Et Tu, Shlomo – A Response to Benartzi’s Response

  Editor’s Note: To his credit, Shlomo Benartzi took the time to respond to my recent column on his Wall Street Journal op-ed on LinkedIn (you can read it here) — though to my read, the concerns expressed on where such a proposal could lead remain. Consider this a brief follow-up.     

Shlomo,

Whew! I can’t tell you how relieved I am/was to have you clarify that you are NOT advocating a government-run retirement plan system. I guess you referring to three specific government-run systems as models to be considered persuaded me that you thought those were good examples for us.

You’ve now pointed more specifically to the Australian model where “workers remain by default with their first plan provider, even if they change jobs.” But as I am sure you know, there are some significant differences between that system and ours — differences that, to my eye, wind up being significant. 

First and foremost, that system is funded primarily by mandatory employer contributions at a fixed rate (on its way to 12%). So, there is no default “reset” when you change jobs — your new employer just keeps putting in the same amount your previous one did. I feel that this default reset was a primary motivator in your recommendation — but that system and ours are “apples and oranges” when it comes to employee contribution defaults. They don’t have the problem you are trying to solve because the government dictates the contribution amount — with no acceleration.

Secondly, and perhaps because we’re (only) talking about employer contributions, there is no access to that Australian system money before retirement (or conditions, like disability, similar to it). I think that makes this money — and feelings about it — different than employee salary deferrals. My financial circumstances change over time, and as your op-ed acknowledges, might do so particularly with job change. I’d have no such option in that system. Good for retirement, perhaps — but for life?      

Thirdly, while the Australian system DOES have private-sector money managers (and a handful of system trustees), those are government overseen and provide a SIGNIFICANTLY smaller list of choices than one would find here. I don’t doubt that those smaller numbers (it’s a smaller market, after all) compete for business, but I haven’t seen the kind of innovations there that we’re seeing here every day (things like the auto-portability provisions/network, which as I wrote, would significantly smooth the rollover process/outcome — PARTICULARLY for small balances that were of a particular concern in your op-ed). While it may not be a government-run program per se (beyond mandating contributions, restricting access until retirement and oversight of the providers), there’s clearly a strong government “influence.”

Finally, people continue making a big deal about how employment patterns in the U.S. have changed — but the data just doesn’t support that. Oh, sure — we now have a label for some of that (“gig” workers), but in the private sector, tenure and turnover have been remarkably consistent…since WWII. Lifetime employment is (and was always) a myth outside of the public sector and certain union occupations.

Shlomo, you’ve been a great supporter and advocate for retirement savings — someone I deeply admire and respect. My comments weren’t meant as an effort to forestall new thinking — rather I see this remarkable and dynamic industry constantly working to improve and expand. 

Not so long ago we didn’t have a reset default “problem” because (a) there were no defaults, and (b) there was no contribution acceleration to reset from. Those are positive developments — that the private retirement system is working on. Let’s not throw that “baby” out with the bathwater by reducing choice and access.    

Your Friend,

Nevin

Et tu, Shlomo?

 As Halloween approaches, a leading behavioral science academic has embraced a truly scary idea that involves your 401(k) account.

That academic, as you might deduce from the title, is none other than Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management — and more specifically a champion of the application of behavioral finance concepts to retirement plans, notably automatic enrollment and contribution acceleration.

As for that scary recommendation, Benartzi has — in a Wall Street Journal op-ed — effectively backed the notion of creating big government-run pools of retirement savings — where ALL retirement savings would be put.

“We no longer have jobs for life” he rationalizes, though employment tenure in the private sector has been pretty consistent going all the way back to the 1940s. What HAS changed is the predominance of defined contribution savings plans and — ironically — that system’s increasing reliance on the behavioral science designs that Benartzi has long championed. It’s been shown that folks who rely on automatic enrollment — and, more significantly, contribution accelerants — tend not to maintain that rate of saving when they change jobs. Rather, and perhaps not surprisingly, having established a pattern of relying on that default, their contribution rate in the new plan tends to be reset — at the starting default contribution rate.[i]

Benartzi would solve this dynamic by separating the participant from his employer-sponsored plan, sending contributions to some means of central government-run plan. He specifically cites CalSavers (a state-run IRA program), as well as two international “solutions” — the Australian Superannuation funds and the UK’s National Employment Savings Trust (NEST).

Nor is Benartzi unmindful of the implications here. In the op-ed he admits, “Of course, these are effective solutions only if both your former and current employer use the same retirement-plan provider, which isn’t a given in the fragmented American system.” He then goes on to offer a “solution” — “having one provider for all, but that would eliminate market competition, reducing provider incentives to offer better plan features and service.” Ya think?

He cites the Australian model as a solution to that — though it’s a “super” finite list of providers relative to the American market.

