Obama's Retirement Plan Needs More Nerve

This weekend, the President announced a handful of new initiatives designed to make it easier for American workers to save more for retirement. The initiatives make use of research from behavioral economics, the arm of the dismal science that incorporates the way people really act into the design of retirement plans. That has proven extremely effective in the past ... except this time the Administration loses its nerve.

The new initiative does four things:

Let employers more easily enroll workers automatically in the company's 401(k) or SIMPLE-IRA. This is mainly a boon to younger employees, who have a disturbing tendency not to sign up for plans voluntarily. The Administration's idea is to use the most powerful force in personal finance inertia to help those younger employees do the right thing in spite of themselves. With automatic enrollment, the company signs you up and starts putting money from your paycheck into your 401(k) without asking your permission. You can always opt out, but as behavioral economics predicts, few do. Inertia, you know.

Make it easier to save tax refunds. The new rule will allow you to use your income tax refund to purchase U.S. Savings Bonds. Nice impulse, but savings bonds are not the right investment for a long-term goal. You're better off shipping the money to an IRA, if you're not already over 2009's $5,000 contribution limit.

Make it possible to save unused leave and vacation pay in your 401(k). This is the money you get for the vacation days you didn't have a chance to take before your employer canned you. Since no one counts on earning vacation pay -- you never see it in cash until the company is showing you the door -- it's psychologically easier to set aside. In theory. Problem is, when you lose your job in this economy, you're probably going to want the cash now rather than an opportunity to stash it away for decades.

Create "plain English" explanations of your options when you leave a 401(k) plan. The Administration promises to create easy-to-understand explanations of why you shouldn't make one of the dumbest of all financial moves: taking money out of a 401(k) you are leaving, rather than rolling it over into an IRA or a new 401(k). If you make that mistake, not only do you lose your savings, but you pay a huge tax bill for the privilege.

Unfortunately, behavioral economics doesn't offer much support to the idea that investor education -- however plain its English -- can change human tendencies. Maybe a few people don't already know it's bad to gut their 401(k) between jobs, but I think their main motivation is that they simply find it too tempting to lay their hands on so much money at one time. In other words, it's not that people don't understand that they shouldn't cash out their 401(k)s; it's that they lack the self-control not to.

If the Administration really wanted to stop the leakage from 401(k) plans, it whould have the courage of its behavioral economic convictions and simply make it impossible to get at the money except in real emergencies. You don't get smokers to quit by showing them plain-English graphs proving that smoking eventually has a suboptimal influence on your health. You just lock up the cigarettes.

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Comments

[wheaties]

No offense but your article represents how out of touch you "media" people are. If Obama really wants to stop 401k leakage then he and the rest of our so called representatives should construct an economic system based on fairness and one that offers workers some security. There is a reason the middle class is disappearing, it isn't some act of God, although our corrupt representatives would like us to believe that. There is nothing substantial in any of these proposals, it is the same ineffective incrementalism that does little to address the current economic realities. The elite is this country want to apply a band-aid to what ails us when we need a tourniquet, pathetic.

[americaforme]

You need to be realistic! I dont think anyone wants to cash out 401 k's. Its double tough to be a parent with everyday demands. The cost of grocerys is so high, your money is sucked in a heartbeat. Just to wipe your tush, cost twelve dollars a week. Think home economics, calculate, with out a paycheck its nigh impossible to make ends meet. Something has to give, and it cant be charging your future. 401 k's are a God send for many folks, to get their kids in school. Even the family dog and cat are on a diet, rationing the pet foods that are outragiously priced. It has been only one year to grow into this frugal life style. American's have come a ninty degree turn, successfully. Only the well off job holders, gripe at us to cut back more. Get real! With the cost of energy, many will be bundeling up in blankets to make fuel last this winter. Kids grow and the purchase of winter duds, brings thoughts of deep financial depression. In our Bacterial climate with so many bugs out there the thrift store is off limits, not the way to go. We need good old fashion USA made clothes that last., good fibres, and good sewing. Cheap only last a few months, not the full school year. We make do, pray the furnace doesn't conk out Or the well dry up..Soon folks wont worry about fat, only the rich will be fat. . .