SURVEY SAYS: Can Participants Handle the Truth?

For years, I would argue that we have largely adopted the same attitude toward helping workers choose to save for retirement – for the very most part, fretting that telling them just how much they ought to be saving, or sharing with them the blunt facts on what their relatively meager deferrals would leave them with at retirement, would “scare them off.”   Even now, while there has been movement on this front, the concern lingers – and perhaps with good reason.   This week I asked readers   what they thought would be the impact on savings if we did, in fact tell them the “truth” (to which one reader answered the question with another thought provoking question; “A more interesting question is, who is ‘we’?”)  

So much for scaring them off – less than 3% of this week’s respondents thought participants would simply give up on saving for retirement.   On the other hand, a mere 6% thought that the truth would motivate workers to save (among these, the reader who drew on the example of “…Winston Churchill, who rallied a people to their greatest glory by promising “nothing but blood, toil, tears and sweat”), and just 14% said “who knows”, while nonetheless acknowledging that it was time to find out.   Just short of one-in-five chose “other”, though these responses generally fell in the ‘different people will react differently” category.

Along those lines nearly half, roughly 45% , of this week’s respondents thought that the truth would have absolutely no impact on retirement savings habits (the remaining 14% said that it might lead folks to break out the antacid, but would have no impact on savings).   As one respondent noted, “The savers may save a little more, but the spenders will keep on spending.”   Indeed, this week’s responses were chock full of concerns about today’s rampant consumerism – a pervasive sense that workers know the truth already (or know enough to know they should be concerned), but instead choose to spend on the here and now.  “I don’t think people are that stupid,” noted one reader.  “They know they need to save way more than they currently are, but they are not willing to give up their “luxuries” in the here and now.”   Another said, “We are a society that lives for today and spends tomorrow’s money today.   Even if we scream from the rooftops and everyone hears the message, it is likely they will do what they are already doing.” 

Another reader observed, “I think they will take that knowledge and suppress it because it is too painful.   For years I have done group seminars in which I have all participants fill out a work sheet that tells them how much they should be saving toward retirement.   The participants are usually shocked and somewhat sickened when they see the results, and leave the seminar numb.   But here is the scary part – I have found that people are repeating the seminar, and are still just as shocked at the results as they were the first time around.   It is as if nobody every told them that they were not on track before.”

Echoing those concerns was the reader who noted, “I gave a presentation recently on different types of retirement plans available for small employers: SEPs, SIMPLEs, 401(k)s, etc.   There was a slide on the importance of saving early and the benefits of compound interest.   A 50-year-old woman in the audience–who happened to be a lawyer–became irate with me because why was I only telling her this now.   It was clearly too late for her and this was (obviously) all my fault.   My jaw dropped in disbelief.   As if it was my fault that she hadn’t been paying attention for the last 30 years!” 

However, another noted, “It is the obligation of fiduciaries to tell them the truth.   It is also in the self interest of the fiduciary.   Tell them what they have to save with a risk free rate of return, taking into consideration health and long term care expense, and they can then make the decision.   Ultimately, like it or not, individuals will be held accountable for their action via lifestyles.” 

That prospect was no doubt contemplated by another reader who noted that “It irks me greatly to think that I save   all that I can in a 401(k) and I contribute the maximum to a Roth and other   investments and when I retire my taxes will go up so that I can also pay for the retirement of the people who are currently having fun spending all their money now ( or incurring debt to have fun).”

Of course, a number were not willing to leave the blame fully on the shoulders of the savers.   “..if participants were also given fund choices that did not have fees on top of fees and investment advisors would devise portfolios of funds that did not have these onerous fees.   How many years of retirement do the fees take away from participants?   Let me count the years….” noted one.

“I think we are the one’s who can’t handle the truth,” said one.  “I have been promoting the “expert’s opinion” on what a person should be saving for retirement for quite a few years.   However, what I have found in actually sitting down and talking with employees is that they don’t fit into our neat little categories.   Who are we to know how much “they ought to be saving”.

