Trade-offs
Over the weekend, my 4-year-old daughter decided she was ready to break into her “spending” jar of allowance money. My two daughters receive an allowance every week, and we’ve implemented our own version of automatic enrollment by mandating savings: 50% of it is put into a jar that says “Spend,” 30% goes into “Save,” and the last 20% is for the “Give” jar.
As much as I like to think my daughters are unique, they do share one trait with most children: Nearly every time we go into a store that sells toys or clothes or books, they ask for something. They may not throw tantrums when they don’t get what they want, but, still, it inevitably leads to a conversation about why I don’t want to buy yet another stuffed animal or My Little Pony. So, when my daughter decided that, since she was going out with her father this weekend, she wanted to bring along the money from the spending jar, on the one hand, I was thrilled. On the other, I was nervous about what she might bring home. Imagine my surprise when she returned empty-handed and put the money back in the jar.
When I asked her why, she explained that she had realized two things: first, that many of the toys were $30 or more, and she didn’t have that much yet; and, second, if she spent her money, she would be further away from the big-ticket item she had been eyeing. Now, that’s pretty good reasoning for a 4-year-old, and I can only hope she continues to keep those principles in mind as she gets older.
We in the world of retirement plans are all too familiar with this concept of trade-offs—“short term vs. long term” is at the heart of our messaging. In fact, there are any number of studies showing what participants will give up now for later or what they will buy today instead of saving for tomorrow.
Our recent PLANSPONSOR Participant Survey shows many examples of this theme. When discussing the most surprising results with one of our research directors, he said that, having spent time with the data, what jumped out at him was how conflicted people are in valuing short-term/immediate rewards vs. long-term interests. Consider the following findings. We asked survey participants to select from a variety of scenarios. People are almost evenly split on whether they would prefer a one-time $5,000 bonus or a one-time $5,000 contribution to their 401(k), 403(b) or 457 accounts—even though, with compounding interest, the retirement plan contribution would be worth more in the long term.
It also turns out that most people would rather have a 4% guaranteed return than market-based returns, although market returns have been shown to exceed 4% over time. Others generally would rather have retirement savings limits and no tax increases than tax increases and no limits.
In talking with some of our Retirement Plan Adviser of the Year finalists this year, I was struck by how many were dedicated to automated plan designs—but only in conjunction with robust participant messaging. This is done in part to help participants understand the trade-offs inherent in the retirement plans.
This recent movement toward addressing holistic financial education—sometimes referred to as financial wellness—can be hard to quantify in terms of return on investment (ROI). However, it gets to the heart of what plan sponsors wrestle with when setting up their plan: Despite the employer’s desire to offer the tools for achieving long-term savings goals, the reality is that employees live in the moment and must constantly adjust their plans for short-term needs and wants. So, any way we as an industry can help them to manage the short term better could help improve their long-term success.