Though Americans bristle at the prospect of being told to do anything – and become even more defensive when they're forced to do things they don't want to do – sometimes it's not as bad as it seems.
I speak not of the thorny issues of health care, but rather the nebulous notion of retirement savings. More than once at an industry conference earlier this week, the notion of behavioral finance came up and it seems pretty clear that to help people reach some extremely nebulous but substantial retirement goals, you've got to use some psychology.
And, maybe, take away their freedom of choice. For their own good.
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The context for all of this heavy-handed behavior is the well-intentioned but way-too-optional-for-its-own-good 401(k). Put simply, while it's a relatively good tool – especially if it's the only tool most American workers have, minus the prospect of some possible Social Security benefits, perhaps maybe - it's a totally ineffective tool if people don't use it. A waste of money, in fact. And your time.
And American workers, hard-pressed after four years of recession and layoffs and cutbacks and draw-downs and general malaise, are not excited about parting with their hard-earned paychecks. Even if you convince them that their own savings are the only help they'll have in avoiding the poorhouse in their later years.
UCLA's Schlomo Benartzi has a better solution, as dangerous as it may sound to freedom-loving, ruggedly individual, "don't tell me how to run my life/wait, I'll sue you for not helping me run my life and giving me the right advice" wage-earners out there.
Auto-enrolment and auto-escalation. Get people involved as soon as possible and, like it or not, make the choice to participate not so much a choice as a more a chance to opt out if they really genuinely don't want to have any retirement savings at all.
By turning it into an automatic routine and not a thick pile of investment prospectuses and fee disclosure information and projected outcomes and disclaimers to be handled by individuals with no financial management skills whatsoever, you might be doing participants a favor.
Then, by cranking up the knob on the auto-escalation machine, those deferrals can go from a little to quite a bit, but the participants' pain level will hardly be affected. They may not even notice. And they will thank you in the very long run.
Benartzi's benchmark is 90 percent of the workforce saving 10 percent of their income for retirement, and having 90 percent of those savers working with financial professionals to optimize the outcome. It's as simple as that.
Others say you should really be saving 15 to 20 percent of your income – T. Rowe Price sets that as a standard, though that seems a little steep for most folks, considering the ongoing financial situation, and all of their other needs.
In any case, 10 percent is better than 3 percent. Or nothing. And by getting participants automatically enrolled at the start and starting them at a higher rate – 6 percent seems to be the generally accepted, "this will actually produce some results" level of deferral, the employer match is better utilized and the savings could and should mount. Minus any unplanned market disaster, again.
Freedom of choice is overrated. Occasionally.
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