Using digital technology and the findings of behavioral economists, these companies poke, prod and nudge customers to spend and borrow less, and to save and invest more.
Vanguard Group, which manages $2.45 trillion in assets, announced Jan. 22 that it has struck a deal with one of them, a Washington, D.C.-based start-up named HelloWallet. Calling itself a “financial wellness service,” HelloWallet will become an option for the almost 4,000 defined-contribution retirement plans that Vanguard runs, potentially making its tools available to 3.5 million workers.
With venture-capital backing by AOL founder Steve Case’s Revolution LLC and the investment research firm Morningstar, HelloWallet thinks it can improve our finances when our own best intentions and New Year’s resolutions have failed. Research and experimentation are key, says Matt Fellowes, 38, who was a retirement expert at the Brookings Institution before he launched HelloWallet in 2009. In an interview with Bloomberg’s Ben Steverman, Fellowes, who is HelloWallet’s chief executive officer, described just how he thinks the company’s brand of persuasion works, why it’s necessary and when it’s gone wrong. Edited excerpts follow:
Workers need more help preparing for retirement than they’re getting. For a lot of 401(k) participants, there’s this mirage of success. Their 401(k) balance goes up and their savings deferrals go up. On the other side of the ledger, though, some 64 percent of plan participants are accumulating debt faster than they’re accumulating savings. So net-net they’re not getting ahead.
There’s so much marketing and attention on investment returns — even though a small fraction of the value for participants comes from investment allocation decisions. In an upcoming paper, we found that for half of the 401(k) marketplace, 96 percent of their balance is a function of their contributions and employer matches. Only about 4 percent is investment returns.
One main component of advice is a math problem: What should I do with this dollar of income? Should I put it in a Roth IRA, a traditional IRA, pay off my credit card, save for a mortgage or put it in my 401(k)?
You can use behavioral economics in a technology environment to influence people’s decisions and help them do what’s in their best interests. In some cases, peer pressure works. In some cases, just giving people the information works. In other cases, incentives work.
I always like to talk about an example that failed, about three years ago.