Saturday, February 18, 2006

Same Old Situation?

Benjamin Franklin once suggested that the definition of insanity is doing the same thing over and over and expecting different results. Our household was treated to a real live example of that over the weekend when our beagle/German shepherd mix got it into his head - - - and, I might add, for the second time in six months - - - that chasing a skunk was a smart thing to do. What troubles me most about the event (and there are MANY troubling aspects) is that at some level, I think, he actually LIKES his new smell!

Last week I was talking to a group of plan sponsors about strategies for boosting participation in their plans, and I was struck by how “traditional” our perspectives on saving for retirement were. Sure, we’re talking in a new way about some old ideas (like automatic enrollment), and we’ve reworked some old ideas so that they seem to be more effective (like lifecycle funds), and while we have added some new thinking to some of those old ideas (like contribution acceleration), all in all, we still seem to be doing the same kinds of things that we have been doing for a long time now.

One could argue, I suppose, that doing the same kinds of things differently, or in new combinations, constitutes doing something new – but I couldn’t quite shake the sense that we were really talking about new packaging for old ideas. In fact, to my way of thinking, the only “new” idea out there now – the notion that we need to take all these decisions out of the participants’ hands altogether – is, according to most proponents, merely applying a defined benefit philosophy to the defined contribution model. In other words, an old idea – but this time with THEIR money.

The apparent simplicity of these “automatic” approaches notwithstanding (and some aren’t as simple as one might hope), it seems to me that we’re still working within an existing, and somewhat limiting, paradigm. We start with a list of given assumptions – and to the extent that they don’t project out to the desired result, we tweak the assumptions. We assume that we will work longer, save more (eventually), invest better (or at least with better results), and live on less. The current arsenal of touted approaches gets people saving sooner, investing better, and saving more – taken in combination – than many otherwise would. Ultimately, however, I can’t shake the sense that all we are really doing is shoring up one leg of a three-legged stool that doesn’t really exist anymore. Getting people to save as they should have been saving in their 401(k) plans all along is certainly a good thing, but is it – can it be - enough to compensate for the disappearance of traditional defined benefit plans, the erosion of Social Security, and the paucity of personal savings? Can it compensate for the strains that extended mortgages, out of control health-care costs and, yes, an extended post-career life will impose on those savings?

I’m not sure, of course, but I’m concerned. And I think we should all be.

- Nevin Adams editors@plansponsor.com

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