A Sunday afternoon general session at the 2022 NAPA 401(k) Summit featured famed behavioral economist Shlomo Benartzi on the topic of Behavioral Economics and Retirement Income.
‘That one-size-fits-all approach doesn’t work with decumulation. The individual situations are too different.’
Shlomo Benartzi
Benartzi, Professor Emeritus, UCLA/PensionPlus began by speaking about “decumulation for humans.”
“What I mean is that I am not trying to create a solution for the Google Ph.D. in big data and the Goldman Sachs Ph.D. in financial engineering, I’m trying to create a decumulation process and solution for humans,” he explained.
Benartzi said he started to think about it more when he got to know David, the UPS driver that has delivered boxes to his house for the past 10 years. David’s been with the company for 32 years, is 62 years old and losing sleep about decumulation, when he should retire, and what will be left for his children.
Where should the UPS driver, schoolteacher or nurse go to figure out what will be left and how to adjust their spending if they want to leave something? It’s a question he claimed the industry has failed to answer.
“We have to start democratizing income planning,” Benartzi said. “We can’t continue by telling them that if they only have enough assets for a retirement advisor, but not a wealth advisor, then we’re going to try to sell them products.”
Although he’s a big fan of annuities, he added that the process shouldn’t start with a product but a process to create plans for everyone, regardless of how much money they have. To do so, the psychology of the participant must be better understood.
Noting it’s a huge problem for advisors as well, Benartzi said a rule of thumb is that they will lose 5% of the assets every year due to participants not finding a solution in the plan “and instead withdrawing the money.”
“I just met with an advisor with $6 billion under advisement, and he loses $350 million every year because we haven’t solved this for participants in the plan. He had to sell $350 million more in plans just to fill the leakage. So, let’s try to figure out a solution because the stakes are just way too big.”
Auto everything
Taking credit for “auto everything,” or automatically enrolling, escalating, and diversification that has proven to close gaps in savings behavior between men and women, have and have-nots and minorities, that one-size-fits-all approach won’t work with decumulation. The individual situations are too different.
“The differences only grow over a lifecycle,” he explained. “So, when you think about legislation in Washington, D.C. that will default people into annuities, it will be very tricky because people are very different. We’re going actually to have to start recognizing those differences.”
Emphasizing it’s not doom and gloom, participants could be defaulted into products if there was enough data, “but we are also in an industry that feels strongly not to have too much data given to advisors or recordkeepers. We’re not like Facebook or AT&T.
“It’s going to be very difficult to create a personalized solution unless we engage people, and we have to start thinking about how.”