Still another said “I guess that my [skeptical] answer is in the other category and is along the lines of “You need to pay more so that I can afford to save without affecting my other spending patterns.”   In other words, it is the employer’s fault, not the employees.”

But this week’s Editor’s Choice goes to the reader who noted, “I can find people and research to support (a), (b), (c) or   (d) depending upon the education, income, work status, of individuals.   So let us go with (e):   we do not know for sure how they will react, but we owe it to all citizens to let them know the facts, including worst possible outcomes.”  

Thanks to everyone who participated in our survey!

(g) I believe the truth is there for anyone who wants to know how much they should save but the reality, according to the folks who study human behavior, is that most of us do not feel the need to plan today for something that is so far away.   We are a society that lives for today and spends tomorrow's money today.   Even if we scream from the rooftops and everyone hears the message, it is likely they will do what they are already doing.   (Maybe I should have picked (d).)

Have a great day.

D, probably, do what they're doing already. When I've encouraged friends my age (24) to put just $100 a month into an IRA to get started and to take advantage of the use-or-lose-it annual contribution window, it's often, "I'll do it later when I'm making more money."

Knowing the short-term cost of saving for college has been a helpful method of family planning. I don't have any kids yet, but my calculations suggest I'll need to save $500 per month per kid from birth to have "enough."

Instead of three, two sounds just fine. I'm not sure how my parents, with five kids, did it.

I think the answer is - All of the above.   Plus, we need to knock some sense into the people who feel that their retirement savings is there for them to get loans to pay off other debts.

A:   The argument goes that people do not want to hear the truth, they want to hear what will make them happy.   It is the obligation of fiduciaries to tell them the truth.   It is also in the self interest of the fiduciary.   Tell them what they have to save with a risk free rate of return, taking into consideration health and long term care expense, and they can then make the decision.   Ultimately, like it or not, individuals will be held accountable for their action via lifestyles.   If they save nothing, they will be able to live on SSA, Medicare or Medicaid, etc.   The accountability is the fact that for most this will be a big decline in lifestyle.   Part of the truth is that at least 75% of SSA will be available, but it ain't much, and that Medicare and Medicaid are likely to provide far less in the decades ahead, with a likely decline from about 50% of costs to 25%.  

I can find people and research to support (a), (b), (c) or   (d) depending upon the education, income, work status, of individuals.   So let us go with (e):   we do not know for sure how they will react, but we owe it to all citizens to let them know the facts, including worst possible outcomes.   

Of the roughly 1/3 of today's retirees with only SSA income, and the roughly 2/3 that rely mainly on SSA, how many are in that position because they did not know the facts?   Besides, with a negative national savings rate, low k contributions, fewer than 10% contributing maximums, how could the "facts" and the "truth" make things much worse?  

D. Continue what they are doing,,,,You need to control   your   weight,   exercise , stop smoking, wear your seat belt   and save more for retirement. Oh, did I say anything that you didn't know. We will continue with the education part.

(b).   Ask Winston Churchill, who rallied a people to their greatest glory by promising "nothing but blood, toil, tears and sweat."

D) Save what they are willing to (or can.)

Concerning convincing someone to put aside more for the retirement years I use the same principal I used for years with my teenage son. I said the same message often and hoped that someday I would catch him in a "mood" to listen. The principal of saving for retirement has to be repeated often and convincingly to reach the most people.

I guess that my [skeptical] answer is in the other category and is along the lines of "You need to pay more so that I can afford to save without affecting my other spending patterns."   In other words, it is the employer's fault, not the employees.

