For the last century or so, retirement savings policy has been a fundamental concern of individuals, employers, and policymakers. The result: government “old age insurance” (Social Security), employer-sponsored retirement plans (now, 401(k) and 403(b) plans), and a broad campaign to get everyone to save more for retirement.
This has all, to a large extent, been for the good. We have for some time faced a unique demographic challenge—dramatically longer life spans and declining birth rates—that has required focus on the single issue of providing for old age.
But in fact, as we all know, there is more to life than saving for retirement. Indeed, there are a variety of situations in which saving for retirement may be the wrong choice—paying down debt, financing a home purchase or children’s educational expenses, or simply buying some (or more) life insurance may all be better choices for a given individual’s limited amount of disposable income.
The problem is, in our current situation we have no (or very limited) tools to make these distinctions—to understand the individual situations of different employees. At this point (well into the 21st century) the person that, in effect, controls the relationship with the employee—generally the plan recordkeeper—knows the employee’s age and (in the most sophisticated applications) something about her other benefits and potential Social Security income. Richer data—about family situation, working spouse, outside assets and debt—generally must be provided by the employee, something that rarely happens in real life.
There has also been a business incentive (for lack of a better word) attached to the preference for retirement savings over alternative financial decisions: retirement savings generates assets that have to be invested (and otherwise “serviced”), creating the industry that most of us labor in today.
All of this—the need to address the demographic challenge, our limited tools, the asset management industry—has generated a considerable momentum/bias. To the point that we are now lecturing Millennials and Generation Z on their need to save for retirement. Even though for many of them the main concern is student debt.
A modest step away from this paradigm has been the recent initiative to use retirement savings—in the form of 401(k) matching contributions—as an incentive for Millennials to pay down that student debt. As I recently discussed here, the math is pretty straightforward—you generally shouldn’t be saving, for retirement, or anything else, until you’ve paid off your debt. The whole concept of “saving” when at the same time you are “borrowing” doesn’t make a lot of sense, to me at least. Indeed, you could argue that employers should be helping Millennials, and non-Millennials for that matter, to pay down student and non-student debt by matching their debt repayments with additional debt repayments.
Finally, there are set of challenges that retirees face that are better handled with insurance than the retirement savings/retirement income model we currently use: most obviously, risks associated with longevity, long-term care and health.
All of this is going to have to change, at some point in what I believe will be the relatively near future.
The most important change will, I think, be technological, in the deepest sense. I believe our data management tools are about to go through a revolution, courtesy of the blockchain. That will do several things. Critically, it will permanently disrupt the chokehold recordkeepers have on the relationship with the individual participant. And it will allow sponsors, for each individual employee (and with that employee’s consent), to look across a much richer dataset and—with a simple algorithm—and identify the (conventionally) “right” financial decision for that individual: save more, pay down debt, buy more life insurance, or none of the above. With, in the spirit of “nudge” and soft paternalism, the individual making the ultimate decision.
This new model—financial wellness implemented across a rich employee dataset and exploiting the efficiency of artificial intelligence (AI)—will (in my humble opinion) re-vitalize the “role of the employer.” To re-say something I’ve said before: companies don’t want to just (themselves) focus on their core competency, they want their employees to focus on the company’s core competency. An employee worrying about how he is going to meet his next mortgage payment is going to be less focused on the firm’s mission than one who believes she is on the right path to financial wellness.
An employer’s ability to offer its employees—as part of the where-you-work value proposition—the very real prospect of improving their financial situation will have enormous appeal. Look at what is happening with student loans—it is what employees want.
In this new situation, employers will be in a position to re-think where they can add value for their employees, in helping them manage the debt, savings, and risk challenges that life—in all its very wide variety—presents.
None of this is to say that retirement savings will not remain a critical financial priority. Birthrates continue to decline, and (despite a couple of bumps) life expectancy is going to continue to increase. Providing for old age remains one of the fundamental challenges we all face. Indeed, the expansion of the gig economy (another development that I believe will accelerate) presents us with a growing group of individuals not only not covered by the employer-based retirement system but, in many cases, not even covered by Social Security.
The first time I heard the phrase “financial wellness” I thought, here we go again—another airy and fine-sounding concept with no substance behind it. It took me about six months to change my mind. In the rough and tumble of our work life the categories we think in terms of acquire an aura of permanence—not just the way things “have been” but the way things “are.” When in fact these ways of thinking are simply ballpark solutions to a specific set of problems using the tools available at the time.
Over the last 30 or so years, the problems have changed, as have the tools. Time for us to change to.
Michael Barry is president of October Three (O3) Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
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