14Jun2011
Author
ekessler
Category
Retirement

Crumple zones, market crashes, annuitization and seat belts: better retirement savings by design

by Emily Kessler, Senior Staff Fellow, Intellectual Capital

EmilyKessler I’ve learned a lot recently about automotive safety design – the hard way. I’m fine, but my 2003 Honda Civic Hybrid went to the auto graveyard about a year ago. Faced with an impact from a larger car whose driver didn’t realize, as she was merging from the high-speed express lane, just how much “stop” there was in the “stop and go” traffic of the local lane into which she was merging, my (late) car modeled crumple zone technology beautifully. The energy from the crash was absorbed by the left rear crumple zone, and with that and my seat belt I emerged shaken but damage free (the air bag never deployed because the frame wasn’t hit).

But let’s be honest; I did the most important thing I could do in that accident to keep me safe: I wore my seat belt. Thanks to joint efforts of regulators, the insurance industry and the automobile industry, cars are much safer than they used to be, but no one can deny that the use of seat belts have saved thousands of lives. Better design of cars and roads has led to fewer injuries and fatalities, but the most important thing we can do as occupants to ensure our safety is to wear our seat belt.

Pension actuaries don’t engineer cars, but we have been working to better engineer retirement systems.

The SOA’s Retirement 20/20 initiative issued a call for models of new pension designs that went beyond defined benefit (DB) and defined contribution (DC) designs, and the best papers were featured at conferences in 2010 in Washington DC and Toronto. Andy Peterson and I took some lessons learned from the Retirement 20/20 call for models to create a set of suggestions on how to improve 401(k) plans that we provided to the PostPartisan Foundation as part of their Campaign for Economic Security. “Teaching an Old Dog New Tricks: How lessons from Retirement 20/20 can Improve DC Plans” expounded on six ideas we garnered from our call for model submissions that we could use today (some with only minor regulatory modifications) to make DC plans work better:

  • Focus communication on retirement income rather than accumulation
  • Set up strong defaults that emphasize retirement income
  • Provide better risk-hedging investment mixes
  • Build variability into retirement income
  • Encourage fewer and larger plans
  • Increase standardization among plans

We’ve been gratified to find that others are interested in our ideas – the PostPartisan paper got picked up by Reuter’s blog which has been picked up by Yahoo Finance and a few other sites.

Reading comments to the Yahoo Finance post are sobering. More than a few people don’t agree with the suggestions. There’s a strong streak of “if you just pay attention and do it yourself, making money in your 401(k) is easy to do.” Strategies to use safer investment options and more annuitization don’t ring well with the general public. If you have any doubts about the unpopularity of annuitization, read the comments submitted to the Department of Labor’s Request for Information on Lifetime Income Options for Participants and Beneficiaries of Retirement Plans.

I think about how the lessons of Retirement 20/20 can improve defined contribution plans in the same way that crumple zones and seat belts let me walk away from my accident. A plan that makes better use of risk-hedging investment structures will do much better in a market crash than one that doesn’t. I may not have the same retirement income stream I could have had, but I walk away from the market crash with a few dreams crumpled but the income for basic necessities intact. Thinking of retirement savings accumulation as income and setting up strong defaults to encourage annuitization is like seat belts, seat belt laws and seat belt usage campaigns. It’s the best thing I can do, and if I can just get in the habit of using the seat belt (and thinking of my 401(k) as an annuity) I may become so used to it that I don’t think about the way it used to be.

Seat belt laws, while they exist, aren’t exactly popular – it only takes about 30 seconds of web searching to find a charged debate about seat belt usage laws (or helmet laws for motorcycle riders) which argue that “I don’t harm anyone else by not wearing my seat belt/motorcycle helmet, so why can’t the government just leave me alone?” You’ll hear the same debate from the “keep your hands off my 401(k)” crowd as well – I’m just not so sure that when they’ve run out of money at 82 they’ll be making the same arguments.

Change comes one step at a time. On the (US) NHSTA site there is a report about how to encourage seat belt use in occupants. It cites a 2007 study that notes that “among [respondents age] 16 to 24, 80 percent either [agreed or] strongly agreed with the statement, ‘I have a habit of wearing a seat belt because my parents insisted I wear them when I was a child.’ The number dropped to 59 percent among people 25 to 34 and to 33 percent among people 35 to 44, reflecting the lower usage rates during their childhood years.” That same report noted that 80% of respondents age 16-20 were in favor of laws that required drivers and front seat passengers to wear seat belts. When people change behavior, they internalize that behavior and make it their own, and think of it as “no big deal” to make that behavior mandatory.

There’s hope yet for the crumple zones and seat belts of the 401(k).

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Discussion

One response to "Crumple zones, market crashes, annuitization and seat belts: better retirement savings by design"

  • Jack Marsh says:

    Nice analogy. The conclusion speaking especially poignantly to the need to change how we do retirement savings sooner rather than later if it’s going to take a generation or two to catch on.

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