mexico has taken a rather unique approach to get people to think about retirement and to actually contribute more. In Canada and in the US and I suspect other countries, cashiers will often ask consumers if they’d like to donate to a charity as they pay for items at retail stores. Mexico applied this concept to retirement savings with good results.

Rhe Mexican project is a collaboration between Mexico’s pension regulator, the country’s 11 retirement savings administrators and Ideas42 (, a U.S.-based non-profit organization that applies behavioral insights to find solutions to social problems). The goal was to find a way to encourage higher voluntary contributions to retirement savings.

Mexico’s pension system has called for 6.5 percent of an employee’s salary to go into individual retirement accounts. For workers formally employed in registered, salaried jobs, the mandatory contribution includes an amount from employers (5.15 percent), employees (1.125 percent) and the government (0.225 percent). At that contribution rate, employees are likely to retire on 40 percent of their current salary, an amount considered insufficient for a successful retirement.

While low voluntary contributions in the formal employment sector are cause for concern, the situation is even direr for the 60 percent of Mexicans who are unemployed or working informally or independently. People in this group, are not only not making mandatory contributions to a pension plan but most likely aren’t saving at all for retirement.

After spending time finding out why people are not thinking about or contributing to their retirement they targeted a representative sample of about 77,000 people from a single pension fund administrator and encouraged both active and inactive account holders to make voluntary contributions at the retail level.

They sent out a direct mail communication about the retail branches and paired it with a micro-incentive — either a free cup of coffee at 7-Eleven or entrance into a lottery — when people went to 7-Eleven to make a contribution.

To make a voluntary contribution, account holders provide their citizen identification number and the cashier provides a receipt of the transaction. The identification number serves to direct the funds to the national database and, from there, to the pension fund administrator.

To address a tendency to procrastinate or not consider retirement, they also used a face-aging software through the banks’ mobile apps that will show people an aged photo of themselves to make retirement feel more vivid.

As for the lessons has taken from this pilot projects the researchers have found that increased access to savings vehicles through retail channels alone wasn’t enough to boost contribution rates. Most important is that increasing access does not translate to behavior change — in this case, contributions. Nor does access make the idea of pension contributions more top of mind.

What works is making participation the default option. In this model, people are registered to participate in employer-sponsored pension plans on employment. They can opt-out after a specific period of time.

By switching from an opt-in approach to opt out, people will still have the flexibility to withdraw their participation. But the evidence suggests most people will be glad to be automatically enrolled and will continue to stay enrolled.