Certified Plan Sponsor Professional (CPSP) Practice Exam

What cognitive bias does incorporating an automatic increase feature aim to overcome in a 401(k) plan?

1. Confirmation bias

2. Overconfidence bias

3. Inertia

4. Anchoring bias

The correct answer is: Inertia

Incorporating an automatic increase feature in a 401(k) plan is designed to combat inertia, which refers to the tendency of individuals to stick with the default option or existing status rather than taking action to change it. Many participants in retirement plans may not actively consider increasing their contributions or may procrastinate on making decisions about saving for retirement. Automatic increases help to mitigate this tendency by automatically adjusting contribution rates over time, often in line with salary increases or predetermined schedules. This nudges participants to save more without requiring them to make an active decision each time an increase is warranted. By doing so, it encourages better saving behaviors and promotes long-term financial well-being. In contrast, confirmation bias involves favoring information that confirms existing beliefs, overconfidence bias relates to an individual’s inflated perception of their own abilities or knowledge, and anchoring bias pertains to relying too heavily on the first piece of information encountered. These biases are less directly relevant to the action-oriented passivity that inertia signifies, making inertia the correct concept associated with the automatic increase feature.