Improving Saving Behavior: What to Do?

Editor’s Note: This is the second in a two-part series concerning behavioral finance. Part I, “Retirement Readiness = Finances +…the Mind,” is here.

Plan sponsors, employers and even individuals are not powerless in the face of behaviors that can have a negative effect on retirement saving and preparation. There are steps that can be taken that will ameliorate behaviors that harm or impair retirement readiness, or even arrest and change them. 

 

Portfolio rebalancing. In a recent webcast, PIMCO’s Amanda Manthey suggested that this can:

 

More perspective from Manthey can be found in Part 1.

 

Employ investment policy statements. Manthey argued that investment policy statements can:

 

Planning and coaching. Investor behavior can cost participants money, Manthey argued, and planning and coaching can help change that. For instance, she noted that there can be a gap between the performance of investments made by the average equity fund investor and the long-term returns for the S&P 500 Index over 20 years. The difference, she said, can be as small as 2 percentage points. “Two percent doesn’t seem like a lot, but over time it is,” she said, and suggested that a professional can help individuals to be patient and have a better outcome.

 

Research by Accenture in 2019 found that a strong majority of workers—84%—said they want more help with pension and retirement planning, and almost as high a percentage wanted help with coaching. But Accenture also found a disconnect between employees’ interest in such assistance and that of employers in providing it; 41% of employees said that their employers offer education and coaching, and 43% said their employers do not. The remaining 16% were not sure, which suggests that if their employers do offer them, they may not be making their availability very well known.

 

Employer matches. In Working Paper 2019-06, “The Effect of the Employer Match and Defaults on Federal Workers’ Savings Behavior in the Thrift Savings Plan,” the Congressional Budget Office found that employer matches can affect employee contributions much more significantly than does the default contribution rate. “We find that raising the matching threshold from 0% to 5% leads to employees contributing 3.3% more of their salaries to TSP [the federal Thrift Savings Plan]. In contrast, an increase in the default contribution rate from 0% to 3% increases employee contributions by 0.3% of their salary,” says the CBO.