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boost retirement savings - capitalizing on flaws in
Barbara Appleby, JD, MA, AIF® Kristin Guibord, MBA, AIF® 100 Middle Street, Portland, ME 04101 207.541.2200 BOOST RETIREMENT SAVINGS CAPITALIZING ON FLAWS IN PARTICIPANT BEHAVIOR - AND OTHER TIMELY TOPICS SECURITIES OFFERED THROUGH COMMONWEALTH FINANCIAL NETWORK MEMBER FINRA / SIPC. Investment advisory services may be offered through Commonwealth Financial Network, a registered investment adviser, and/or BerryDunn Wealth Management, LLC, a state-licensed investment adviser. Advisory services and fixed insurance products and services offered by BerryDunn Wealth Management, LLC are separate and unrelated to Commonwealth. Commonwealth does not provide tax or legal advice. You should consult a legal or tax professional regarding your individual situation. berrydunnwm.com | GAIN CONTROL AGENDA • Fees in Focus • Investment Due Diligence: A real world example • Retirement Crisis in America • Behavioral Finance to improve Retirement Readiness 2 FEES IN FOCUS • Media • Academia • Litigation 3 2013 HEADLINES “Industry Eyes Lawsuits Over Pension Investment” Financial Times “401(k) Fees Gain a Bit of Clarity” New York Times “What Your 401(k) Really Costs You” U.S. News & World Report “Labor Department Requires 401(k) Fee Disclosure” Bloomberg “Cracking Down on 401(k) Fees” CNBC “Shining a Light on Murky 401(k) Plan Fees” Wall Street Journal 4 2014 HEADLINES “Finding and Battling Hidden Costs of 401(k) Plans” New York Times, November 2014 “401(k) Fees at Issue as Court Takes Edison Work Appeal” Bloomberg, October 2014 “Creative Ways to Cut Your 401(k) Fees” Forbes, August 2014 “Lockheed Settles Suit on 401(k) Fees” Washington Post, December 2014 “Half of Baby Boomers Don’t Know They Pay IRA, 401(k) Fees” Daily Finance, October 2014 “How to Navigate the Complicated World of 401(k) Fees” US News and World Report, August 2014 5 2013 - ”LOVE LETTERS FROM YALE” 2014 - CONNECTICUT RETIREMENT SECURITY BOARD 6 LITIGATION 7 INVESTMENT DUE DILIGENCE: A REAL WORLD EXAMPLE • NEED A BETTER IMAGE FOR THIS SLIDE! 8 INVESTMENT DUE DILIGENCE: A REAL WORLD EXAMPLE • The Case Study: The unexpected. • What should a prudent fiduciary do? • Rely on the process. • How did the story end? 9 RETIREMENT CRISIS IN AMERICA 10 2013 FEDERAL RESERVE SURVEY OF CONSUMER FINANCES 11 2014 SENATE FINANCE COMMITTEE --FOCUSES ON RETIREMENT September-Retirement Savings 2.0-Updating Savings Policy for the Modern Economy December-Priorities for Pension Reform 12 Save Save More Save Smarter 50% 33% 11% But how can actually are saving save many save through of enough... these a 11% Defined are saving Contribution wisely? Plan IS THE DEFINED CONTRIBUTION WORLD IN CRISIS • Source: Choi, et al. (2006) 13 Save Save More Save Smarter HOW BEHAVIORAL FINANCE CAN HELP • Behavioral finance combines psychology and finance. • It reveals how people make financial decisions. • It also provides behavioral solutions to help people make better choices. • Let’s see how behavioral finance solutions can improve retirement outcomes … 14 Save Save More Save Smarter SAVE: Best Behavioral Practices 15 Save Save More Save Smarter BEHAVIORAL CHALLENGE: INERTIA Source: Johnson and Goldstein (2003) 16 Save Save More Save Smarter INERTIA, AUTO-ENROLLMENT AND PLAN PARTICIPATION Source: Beshears, et al. (2009) 17 Save Save More Save Smarter IS AUTO-ENROLLMENT TOO PATERNALISTIC? • When people make a choice, the environment around that choice influences their behavior. • There is no neutral environment to make a choice. • For example, whatever is accessible to grab will be eaten more often, apples or French fries! • So what is the most sensible way to frame choices? Source: Thaler and Sunstein (2009) 18 Save Save More Save Smarter INERTIA, AUTO-ENROLLMENT AND PLAN PARTICIPATION (Continued) Source: Beshears, et al. (2009) 19 Save Save More Save Smarter BEHAVIORAL CHALLENGE: PRESENT BIAS 1 6 5 4 3 2 7 74% 30% 26% 70% Source: Read and van Leeuwen (1998) 20 Save Save More Save