Incorporating an automatic increase feature into your 401(k) plan helps overcome which of the following cognitive biases?

Incorporating an automatic increase feature into a 401(k) plan effectively addresses the cognitive bias of inertia. Inertia refers to the tendency of individuals to stick with familiar behaviors or choices due to a lack of motivation to change, even when a change could be beneficial.

Many employees may feel overwhelmed by the complexities of retirement planning and may not actively choose to increase their savings rates over time. By implementing an automatic increase feature, the plan takes the initiative to adjust contribution rates routinely, typically tied to salary increases or set increments. This helps participants overcome the inertia of not making changes to their contributions on their own, ensuring that their savings remain aligned with their growing income and fostering better financial preparedness for retirement without requiring much effort from the employees themselves.

While other cognitive biases like anchoring, overconfidence, and framing can influence decision-making in different contexts, they do not directly pertain to the passive decision-making aspect of saving for retirement that inertia embodies. This focus on overcoming inertia highlights the importance of design features in retirement plans that enhance employee engagement and savings behavior.