Ultimately, however, it’s a solution in search of a problem. Defined contribution savings are already, in fact, portable — if not to a successor plan, then to an IRA — and have always been. Beyond that, automated rollovers as a distribution default is an emerging capability — via networks like the Portability Services Network that already connect a half dozen of the nation’s leading recordkeepers to facilitate exactly the type of job-to-job plan transfer Benartzi seems to think only a centralized government pool could accomplish.

Oddly enough, the big problem he seems to be trying to address is the reset of the default deferral rate at job change but his big government “solution” would — at best — still require[ii] some kind of massive employer-to-employer payroll data transfer — and the op-ed doesn’t even acknowledge the cost or challenges in developing or administering that transfer (or what might go wrong). He points to data that suggests that participants want tools like contribution acceleration to boost their savings — but apparently thinks individuals are unwilling or incapable of relaying that information to their next employer.[iii]

Benartzi concludes that “we need to develop retirement accounts that fit the way we work and live today.”

Somebody should tell him we already have.

- Nevin E. Adams, JD

NOTE: subsequent to the posting of this article, and despite the implications of the comments in the op-ed, Professor Benartzi assured me he is NOT in favor of a government-run retirement system. Here is his "response".

[i] They COULD, of course, override that default rate at any time.

[ii] He also assumes – incorrectly, I believe – that that kind of information is already shared via the CalSavers program during job change. When you change jobs, the new payroll provider and/or recordkeeper (not to mention employer) have no way of knowing what you were deferring previously – unless you tell them.

[iii] Some of his concern is based on a recent report by Vanguard that claims job-changing could cost folks $300,000 in retirement savings – but it’s based on some assumptions and extrapolations that likely exaggerate the impact for the vast majority of real savers and job changers.

The Big(ger) Picture

Our industry often seems to treat participants like children who can’t make big decisions—but a recent research paper suggests they might make better choices if we expanded their perspective.

The paper, intriguingly titled “Financial Wellness Meets Behavioral Economics,” highlights a behavioral tendency known as “narrow framing”—basically a tendency to focus on one complex choice, or one element of a complex choice, at a time.  Now, at first blush this seems rational, and perhaps even prudent—but the paper suggests that this kind of linear thinking means that people are inclined to overlook real-life disruptions like financial emergencies—which are not only uncertain with regard to amount or timing, but even in terms of whether they will occur at all. Little wonder, therefore,  that studies routinely find that workers say they are ill prepared to come up with the funds to cover some kind of short-term emergency outlay of $400.

This particular e paper—authored by none other than Shlomo Benartzi, Professor Emeritus, UCLA Anderson School of Management and Senior Academic Advisor at Voya Financial, which published the paper—explains that “when it comes to household financial planning, the ‘one future’ fallacy often leads people to focus on predictable and recurring expenses, such as rent and the monthly phone bill.” It cites research by Abigail Sussman and Adam Alter that finds that people struggle to budget for any kind of “exceptional expense,” whether it’s a summer vacation or a new television. Since these expenses are not recurring, and most household budgets are narrowly framed around regular monthly charges, people fail to consider them as part of their financial plan. So far, so good.

The paper’s ultimate premise seems to be that if people could see the full range of their financial needs, they could do a better job of allocating funds—that, among other things,  they’d make more rational health care decisions if they were presented a full integrated cost impact of a plan with premiums and deductibles (the author suggests most focus on the deductible). In short, the paper suggests that we (advisors and the retirement industry generally) need to do a better, holistic job of helping individuals see the full range of options and alternatives, work with them to choose the most optimal—and, of course, make it easy for them to act, rather than defer acting on those choices.

Or, said another way (as the paper does), “the ultimate goal is to develop a data-driven financial wellness platform that helps people better allocate their scarce dollars.”

Now I don’t doubt for a minute that people “overlook” budgeting for emergency expenses because they don’t view them as a specific reality (I also figure that many don’t because they feel they have other, better uses for that money, including perhaps “eating”). In that sense, creating a “slot” for emergencies alongside the budgetary savings/spending slot for “retirement,” rent, food, and transportation is logical in both acknowledging the potential need alongside those that tend to be seen as “must-pays.”   

I’m not altogether sure, however, that an unspecified emergency (and approximated cost) will warrant the appropriate attention—and more than a little concerned that if it did, it would do so at the expense of items that feel more “discretionary” (like retirement).[i] And while this may be old-world thinking, I’ve seen (and heard of) far too many situations where giving people not only lots of decisions to make, but forcing them to come up with “answers” for all of them might well produce a misallocation of resources—or in a worst-case scenario, forestall a decision of any kind whatsoever.   

So from an academic perspective, “narrow framing” might well be a “bad behavior” that precludes “rational” decision-making, though I tend to see it more as a coping strategy for folks struggling to make complex financial decisions spread across limited means. But then I’d also argue that sometimes you need to make choices that, while perhaps deemed financially rational, aren’t necessarily the ones you need to make in order to sleep at night.

Thoughts?

- Nevin E. Adams, JD

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[i] I am, however, convinced that the positioning of health care programs/options/expenses could do with some improvement.