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March 29, 2012 at 10:54 AM
Speaking of retirement planning in general and 401(k) plans in particular, Professor Shlomo Benartzi said Wednesday night that “we’ve created airplanes without landing gear.” He suggested that some progress has been made in encouraging American workers to save more for their retirement and to do so in more appropriate vehicles, but acknowledged in his use of the airplanes metaphor that “we haven’t created income solutions” for getting cash out of retirement plans.
Spe
aking at a gathering that marked the publication of his latest book, Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans, Benartzi (left) only half-joked when he said that while his book (co-authored by Roger Lewin) is “meant to get people to save enough” in their retirement plans, his next one “may be how to get income” out of those plans.
The UCLA professor, who is also chief behavioral economist at the Allianz Center for Behavioral Finance, addressed what he said were the three biggest behavioral finance obstacles for workers saving for retirement, and ways to overcome those obstacles.
The first obstacle is inertia. “Filling out the paperwork for a 401(k) might seem easy,” he said in a conversation with Jason Zweig of The Wall Street Journal, “but it’s difficult for many people,” so the solution is to enroll workers in a plan automatically. The experience of plan sponsors who adopt auto enrollment schemes, where a worker must opt out of a plan rather than be asked to opt in, is that more workers join plans. Benartzi argues in his book that in addition to just enrolling people automatically, a default savings rate and appropriate asset allocation be chosen for the worker. Benartzi characterizes this approach in behavioral finance terminology as “changing the choice architecture.”
The second is loss aversion, the principle that most people fear the possibility of loss much more (twice as much, in fact) than they are attracted to the prospects of a gain. The principle plays out in retirement planning when workers are reluctant to increase their savings because they will immediately see a decrease in their take-home pay. The basic solution, Benartzi argues in the book, is to synchronize saving increases with pay increases, so the face value of workers’ paychecks never declines, or alternately to split pay increases 50/50, with half going toward retirement and half showing up in the paycheck.
