Et tu, Shlomo?

  As Halloween approaches, a leading behavioral science academic has embraced a truly scary idea that involves your 401(k) account.

That academic, as you might deduce from the title, is none other than Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management — and more specifically a champion of the application of behavioral finance concepts to retirement plans, notably automatic enrollment and contribution acceleration.

As for that scary recommendation, Benartzi has — in a Wall Street Journal op-ed — effectively backed the notion of creating big government-run pools of retirement savings — where ALL retirement savings would be put.

“We no longer have jobs for life” he rationalizes, though employment tenure in the private sector has been pretty consistent going all the way back to the 1940s. What HAS changed is the predominance of defined contribution savings plans and — ironically — that system’s increasing reliance on the behavioral science designs that Benartzi has long championed. It’s been shown that folks who rely on automatic enrollment — and, more significantly, contribution accelerants — tend not to maintain that rate of saving when they change jobs. Rather, and perhaps not surprisingly, having established a pattern of relying on that default, their contribution rate in the new plan tends to be reset — at the starting default contribution rate.[i]

Benartzi would solve this dynamic by separating the participant from his employer-sponsored plan, sending contributions to some means of central government-run plan. He specifically cites CalSavers (a state-run IRA program), as well as two international “solutions” — the Australian Superannuation funds and the UK’s National Employment Savings Trust (NEST).

Nor is Benartzi unmindful of the implications here. In the op-ed he admits, “Of course, these are effective solutions only if both your former and current employer use the same retirement-plan provider, which isn’t a given in the fragmented American system.” He then goes on to offer a “solution” — “having one provider for all, but that would eliminate market competition, reducing provider incentives to offer better plan features and service.” Ya think?

He cites the Australian model as a solution to that — though it’s a “super” finite list of providers relative to the American market.

Ultimately, however, it’s a solution in search of a problem. Defined contribution savings are already, in fact, portable — if not to a successor plan, then to an IRA — and have always been. Beyond that, automated rollovers as a distribution default is an emerging capability — via networks like the Portability Services Network that already connect a half dozen of the nation’s leading recordkeepers to facilitate exactly the type of job-to-job plan transfer Benartzi seems to think only a centralized government pool could accomplish.

Oddly enough, the big problem he seems to be trying to address is the reset of the default deferral rate at job change but his big government “solution” would — at best — still require[ii] some kind of massive employer-to-employer payroll data transfer — and the op-ed doesn’t even acknowledge the cost or challenges in developing or administering that transfer (or what might go wrong). He points to data that suggests that participants want tools like contribution acceleration to boost their savings — but apparently thinks individuals are unwilling or incapable of relaying that information to their next employer.[iii]

Benartzi concludes that “we need to develop retirement accounts that fit the way we work and live today.”

Somebody should tell him we already have.

- Nevin E. Adams, JD

NOTE: subsequent to the posting of this article, and despite the implications of the comments in the op-ed, Professor Benartzi assured me he is NOT in favor of a government-run retirement system. Here is his "response".

[i] They COULD, of course, override that default rate at any time.

[ii] He also assumes – incorrectly, I believe – that that kind of information is already shared via the CalSavers program during job change. When you change jobs, the new payroll provider and/or recordkeeper (not to mention employer) have no way of knowing what you were deferring previously – unless you tell them.

[iii] Some of his concern is based on a recent report by Vanguard that claims job-changing could cost folks $300,000 in retirement savings – but it’s based on some assumptions and extrapolations that likely exaggerate the impact for the vast majority of real savers and job changers.