Keep Pedaling!

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Last month we considered how 401(k) and Social Security add up to a two-wheeled replacement for the traditional three-legged stool. The idea is that both are proportionally more important, and should be optimized with care. There’s another interpretation, however, based on the first thing anyone learns about riding a bike: if you stop moving, it falls over. Retirees can no longer count on these programs to keep them upright without a lot of steady pedaling. Self-directed investing means that both the steering and the driving are up to you.

That’s always been the case, but until recently it’s been unfashionable to say so. Our industry is quick to point out the behavioral quirks that keep people from making prudent decisions about their retirement. We’re less ready to admit our own cognitive biases. We feel that whatever corner of the retirement world we live in is the most critical one. We think the solutions lie in technology, or finance, or policy. We believe the “retirement crisis” is only about retirement.

In fact, both the problem and the solution are bigger in scope. Retirement is inevitably connected to the whole of personal finance. If we really want to help people build retirement security, we need to do the same thing we’re asking of them: look outside the retirement box, and embrace the complexity of the challenge.

Asking the hard questions

That’s a message we’re starting to see almost everywhere outside the world of employer plans. Rather suddenly, popular media and consumer advertising have a great deal to say about retirement planning. The aging of the Baby Boom no doubt plays a role, and a surging stock market makes investment more appealing than it has been in recent years. However, we also see signs of a truly fresh approach.

For example, the national conversation is finally getting around to some hard questions many have long shied away from. How long will you actually live in retirement? How much money will you need? What concrete plans do you have – rather than vague notions of a sun-drenched existence – that you’ll want to pay for? And perhaps the toughest: why is it so difficult to do the right thing for ourselves in the face of more pressing priorities and behavioral barriers?

The answers are inherently complicated. That admission also represents something of a change from the “trust us” mentality that used to be common in the financial industry. Getting those answers, the narrative continues, requires a more holistic, more hands-on approach to retirement.

The new paternalism?
Even employers seem to be getting an inkling. Now that matching contributions have ticked back up to pre-recession levels, signs point to “a trend towards greater paternalism on the part of 401(k) plan sponsors,” according to one observer. Citing an Aon Hewitt study of plans in 2013, the article reports that the most common match formula is now dollar-for-dollar up to 6% of pay, replacing the 50-cent match in popularity.

What’s more, 76% of plans now allow contributions from day one of hire. Fully 50% offer a Roth option. And most make available some kind of advice or guidance. It certainly looks like employers are increasing their commitment to retirement readiness. But as an Aon spokesman notes, prospective employees should be careful to see retirement savings offerings as just another form of compensation to weigh in their employment decision-making (and we would add, in their overall financial planning). In other words, it’s all up to you.

Leaving the nest
Another interesting example is the latest generation of planning tools cropping up around the internet. In place of simple calculators designed for speed and ease of use, some are now detailed applications that run to many pages. Beginning with goal-setting, they offer sections on income, savings, investment, insurance, and more. One we’ve seen even comes right out and asks about the value of your house. While it’s unlikely that a simple calculator can accurately handle that piece of data, it’s a welcome reminder that retirement isn’t just about a “nest egg,” but includes the nest and everything in it.

Even the federal government is getting into the spirit with the recent proposal for tax-deferred, Treasury-managed “MyRA” accounts. These are intended primarily as an inducement to the habit of regular savings, and serve as a bridge to other vehicles, specifically IRAs. However, they do begin to address the issue that many workers don’t have access to employer-sponsored plans, and the concern that the fee structure of traditional plans may be inappropriate for those with small balances.

All of these efforts can be seen as well-meaning exceptions that prove an unavoidable rule: you’re responsible for your own retirement. For decades the industry, the government, and the public have often seemed conflicted about this reality. Now at last we may be coming to terms with the simple physics of the matter. When we do, we’ll be able to do a lot more good.

Are there other ways in which the industry is thinking big -- or failing to? As always, your comments are welcome.