As the societal experiment to shift liability and responsibility to save for retirement from corporations and governments to individuals called 401(k) plans continues, it’s time to get real about what’s working and what’s not.
What’s working is payroll-deducted retirement plans using auto features to get people in the plans, save enough and invest wisely using professionally managed investments. The incredible demand for financial wellness by plan sponsors, 110 million defined contribution accounts and over $22 trillion in IRAs and DC plans are working. With legislation pending or passed in all but four states, tax incentives for small businesses in SECURE 2.0 plus the growing importance of retirement plans for recruiting and retention, the explosive growth of the small plan/startup plan market has only just begun.
Leveraging academic research like what professors Shlomo Benartzi and Richard Thaler conducted leading to auto features or what UCLA professor Hal Hershfield has done about our relationship with our future selves is working. Provider or industry-driven research that, while valuable, will only validate what we think is happening, not uncover a “new reality.”
Participant education is not working and is no more than a fiduciary hedge or “feel good” activity. Pushing for more education validates one of the biggest inhibitors for participants to engage—shame. The message is, “You should have known better. We are going to educate you so you don’t keep making stupid mistakes.” Auto features did for participants what they would not do themselves with stunning results.
Focusing exclusively on accumulation and the asset side of a “personal pension plan” P&L, which is what DC participants are managing, is not working and is dangerous. We need to also focus on debt as well as liabilities like DB managers who use liability-driven investing.
As Benartzi outlines in his recent interview on 401k Real Chat, automatically enrolling people into a retirement income plan will not work. The good news is that as people approach retirement, there are very promising initial engage successes.
Risk tolerance questions and asking people what they want do not work. We need to understand their goals and aspirations and ask less direct financial questions to create a plan that understands their fears and emotions, not eliminate or ignore them, as Carson Group’s Jamie Hopkins brilliantly outlines in a three-minute video.
The lack of data sharing and the looming war between record-keepers and advisors over who gets to serve and monetize participants will not work. There are plenty of opportunities for everyone. Shouldn’t we cooperate and let the plan fiduciaries and participants decide, or act like stewards and determine what works best for that plan or type of participant?
Even the initial conceit of this column does not really work. Chapter 64 of the Tao states, “The journey of a thousand miles starts from beneath your feet.” Beyond the 3% of participants with $1 million in investible assets, why not start with the next 7% with at least $500,000? Or the HENRYs (high earners not rich yet), with lots of cash and little debt? Or those within five to 10 years of retirement more willing to engage?
While there is lots of noise about financial wellness and DC tech, which The Wise Rhino Dick Darian characterizes as lots of condiments without hotdogs, and lots of attention on retirement income inhibited by the lack of transferability from one record-keeper to another, and lots of talk about education that does not work and reinforces shame, there is hope and there are signs of progress.
What’s working is action based on academic research, renewed engagement by plan sponsors, the explosion of small and startup plans, the implementation of auto features, and the initial engagement successes with near retirees as well as the Portability Services Network, which allows record-keepers to share data.
Whether we can professionally land this great societal experiment called 401(k) plans, with lots of passengers already on board, starts with treating participants like real people, not data points, who have real aspirations and emotions that get more disparate as they approach retirement.