July 13, 2018

(That’s poorly written clickbait, but if I had another title referencing pensions, I didn't think anyone would read it. So let's talk pensions.) Recently, I wrote a post about pensions and within the post, spoke a bit about the ever-changing state of the pension industry, and frankly, the shaky footing that some of the industry stands on. The difficulties facing pensions have created a massive shift in the way companies help (or don’t) their respective workforces save for retirement. This, combined with a century of relentless advances in average life expectancies and few adjustments to account for these, has forced many who previously relied on the mindless and automatic retirement savings provided by a pension plan (I’m not presenting this as a negative, if anything, it was a positive) to shift to making the conscious and numerous choices necessary to invest in their company retirement plans – typically 401(k)s. And they’re not doing it. I listened to a couple of TED talks, each attacking a different angle of the consequences of, and solutions to, this shift. The outcomes for many have been disheartening, as evidenced by Elizabeth White’s talk – ‘An honest look at the personal finance crisis’ – but we have sufficient knowledge to alter the course of the conversation, which is the topic of the second talk given by Shlomo Benartzi.

Elizabeth’s talk was a sober, and at times grim, look at the retirement crisis facing many Americans, specifically Boomers. She spoke of the $7.7 trillion retirement funding gap facing the country today, of the fact that now, only 13% of companies offer their employees pensions (a number that has and will likely continue to shrink), and of the fact that only half of Americans have any retirement savings at all. To paint an even starker picture, of the half that have savings, the median balance of those ages 55-64 is only $104,000 – a number that she said equates to an annuity paying a little over $300 per month. She spoke about Social Security and the relatively small (40% at best, in her terms) amount of income it replaces in retirement, and how it was never intended as anything more than a supplement in the first place (all accurate takes, in my opinion). The talk went forward to discuss how she felt her generation would need to address the fact that so many of them, including someone like her, a graduate of Harvard Business School, had difficulty making ends meet (she said only one-third of adults eligible for food stamps applies for them, likely hiding money issues because of embarassment), let alone saving for retirement. She said the group would have to get comfortable doing work that ‘we think is beneath our station and talent and skill.’ [1]

The purpose of this post is not to cause a spike in Prozac sales or to, as one of our client’s preferred method of handling a potential retirement funding gap goes, increase the lard content in your cooking as life goes on. It’s to acknowledge that Elizabeth’s talk is an accurate representation of reality for some – but it’s not destiny. The issues facing many today can be averted by acknowledging the challenges confronting individual savers and investors and taking the simple (but not always easy, as you’ll see) steps to addressing our shortcomings as a species.

This takes us to TED talk #2 – ‘Saving for tomorrow, tomorrow’ – by Shlomo Benartzi. If you decide to watch the talk – and you won’t, because you’re not even convinced you want to read a post this long all the way to the end, you have so many important apps to scroll through today – be forewarned that Shlomo has a thick accent, which he makes up for with a good bit of humor. He starts his talk by saying, ‘A lot of people buy the biggest house they can afford…and actually slightly bigger than that…and then they foreclose…and then they blame the banks.’ Too soon, Shlomo, too soon (the talk is from 2011). He, like Elizabeth, goes on to give some stats to paint a picture of the personal finance crisis facing Americans. American households spend an average of $1000 per year on lottery tickets. Only 50% or so of us have access to a 401(k), only 33% actually save in that plan, and only 11% actually think they’re saving ‘enough.’ Among the issues, he says, is human beings’ inability to predict their future actions.[2]

He started with a story about a study that was done, asking participants in a group setting – if next week at this time you are offered a snack choice of chocolate or a banana, which would you choose? The group stated that they would choose the banana over chocolate at a rate of 74% to 26%. You can see where this is going. Next week when they came back, they were faced with this exact decision – and chose chocolate at a 70% clip. In his words, self-control isn’t a problem in the future, just in the now (because we value the present more than the future). Further, he discussed organ donation statistics in a couple of European nations, showing that by changing the way people sign up (checking a box to donate or checking a box to opt out of donating) Germany has a 12% donation rate and Austria a 99% donation rate – because even checking a box is too difficult.[3]

He also discussed an experiment with monkeys in which the first group is given an apple and they’re very happy, while the second group is given two and one is subsequently taken away, so they now have one, and they’re very unhappy. The issue, as he says, is loss aversion – something that upsets humans and monkeys (and cats and dogs) alike. How does this relate to savings you might ask? (You didn’t ask? Well, I’ll tell you anyway.) People think of savings as a loss – if I save money today, how will I afford to buy another romphim (you may have to google that)? The answer, which he clearly lays out, is getting people to save more, not today, but tomorrow. They did a study indicating that such a strategy actually works beautifully, asking employees to commit to increasing savings by 3% every time they received a raise and the result was that, over a four year period, the savings rate of employees in one company went from 3.5% to 13.6% - a fairly remarkable accomplishment in that kind of timeframe. And now, over 60% of company 401(k) plans offer such an option.[4]

The point of this post, which may have felt to the carnivorous among you like staring at a plate of quinoa for 30 minutes while waiting for your porterhouse to arrive, was that good intentions are not nearly enough. You can be a well-intentioned person, but loss aversion and present bias and a derivative of Parkinson’s law (the idea that expenses rise to meet income) will prevent savings from ever becoming a reality in the absence of concrete steps and a plan. If you don’t make savings automatic, your chances of retiring with an adequate amount of money are about as good as a banana being my snack of choice this afternoon. If you don’t have a plan, and preferably someone to hold you accountable to that plan, the outlook has the potential to be equally dismal. If there isn’t some system in place that forces you to save and invest without you constantly being required to decide to do so, well, your goal of playing on the PGA Tour might turn into a 4.2 handicap with an occasional case of the yips. Sorry for making it personal. Do yourself a favor and don’t trust yourself, you’ll thank me later.




[3] Ibid.

[4] Ibid.

LPL Financial is not affiliated with Elizabeth White, Shlomo Benartzi or TED Talks. The opinions of Elizabeth White and Shlomo Benartzi do not necessarily reflect those of LPL Financial.  This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.