Perspective: Better than “Good Enough”

I read with interest about Putnam Investments’ recent success with its online Lifetime Income Analysis Tool—a tool that projects how much income a participant’s savings may generate in retirement, that highlights savings gaps and, according to the report, motivated participants to raise their savings rates.

Yet, once I spent some time with the numbers, I was less encouraged—disappointed in participants, perhaps. Putnam followed a sample of 10,000 participants and, of the 34% who made some sort of change immediately, 80% increased their deferral rate. Therefore, of the 10,000 people who responded immediately, only about 27% increased their deferrals! That’s certainly a success, but is it “good enough”?

I don’t mean to discount the reality that some participants increased their savings rate, and by a noticeable 23% (bringing the average deferral rate from 7% to 8.6%). However, why didn’t more people increase savings and why wasn’t the increase larger?

We know the answer to both of those questions, actually; people say they can’t afford to do either one. I think there is, however, an opportunity for advisers to challenge those answers.

Look at this example for two things: one, gap analysis can work, and two, it is clearly not enough.

This is not the only example that shows participants react to gap analysis. Although, at first, our industry thought that showing participants how far they had to go would be harmful, the opposite generally has been shown—people want to save more; they are simply intimidated and unaware of what kinds of savings rates should be expected. Are you working with your plan sponsor clients and plan providers to show participants how much their savings will “pay” them? For all that our industry talks about retirement income and moving from accumulation to distribution phases—none of which will matter if participants don’t have enough savings—as an industry we should be trying to make this type of picture available from all vendors and discussed by all advisers.

So, if gap analysis showing people their likely shortfall isn’t enough to spur action, what are some other ideas? There was the SMART (Save More and Retire Tomorrow) program pioneered by Shlomo Benartzi and Richard Thaler; people who committed to saving more in the future stuck to it. Instead of relying on automatic programs (still not in place at a majority of employers), why not ask participants to commit to save more in the future? What about a calculator that reminds participants that deferring $1 of income won’t reduce their take-home pay by $1—they might be able to afford to put away a couple more dollars than they thought?

Of course, we might just try telling participants that saving only enough to receive the company match won’t be enough—a novel idea. It seems difficult, yes, but everyone has to face the truth sometimes—and better to face the truth when there is still time to change the outcome than when a participant is out of a job and income and has to rely on that paltry savings.

What we all need to keep in mind: While any increase in savings is laudable, is it “good enough” to provide a secure retirement?