A quick riddle
Economics is the study of consumption and scarcity. How much can you get and what do pay to get it? So here’s an interesting riddle: what is the most attractive and expensive good or service you can buy which you inherently avoid? Generally speaking, consumers pay the most for attractive goods and services in high demand. Lots of goods and services are both expensive and attractive: luxury cars, big houses, personal butlers, executive chefs, first class airline tickets, and so on. There are some items which you begrudgingly pay for, despite the ambivalence (e.g. insurance) or even physical pain (e.g. the flu shot at your local pharmacy). There is, we would argue, a very expensive service many of us have actively avoided utilizing to its fullest.
Of course, the answer is in the title of this article: education. Think about it. Ivy League schools are charging students over $60,000 (or more) every year for an undergraduate education, which means that a B.A. in English can easily cost a quarter of a million dollars – certainly enough to buy a very fancy car or even a house. Despite the cost, can’t you see the temptation for a hard-working student to put off classes or even avoid them entirely? Who among our readers hasn’t wished for a heavy snowstorm to shut down classes at their school for a few days?
There are several reasonable criticisms to our assertion that education is both very expensive and, despite that, prone to avoidance from their very consumers. For instance, parents or taxpayers are generally the ones who pay for (and therefore, those who value) the service of education, not students. Certainly students don’t pay for school up through high school and, even then, it is rare for most students to fully pay their own way through college.
However, we still think the assertion stands. If you were to ask a typical high school student if their education were important, most know that their education level is a primary predictor of their future economic well-being. The cynical college student who is more concerned with the proof of education – the degree – rather than the intrinsic value of knowledge still knows that learning the concepts, even if just for the hours of the final exam, has to occur. Students know education is valuable, but avoiding it is still appealing.
Education’s long term benefits competes with short term goals
Why avoid education? If you think of a student’s job as going to school, then avoiding education means more vacation days and extra leisure time - sometimes the most precious resource we have. This truism doesn’t change as we become employed adults. If anything, leisure time is even scarcer for adults who have to juggle the responsibilities of their family, career, and home. There are an infinite number of ways we can spend time at work, improving our family lives, or (finally) relaxing at any given time, so long-term projects with distant advantages and multi-year goals are easy to procrastinate on.
Finally, we get to the point as it relates to the investment and finances. In previous Confero magazine articles and monthly newsletters, we have described the retirement crisis in this country. The traditional foundations for retirement have weakened as underfunded pension plans are phased out and social security payments will likely shrink for future retirees. Therefore, personal retirement savings plans, often through an employer sponsored plan, like a 401(k), are going to be the heart of our retirement system, but today’s workers aren’t saving enough and they aren’t investing appropriately. How can we educate them to change their behavior?
There are a variety of participant education initiatives being taken by recordkeepers and consultants to address this problem. Simplifying the participant education experience can lower the time requirement and mental burden for employees interested in understanding their investment shortcomings and making positive changes. Sophisticated tracking systems can measure which educational techniques are most effective in getting participants to change their investing behavior. Reporting systems which track individual savings levels against short term waypoint goals can impress the immediacy of retirement savings to employees and encourage them to personally confront their retirement security.
Making education easier and more effective is an obvious good. The question we have is: is it good enough? Retirement plan participation rates for large and medium size companies has remained essentially flat for 20 years, despite the improvements to education methods.
Outcome based retirement vs. education-only solutions
The efficacy of retirement programs used to be judged by asking, “are you giving your employees the tools they need to retire appropriately?” Most employer sponsored retirement plans pass this test. (However, 1/3rd of U.S. workers lack access to a retirement plan at work; this problem is worthy of a separate article.) The new and more stringent test for retirement plans is now, “have your employees retired appropriately?” What is the actual outcome of your employees when they leave the working world? In other words, the plan sponsor may have provided every planning tool, the best investment lineup, and the most generous payment matching arrangements, but they still will be judged a failure if employees don’t participate in the plan.
Voluntary education programs can be relatively easy, but a significant proportion of your employees will still avoid them simply because of time constraints in modern life. Some level of compulsion may be required to change employee outcomes.
Voluntary education or compulsory automation?
With this central paradox – education’s importance and under-utilization – in mind, an alternative way to promote positive retirement outcomes comes to the fore: retirement plan automation. Employees are defaulted into the plan, into an age-appropriate investment. Educated employees with atypical needs may opt-out of the program, but most employees will stay opted-in and, hopefully, enjoy better outcomes by retirement than they would have achieved with voluntary education efforts.
Time is a scarce resource, and retirement education draws heavily upon it. However, the collective time spent by a plan committee to prudently design an automated default retirement scheme could pay off for their employees by saving a tremendous amount of time for plan participants.
To Read other articles on Participant Education check out the links below
Educating Participants: Focusing the Lense
Winter Confero 2014 - Participant Education Vs. Advice