Though the message about the positive impact of behavioral finance’s beneficial applications to retirement savings hasn’t changed much, one of its leading proponents has some interesting ideas about its future.
Speaking at the 2016 SageView National Conference, Prof. Schlomo Benartzi, co-chair of the Behavioral Decision-Making Group at UCLA, said he was focused on “fixing” 401(k) plans, not replacing them.
Benartzi, who pioneered the concept of “save more tomorrow” with University of Chicago professor Richard Thaler in the 1990s, has outlined some specific targets for the approach in recent years. At the SageView event he outlined the particulars of his “90-10-90” approach — an effort to get 90% of Americans saving at least 10% of their pay, with 90% of them relying on some kind of professional money management for their portfolios.
In the course of his remarks at the SageView event, Benartzi made the following observations.
Studies have shown that defined benefit plans were riskier for participants than defined contribution plans, though it was a different kind of risk (mobility — the risk/likelihood that you’d change jobs and lost most/all of the benefit).
Decisions made on mobile devices tend to be more emotionally motivated and demonstrate less financial knowledge — “lots of dumb decisions on smartphones” — drawing into question whether we should be relying on those technologies to help people make good retirement decisions, especially for opt-out decisions. Benartzi said that when it comes to online devices, we are accustomed to unchecking boxes that are pre-checked, and that such approaches could actually backfire for certain auto approaches.
One way in which the new digital age may help is that it allows for less synchronization of contribution acceleration with an annual pay raise. The per paycheck difference is less visible, and thus engenders less resistance.
He related the story of a participant who expressed interest in a $100,000 savings goal because it sounded like a lot of money — until she was told what $100,000 would equate to in terms of a regular monthly distribution. This illustrates the importance of expressing these complicated subjects in terms that people can understand in establishing a goal.
While there is no real difference in the opt-out rates at a 3% default contribution and a 6% default, there is a big difference in outcome/result.
Benartzi noted that there is a point at which the default rate triggers a big opt-out, but that we don’t really know where that is because of difficulties in obtaining data and testing. He noted a situation he was involved with in the past where the default rate was 12% — and the opt-out rate was 75%. However, Bernartzi said, he doesn’t know where between 6% and 12% the tipping point lies.
But on the subject of those who do opt out, he said that if you give them an opportunity at the point of opt-out to enroll now for the future, 80% will do so.
Benartzi said that eventually we will come to the realization that some people should be defaulted at 4%, others at 10%, etc.
Of course, the real challenge for advisors in the future may not be changing the behaviors of participants but, as an audience member suggested, in figuring out how to change the behaviors of plan sponsors.