(d) do what they are doing already - they're either saving   what they can, or what they are willing to,

I gave a presentation recently on different types of retirement plans available for small employers: SEPs, SIMPLEs, 401(k)s, etc.   There was a slide on the importance of saving early and the benefits of compound interest.   A 50-year-old woman in the audience--who happened to be a lawyer--became irate with me because why was I only telling her this now.   It was clearly too late for her and this was (obviously) all my fault.   My jaw dropped in disbelief.   As if it was my fault that she hadn't been paying attention for the last 30 years!  

I think the answer is (a) people will give up or (d) no changes will occur. I liken it to credit card debt: when you're already $46000 in the hole, why not charge another plasma TV to the card?   Adding more debt won't make a big difference.   For retirement planning, if what I have isn't enough, saving a little more won't make a big difference, so why inconvenience myself further?   I'll either continue doing what I'm doing--why change the status quo?--or I'll quit altogether and satisfy my immediate cravings for specialty coffee and new shoes.

What a depressing thought to start the day….   🙂

Survey response: e

Great question!

Well, I say probably   (c) wake up, smell the coffee, and break out the antacid - but probably won't save any more

(d) do what they are doing already - they're either saving   what they can, or what they are willing to

Best way to increase contributions to increase the employer match, and sell sell sell the benefits of getting the free money. There's something about putting money away for so far in the future that is such at odds with, say, mortgages that can be experienced today. Has to be a high potential return for future investments. Employer contributions help offset the pain of the loss of the "now" money while increasing odds of high future returns.

g) Other.   I think we are the one's who can't handle the truth.   I have been promoting the "expert's opinion" on what a person should be saving for retirement for quite a few years.   However, what I have found in actually sitting down and talking with employees is that they don't fit into our neat little categories.   Who are we to know how much "they ought to be saving".

Do we ask them what their dreams are?   It's like telling a person how much they will need to go on a vacation, without asking them where they want to go, or what they want to do while they are there, or how long they want to stay?   Sure we should all be saving something for the future...but shouldn't we first encourage the employees to think about what they want their future to look like?

I believe the best we can do is to keep reminding them that there is a future different from today, your future is unique, try your best to plan for it, and here are some tools to help (or, if we really want to help, here is someone to talk with who can help you shape and fulfill your "retirement"

dream).    

I think it's d. The savers may save a little more, but the spenders will keep on spending. Among those who aren't saving much, there are a fair number who think that they just can't afford to save, but I think there are a lot who think things will just work out, somehow, when they get to retirement age. They don't see a lot of retirees living in cardboard boxes and eating cat food now, so they may think, "If it's working out for retirees now, somehow it will be OK for me, too, when I get there."

Put me in for answer (d) on the survey. I think people are really stretched and think they *can't* save.

(d) do what they are doing already - they're either saving what they can, or what they are willing to.   I don't think people are that stupid.   They know they need to save way more than they currently are, but they are not willing to give up their "luxuries" in the here and now.

My answer is (e).   I would have said (b), but something else will happen before we find out. There is another problem that needs to run its course first.   We need to see if they collapse under a sea of debt.   Only after they get through that (even if they fail) will they get religion about retirement saving.

b.  I'm surprised that you have to ask the question. One would conclude from articles and press releases that you've shared in your newsletter that gap and asset allocation analysis tools are effective in changing behaviors of a majority of the participants who receive a wake up call. It will be interesting to see if perceptions are consistent with these reports.

It depends. When I told them in the past it was c or d. But now I've convinced some plan sponsors to allow me to teach a personal finance workshop that shows participants how to change their spending patterns. To show them just how much $1/day can make a difference is something that anyone can relate to, since they can all easily change their behavior that much. Once motivated, have them list all the things that they could do to save, and people start deferring more (b). This 30-45 minute interactive course is so fun to teach because of the uncontained laughter, combined with the dead serious silence that comes with revelation of what they could do (or could have) and hope. The twenty somethings especially get an epiphany when they realize that $1 less a day for coke could be a six figure amount in 40 years and the $4/day smoker is watching a potential half a million dollars go up in smoke (I always tell the smokers that may be better off than the non smokers though, since they won't need as much if any retirement savings). I've attached my $/day chart.