Smarter WHEN PARTICIPANTS FAIL TO ENROLL, WHAT ARE THEY TELLING THE PLAN SPONSOR? I am an eternal spender I want to save and eat bananas, but not now 21 Save Save More Save Smarter ALTERNATIVE ENROLLMENT METHODS • Future Enrollment • Easy Enrollment • Active Enrollment 22 Save Save More Save Smarter ALTERNATIVE: ACTIVE ENROLLMENT YES – Please enroll me in the company retirement savings plan. I understand that 6% of my salary will be deposited to my retirement account and that the money will be invested in a well-diversified fund based on my age. NO – I am not interested in joining the company retirement savings plan. EMPLOYEES MUST CHOOSE A BOX TO CHECK ‒ THERE IS NO DEFAULT. 23 Save Save More Save Smarter ACTIVE ENROLLMENT AND PARTICIPATION Source: Choi et al. (2005) 24 Save Save More Save Smarter RECAP: BOOSTING PARTICIPATION Note: All participation rate outcomes are illustrative 25 Save Save More Save Smarter MATCH CAP AND THE DISTRIBUTION OF DEFERRAL RATES Source: Adapted from Choi et al. (2006) 26 Save Save More Save Smarter MATCH OPTIMIZER ENCOURAGES BETTER OUTCOMES See Save More Tomorrow (2012) pp 69-71 for more information on safe-harbor considerations. 27 Save Save More Save Smarter SAVE MORE Best Behavioral Practices 28 Save Save More Save Smarter SAVE MORE TOMORROW 1.0 Source: Thaler and Benartzi (2004) 29 Save Save More Save Smarter SAVE MORE TOMORROW 1.0 (Continued) • First implemented in 1998 • Mid-sized manufacturing company • Employees offered opportunity to meet with financial consultant • Almost all met with consultant and were advised to increase savings one-time by 5 percentage points • Those who declined advice were invited to automatically increase their deferral rates by 3% every time they get a pay raise, up to four increases. Source: Thaler and Benartzi (2004) 30 Save Save More Save Smarter DEFERRAL RATES WITH AND WITHOUT SAVE MORE TOMORROW Source: Thaler and Benartzi (2004) 31 Save Save More Save Smarter BEHAVIORAL CHALLENGE: LOSS AVERSION Source: Chen, et al. (2006) 32 Save Save More Save Smarter SAVE MORE TOMORROW 2.0 Source: Thaler and Benartzi (2004) 33 Save Save More Save Smarter IF SYNCHRONIZATION ISN’T POSSIBLE, THEN WHEN TO BOOST SAVINGS? “January Effect” ― Subjects overwhelmingly select January as the month to take action in the future. • Source: Benartzi et al. (2012) 34 Save Save More Save Smarter SAVE SMARTER: Best Behavioral Practices 35 Save Save More Save Smarter THE INVESTMENT SOLUTIONS PYRAMID Source: Benartzi and Lewin (2012) 36 Save Save More Save Smarter BEHAVIORAL CHALLENGE: PRIMACY EFFECT WHICH DO YOU LIKE BEST? • Source: Mantonakis et al. (2009) 37 Save Save More Save Smarter FLIP IT TWICE: THE EMOTIONAL EXPERIENCE OF OBSERVING SHORTTERM LOSSES • Source: Benartzi and Thaler (1995) 38 Save Save More Save Smarter PLAY THE ODDS: THE EMOTIONAL EXPERIENCE OF IGNORING SHORT-TERM LOSSES Source: Benartzi and Thaler (1995) 39 Save Save More Save Smarter WHAT’S WRONG WITH THIS ACCOUNT STATEMENT? 40 Save Save More Save Smarter RECAP OF BEST BEHAVIORAL PRACTICES • • Action 1: Auto-enrollment for all employees, initial savings rate of 6% • • • • • • Action 3: Match optimizer Action 2: Alternative Enrollment Methods: Future enrollment, Easy enrollment, Active enrollment Action 4: Auto-escalation for all employees Action 5: Synchronization Action 6: January increases (alternative to synchronization) Action 7: Tailor the investment menu Action 8: Lifetime statement 41 WE ARE ALWAYS AVAILABLE FOR YOUR QUESTIONS. Barbara Appleby, JD, MA, AIF® [email protected] Phone: 207.541.2306 Kristin Guibord, MBA, AIF® [email protected] Phone: 207.541.2232 SECURITIES OFFERED THROUGH COMMONWEALTH FINANCIAL NETWORK MEMBER FINRA / SIPC. Investment advisory services may be offered through Commonwealth Financial Network, a registered investment adviser, and/or BerryDunn Wealth Management, LLC, a state-licensed investment adviser. Advisory services and fixed insurance products and services offered by BerryDunn Wealth Management, LLC are separate and unrelated to Commonwealth. 42
