Going Dutch

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What do people in the Netherlands practice openly that’s almost inconceivable here? Eating frites with mayonnaise, of course. Safe and universal bike transit also comes to mind. Oh, and one other thing: big-picture thinking about what retirement planning should be all about.

Specifically, we refer to a program reported here that seeks to split the difference between defined-benefit and defined-contribution plans to create a “defined-ambition” plan. The idea is to shift some responsibility for a guaranteed income back to the employer – but ease the burden with adjustable targets and new income-focused investment strategies.

The new approach is already up and running in the Netherlands. While it’s not likely anything similar will be adopted here soon, we do love the name. The renewed focus on income, and the wise admission that long-term guarantees are imprudent without some flexibility, both have interesting implications for the future of 401(k).

Blue-sky ideas also help us step away from the details and ask big questions. Such as: What should the “401(k) of the future” look like?

It just works
As we’ve discussed before, the retirement system of the future should operate like your car, your phone, or the Internet (on a good day, at least). The technical inner workings are something you don’t even think about. They just work. All you would see are the results: regular deductions while you work, then regular income payments when you retire.

This isn’t simply a matter of convenience. Behavioral economics research and our own experience show that many people consistently make poor decisions about their retirement finances. “All-in-one” solutions of various kinds have made the decision path easier for plan investors. However, we find most of them disappointing, largely because they are too generic to meet many people’s real life goals.

Fully automatic

What’s even better? Solutions that make practically everything automatic. Start with universal, automatic enrollment. Then add a default savings rate that’s much higher than today’s average of 3.4%. Ideally this would be set individually, based on personalized modeling and a target income. But even a default of 10% or 12% would help set realistic expectations. In Australia, for example, a 9.25% rate is now virtually mandatory, and it’s set to increase gradually to 12%. Behaviorally speaking, opting out should feel less like a personal preference and more like defeating the seatbelt buzzer in your car – fairly easy to do, but very clearly a bad idea.

A fully automatic 401(k) would also “know” much more about your financial circumstances than just your salary and age. It should include your target retirement income, all significant assets and income streams, and any major  needs on the expense side of the ledger as well. When any of these change, your retirement strategy changes automatically in response.

This might sound farfetched, but much the same thing is slowly becoming a reality in medicine, where the goal is to give you and your physician a complete, dynamic, and accessible picture of your health. Even industry professionals in recentTransamerica survey believe that in just five years nearly 60% of plans will offer “a personalized report that tells you how much to save in order to reach a fully funded retirement.”

Call in the professionals
Many of these automatic features rest on one key assumption: that the 401(k) of the future will be professionally managed using institutional methods and standards. The average retirement investor may like the ideas of choice and control. But in practice most would prefer to let a trusted advisor handle the details more or less invisibly.

Someday we’d like to look back on the era of truly self-directed plans as a sort of social experiment. It helped show us the importance of personalization, and underscored the need for professional involvement. Then it gracefully faded away, leaving just a handful of hardcore do-it-yourself investors – probably the same people who fix their own computers and rebuild their own homes.

All are welcome
The last principle we suggest is near-universal inclusiveness. The details will be tricky: we certainly don’t advocate a government-driven plan, or mandatory sponsorship for employers. We think the answer lies somewhere between real portability and what an engineer would call interoperability.

Imagine if you could take your account balance with you from one employer to the next, with the same or similar features and management. Now imagine keeping it intact when you’re self-employed or unemployed, without jumping through a series of hoops to set up and fund a “solo-k” or IRA.

Reimagining the future

If all this sounds wildly optimistic, consider that we’re not alone. The National Association of Retirement Plan Participants (NARPP) is a great example. Co-founded by behavioral economist Shlomo Benartzi, this independent, cross-disciplinary organization is “reimagining the retirement landscape” from the point of view of everyday people.

Their intent is no less than to do for retirement planning what Google, Apple, and social media have done to reshape the ways we gain, understand, use, and share information. It’s a lofty goal – until you consider that it isn’t, really. The information revolution has changed what we do and how we do it, nearly every minute of every day. All NARPP wants is to connect existing information, technologies, and expertise to solve a single challenge.

Qu'est-ce que c'est?
We admit it, we love the big picture. But our practical side calls for something, anything, that we can do right now to improve retirement.

Sensible people agree that terminology we take for granted in 401(k) world is nearly incomprehensible in the real world. It reminds us of Steve Martin’s advice about visiting France: “When you go over there… ‘Chapeau’ means hat. ‘Oeuf’ means egg. It’s like those French have a different word for everything.”

So in the spirit of daily affirmation, let’s change the way we talk about retirement. Call “Participants” investors, or simply people, anywhere outside a plan document. Don’t say “allocation,” say investments. “Distribution” becomes income. You get the idea. It’s a small step, but by changing how we talk, we can reshape how we think. Let’s hope that leads to thinking big.