I think   that we should tell them the truth, I think some will save for retirement, others will choose not to as it seems that    people today want    fancy cars, big houses full of furniture and they want to   enjoy expensive trips etc, they want to do all of   that now.   Some   people incur extreme debt to do this, so that crowd will never save a penny toward their retirement.

It irks me greatly to think that I save   all that I can in a 401(k) and I contribute the maximum to a Roth and other   investments and when I retire my taxes will go up so that I can also pay for the retirement of the people who are currently having fun spending all their money now ( or incurring debt to have fun).

So tell   them how it is, scare them into contributing,   auto enroll them into   contributing , whatever it takes, but   stop letting them   take Hardship   Withdrawals   to purchase   a primary residence.    If they can't afford a down payment, they probably can't afford payments, taxes and upkeep on the house over the long haul so they just end up taking another hardship withdrawal to avoid foreclosure.

M answer to your survey question would have to be (g) other.   I think they will take that knowledge and suppress it because it is too painful.   For years I have done group seminars in which I have all participants fill out a work sheet that tells them how much they should be saving toward retirement.   The participants are usually shocked and somewhat sickened when they see the results, and leave the seminar numb.   But here is the scary part - I have found that people are repeating the seminar, and are still just as shocked at the results as they were the first time around.   It is as if nobody every told them that they were not on track before.

I think the answer to "telling the truth" about retirement savings is a little more complicated than what you outline.   But the bottom line I think would be (c), wouldn't save any more but would worry a lot.

What I see all around me is a lack of financial literacy and money management skills.   It isn't that people don't want to save, it's that they don't understand the basics about money management, budgeting, and deferring consumer wants and desires until you can afford it.   Our grandparents saved up for a big purchase, mostly because there was no alternative.   They lived through a Depression and two World Wars, they knew what hardship was.   It's so easy now to get deep into debt if you're not careful and then you're trapped.   Our consumer lifestyle of "more more more" encourages excess consumption.   People don't even stop to think whether they really WANT something, they just think they have to have it because it's the thing to have.   If you don't have an emergency cash cushion to fall back on when the inevitable crisis hits (illness, job loss, divorce), then you are really in trouble fast.

We've also fallen into a mindset trap of depending upon the government to rescue us from everything, instead of being more self-reliant as our forebears used to be.   Of course our forebears suffered greatly when adversity struck, too ... and I'm not advocating a return to those times.  

But I can't tell you how many times I see co-workers who think nothing of spending $75 a month on getting their nails done, plus $75-100 a month on Starbucks coffee, parking for $125 a month (instead of taking public transit), plus many other little things that all together add up to big bucks, and then lament that they have no money left over to save for retirement.   If you track your spending carefully and monitor where it's going, you'll be shocked at what you discover.   When I first bought Quicken back in 1992 I was amazed at what I was spending on hair care - but I fixed that quickly enough and freed up over $1,000 a year from that one category alone to save for retirement and a house down payment.

I realize this sounds like preaching, but honestly - do you NEED to be driving that $45,000 SUV or luxury car?   I think Americans' priorities have gotten a lot out of whack.

D) I'm in the retirement business and know I'm not saving enough, but I won't change because I can't change. At least not right now. If I am like most in the middle class, and I think I am, cash flow is squeezed by external factors such as health insurance co-premiums, taxes, etc. In the last 3 years, we have personally seen a 100% increase in our property taxes, the addition of a $2,000/yr property assessment due to annexation from the township to the city, and going from zero co-premium for health insurance to $140/mo for the same coverage. That premium is increasing 65% for 2007!

The only reason I continue to save 6% of my salary is to get the current 100% guaranteed return from my ER's $ for $ match, for which I am grateful. Reality keeps me from saving more.

A more interesting question is, who is "we"?

The optimistic part of me wants to believe B, but I suspect it is more like C.   However, I definitely think it is time for E!

