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Retirement Planning > Saving for Retirement

The ‘Mirage of Success’ Shimmering in Your 401(k)

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Manipulation used to be a bad word. Now, for a growing number of financial startups, it’s a stated goal.

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.

A prominent behavioral economist had written a paper showing that if you send an e-mail to people about their credit card balance at the time they receive their bill, and if you let them know what the cost of maintaining credit card debt is, they were more likely to pay off their debt faster.

The economist said: “Let’s test that in your product. Let’s send people a note on Friday evenings about how much they can safely spend over the weekend.” Over the weekends, people blow their paychecks, build up credit card debt and buy things they shouldn’t. So, for four weeks, we ran this personalized e-mail alerting people to how much they could safely spend heading into the weekend.

What we found is that we systematically increased spending on the weekend. It had the opposite effect because we were basically giving people permission to spend. That was an example of something that worked in a laboratory but didn’t work in real life.

Some things did work. We tested another behavioral economist’s ideas on how to help people pay off credit card debt faster. The conventional wisdom is to start with the card charging the highest interest. That’s optimal from a mathematical point of view. We tested that alongside another group; we recommended to them that they focus on their card with the lowest dollar balance first.

The thinking there, from the behavioral economics world: It builds confidence if people can tackle low-hanging fruit. They feel a sense of accomplishment and then move on to harder problems. That sample paid off their debt two times faster compared to the sample that was focused on the higher-interest debt first.

Generally speaking, people are spending too much today and saving too little for tomorrow. We really, really aggressively experimented with lots of ideas about how to get people to increase savings. There are dozens of different ways we do that. And we’ve been very successful, increasing savings deferrals by $150 over a one-month period.

We help people build emergency savings. Across the U.S., 84% of the population doesn’t have three or more months of income saved in a liquid account. Just the knowledge we provided to people about all the negative consequences of not having emergency savings is very influential. In some cases, we’ll send emails letting people know what their emergency savings look like relative to people with the same income and education. That’s been effective for some employees. Also, there’s just the greater awareness we provide members on where their money’s going, and how much they need to save for things they want. They really can’t figure out how much to save for retirement or for health care if they don’t know how much they spend on groceries.


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