by Marc Bastow | March 11, 2013 2:33 pm
Here’s a question to ponder: How would you react if you were forced by law to set aside 8% of your earnings into a 401k plan administered by your employer?
It’s a startling thought to me, and one at the heart of Santa Clara University professor Meir Statman’s work in behavioral finance — the study of how investors’ emotions and beliefs affect decisions on money and markets.
Statman argues that retirement savings should be mandatory. His 30 years in the field have led him to believe that because Americans in general don’t save enough for retirement. He also posits that Social Security “is an insurance plan more than a retirement savings plan” and that people need to understand the difference.
Since it’s pretty much dogma by now that Americans don’t set aside nearly enough in savings and investment for retirement, Statman’s concerns over the psychology of the matter seem spot-on.
He goes further in his analysis here, discussing some of the big issues in the ways in which people invest based on behavioral traits and characteristics. But for now, let’s simply focus on the premise: a mandated savings rate for all employees, including those self-employed.
I genuinely like the idea because it gets people into a savings and retirement mentality right from the get-go; the hope is that payroll deductions eventually become the norm, and people learn to live within the reduced paycheck.
That’s the theory, anyway. But in reality, too many people live too close to the edge, so any hit to the wallet as things stand right now — and in most cases, 8% is quite the hit — such a law wouldn’t exactly be viewed as a magnanimous gesture.
The other side of equation is the investment angle, of course, and this scares me just a bit.
It’s hard enough to make a case today that third-party investment companies are looking out for you and your hard-earned money every day. So, just pushing more money — required by law — into the hands of investment managers stirs the “greed” gene in my DNA. I can just feel it getting out of hand for the benefit of some (investment and banking companies) and the detriment of others (investors in way over their heads).
It’s an interesting concept to ponder, and I generally am for anything that helps investors save toward retirement, so I hope the idea gets a least a little bit of an airing in public forums, and perhaps at some Investment Company Institute seminars.
Do I think it has any chance at becoming legislation? Hell no. Tell the American people they don’t know how to save and aren’t fit to manage their own finances? Heresy…
… albeit with a bit of truth.
What do you think?
Marc Bastow is an Assistant Editor at InvestorPlace.com.
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