I think it's (d).   For most people, the truth is that they ought to be saving 15% of their pay, or more.   The reality is that most people don't know how to deny themselves today to gain something tomorrow.   Telling them the truth isn't going to change that.

It's time to come out of the closet. After working in the retirement business for 20 years I have nothing to show for it. Nada. I'll work until I drop dead. I can hardly wait.

I say (e) who knows, but it's time we found out.   Speaking as a participant who has never had anyone give me an explanation of plans or advice on investment, I would LOVE for someone to show me what's what.

(c) wake up, smell the coffee, and break out the antacid * but probably won*t save any more,

C.   The people who are not already participating will be upset and concerned, but will do nothing.   They are part of the population who will wait for someone else to take care of the problem for them.   They are the same ones who always blame someone else for their mistakes, accidents, etc.

My answer (d)   We have informational meetings for employees about once a year to give them a reality check on how much they need to be saving in order to have enough at retirement and beyond. The meetings are sparsely attended and I don't see a change in the amount of the deferrals after the meetings. I think employees live mostly in the here and now and they think that somehow it will all be miraculously taken care of by the time they get to that stage of life. We also have a significant Hispanic population and they tend to save very little - I believe they are relying on the fact that family will take care of them in their "golden" years.

I would say somewhere between C & E.   My company offers a 50% match of the first 6% after 6 months of employment and it is also fully vested at that time yet I am told that not everyone participates.   While I understand that not everyone can afford to save 6%, why not start at 1% or 2% and grow from there?   At least you got started!

I also don't think that there is enough education.   I was handed a 'brochure' and told to read it.   There was no opportunity to discuss any of this with a 'financial planner/advisor' so that I would really understand what I was doing.   I am lucky that I have a Roth IRA and that advisor helped me pick complimentary funds.

I am very proud to say that my 18 year-old has over $3400 in her Roth!

My primary answer is e) who knows, but it's time we found out.

This is a passion of mine.   It's unfair to let people tool along in life without the information they need to succeed.  

The truth is that most thinking people will "wake up, smell the coffee, and start saving more."   (I hope.)   But there will always be those whose inertia is so deeply ingrained that they will prefer to stay in the dark and pray for divine intervention or a lucky lottery ticket to pay for their retirement.   The following cartoon is an excellent illustration:

Nevin - my best answer to this question is (e) "who knows, but it's time we found out".

We have open enrollment coming up on 1/1/07 and we are adopting an auto enrollment feature to our plan.   Plus, the partners and major players at our firm (all HCE's) are pushing hard to increase enrollment so that we can pass the discrimination testing (which we have yet to do since plan inception) to eliminate the return of excess contributions.   Of course, I do not present to our employees that we need to increase enrollment to make the partners and attorneys even more wealthy since that would go over like a "fart in church."   During meetings, I am stressing for everyone to enroll since there is no guarantee that social security will be around when they retire and even as is, it is insufficient for most people to retire on.   They typical reaction is similar to a "deer caught in the headlights."   Any thoughts you may have on enlightening your average employee on the absolute necessity to save for retirement would be most appreciated!

Se.x, d.rugs, and rock n roll, baby.   Or fast cars, extreme skiing, and bungie jumping...can't afford to retire, die young

The question called to mind the image that was out a few years ago of grandma selling girl scout cookies door to door.   Not wanting to meet that fate and feeling a bit cynical because it is already too late to catch up and I'm not even 35, my response escaped me.   I also thought you might get a chuckle.   I know I did when it popped into my head.

Have a great afternoon.

(g) About 50% would save more, the rest would do what they're doing now, if participants were also given fund choices that did not have fees on top of fees and investment advisors would devise portfolios of funds that did not have these onerous fees.   How many years of retirement do the fees take away from participants?   Let me count the years....

(g)   participants will react individually - some will give up, some will save more and some will save the same - but it is definitely time we found out.