Behavioral economist, TED Talker and UCLA professor Dr. Shlomo Benartzi shoots high. His goal is to “help people make better decisions on a very large scale.” On a more granular level, these lofty aspirations translate to the Save More Tomorrow program (SMarT), an auto-escalation program for 401(k) participants he developed with famed colleague Dr. Richard Thaler.
“When you get a committed advisor to improve the outcomes for a plan, you can actually transform the prospect of retirement for employees,” Benartzi recently explained in an interview with Cammack Retirement Group vice president and senior consultant Jeff Snyder. “They call it a behavior finance makeover.”
Snyder asked Benartzi about the problems and perils associated with “de-cumulation” from a behavioral standpoint, and what can be done to help ensure retirement assets last.
Dr. Shlomo Benartzi: I think one of the key insights from behavioral economics and behavioral finance is that if you make the right decision easy, people will do it [emphasis ours]. We have all probably learned by now about changing the default, and what I mean by that is automatically enrolling employees into 401(k) plans. If they don’t like it, they can opt out.
One of the issues, though, is what do we do with the people who opt out? Industry practice is to write them off – we forget about them. They have to find their way back into the plan, to navigate the complicated website and fill out forms, and it’s very challenging for most people. If you believe that most of the people who opt out would like to save for retirement – but not today – we could ask one little question: “when would you like to join the plan?” So, as people are opting out, we would just ask them if they would like to start saving next January, and then just make it happen.
The evidence we have is that it is very easy for people to imagine doing the right things in the future, like exercising more and like saving for retirement, so we believe that 80% of the people who opt out will actually commit at the point of opting out to save more in the future. If you have a plan that has reached a very impressive participation rate of 88%, by simply asking the people who opt, “would you like to save next year?” we could probably get that plan participation rate to 96%.
There is a critical general lesson here that the devil is in the details. Everyone talks talked about behavioral finance – the behavioral finance bubble – but you have to think about how exactly you implement things and what questions you ask the people who opt out so that you actually get the maximum benefits of the plan and the highest participation rates, savings rates and proper diversification.
Jeffrey H. Snyder: You have spent a lot of time talking about accumulation and bringing people into the program. We know that people have to accumulate assets, start early, and contribute at the right rate. But what happens at or near retirement? Taking money out of the program, what does that look like? I think that is something with which the industry is really struggling.
Benartzi: It is a very difficult problem to solve. The accumulation phase – saving for retirement – is a lot easier. If you take college graduates, for example, the vast majority is healthy, they are excited about the next job, and they have decades to work and save. We can favor the one shoe fits all approach and put them all into the 401(k) plan. If they don’t like it, they can opt out, but they should all probably be saving. We could increase those savings rates over time, so they slowly but surely save more; we could put them in a very well diversified fund that could adjust based on age, with low fees, and eventually on autopilot to a dignified retirement. The point is that individual differences in preferences and circumstances widen, a lot, over a lifetime and at the point of retirement you cannot have the one shoe fits all approach.
Read more on CammackRetirement.com.