Coercion versus Changing Behavior

by | Jan 5, 2018 | Investor Behavior, Financial Planning

When we begin working with new clients, we try our best to explain investing is (to some small degree) a participation sport. Clients need to be involved! And for the most part, clients get it. I’d like to believe we do a good job of explaining what’s needed and we stay in good contact.

But I was thinking about that as I read the article in this morning’s issue (January 5, 2018) of the Wall Street Journal about the “Downside of Automatic Savings: More Debt.”  The WSJ is a subscription website. I’ll spare you the expense: the gist of the story sits squarely in that headline.

Coercion versus Changing BehaviorIt seems that what folks are learning is: getting new hires automatically invested in a 401k at work, WILL build their account balances. Nearly 70% of all plans feature some form of automatic enrollment, according to the article.

That’s the good part.

The bad part: many are discovering these very same folks are now carrying larger debt balances. If you think it through, it may make some sense. Automatically enrolling new hires into a 401k account takes current cash flow out of their pocket — money that could be used to pay down student debt, pay down a car loan, credit card balances or save for a down payment on a home.

From a related WSJ article today from Anne Tergesen (@annetergesen), Neil Lloyd, head of U.S. defined contribution and financial wellness research at consulting firm Mercer, said “the findings aren’t a total surprise. He cites a client with high employee turnover that recently added auto-enrollment only to reverse course after the number of 401(k) loans increased.” according to the WSJ article.

Young people are learning the importance of saving for retirement. The investment industry has done a fair job (not a great job) getting that message out. We could do better. But plowing money from each pay period into an account that can’t (or better, shouldn’t) be tapped for twenty, thirty years or longer makes little sense when you are having trouble paying a student loan, or saving for a down payment on a home.

Or carrying some other kinds of debt.

I’ve commented on similar themed-articles in the WSJ in the past: if we can construct a model that forces new hires to automatically enroll in a retirement plan, why can’t employers construct a model that forces (“encourages” may sound less strangling) encourages new hires to build a primary after-tax savings account first?

Suppose once a new hire reaches $10,000 in a savings bucket, they would then be invited to join the 401k plan at work? This would reduce the potential for tapping into the 401k account for a new car, paying off credit cards, or student loans, or for that big down payment.  Holding a 401k loan is still a loan that needs to be repaid.

Plus, we’ve discussed with our planning clients how a clear shift in mindset develops when you have a few bucks in the bank. Planning clients have told us how they relax and don’t stress as much when there’s a cash balance available for emergencies, instead of “praying” your car won’t break down.

We work with clients who carry 403b, 457 accounts and 401k accounts. Currently we see 29% of our clients with these retirement plans carrying loan balances against a retirement account. And of our clients under age 35 (not a small sample size), the number approaches 50%.

But one of the comments in the WSJ article made me sit back and think “bigger picture.” The commenter wrote: “So coercion is not a good way to change people’s behavior? Shocking.”

If employers are going to be “in the coercion business” by forcing new hires to automatically enroll in a retirement account, maybe they ought to consider the post-tax savings plan I’ve suggested as an alternative.

On the other hand, perhaps what might make a better suggestion would be to have employers provide new employees a mandatory one-on-one sit-down with a fiduciary financial planner for sixty minutes (at the employers expense) to talk about some choices they ought to consider before enrolling in a plan.

For the record to employers, the Mullooly Asset Management team is available for these arrangements!

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