Freedom not to choose

Freedom not to choose
Meir Statman. Photo courtesy SCU Leavey School of Business
by Dan Nakaso |
Behavioral finance expert Meir Statman explains why most employees shouldn't be given the choice of managing their own retirement accounts. This article first appeared in the San Jose Mercury News on April 1, 2012, under a different title.

Santa Clara University Finance Professor Meir Statman believes that American employers should be forced to set up retirement plans for their workers for one simple reason: “People are stupid,” he says.

A serendipitous life

Born in a German refugee camp to Holocaust survivors, Meir Statman has had a serendipitous route to the Mission Campus. Read the tale—and Statman’s observations on the surprises that working and living can yield—in the Winter 2012 SCM.

Or see some of the lessons Statman shares in his latest book, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions, in the Summer 2011 SCM.

Statman, an expert in behavioral finance, includes himself among people who sometimes make stupid financial decisions.

“I know a great deal but I sometimes catch myself saying, ‘Whoa, that was stupid, Meir,’” he says.

Statman and his wife, for instance, recently had some windows replaced in one of their bathrooms. Statman paid the bill for the work in full, even though he noticed that some of the caulking wasn’t right.

“Then I called to say, ‘Can you send somebody to fix it?’” says Statman. “Well, I haven’t heard back. Why didn’t I just pay them some of the money until it was fixed? There is the matter of social niceties and our aversion to argue. But you can describe that as less than smart.”

Statman sat down recently with the San Jose Mercury News to talk about retirement planning. The following interview has been edited for length and clarity.

Why should employers be required to set up retirement plans for their employees?

In 1975 I got a job at City University of New York making $13,500 per year. I was 28 years old. The university had a mandatory savings plan and they put as much as 15 percent on top of my salary into retirement. I had no choice. I couldn’t say, “Listen, I could really use that money now for diapers for my daughter.” But I had no option. I worked there for two years and contributed a total of $7,000. Thirty-eight years later, when I last looked, that retirement was worth more than $190,000. Even if I had contributed nothing, I would still have a good amount.

Even if employers are only required to set up a retirement account for their workers—and not contribute cash like you received in New York—what’s in it for the employers?

In Australia, the system has existed for ages now—same thing in Israel. And Britain did the same thing last year. In America, pensions are underfunded. [American] companies today offer 401(k)s and, in some ways, it’s complicated for them. It would just make life simpler for employers if the government said, “You have to do it. End of story.”

What’s the likelihood that your idea would become reality—and who would administer such a sweeping change in the United States?

The idea that it would happen tomorrow in the U.S. is absurd. There’s just too much opposition from many quarters. But in an ideal world, I would have it all handled by a central agency, another government agency, like the Social Security Administration.

Is there an overall benefit to the U.S. economy in having more Americans with company-provided retirement plans?

It’s not about helping the economy, it’s about helping individual people. When people reach the age of 65, they shouldn’t have to rely on soup kitchens and public agencies. This will improve the lives of people. Will it increase the GDP for the U.S. economy? I don’t care. If you have a centralized system that keeps expenses low, money that would otherwise go to financial services companies that charge 1 percent or 2 percent won’t go to them. That’s going to end up in the savings accounts of employees, rather than going to the money managers. And that will help improve people’s lives.

In your scenario, how much control would employees have over managing their own retirement accounts?

I don’t want to give people too much choice because people are stupid. I would say, abolish all pensions and have everybody in a defined contribution plan. You can still put it all into government bonds, if you want to ensure a conservative income. If it were up to me, I would have retirement plans that put them into index funds only.

There are 50-year-old employees with little retirement savings and 30-somethings making $30,000 a year who believe they will never get ahead and will never be able to afford a house, let alone be able to retire comfortably someday. Both groups say there’s no point in trying to save for retirement at this point in their lives. What would you say to them?

They’re going to say, “I don’t have money to spare for retirement,” or, “I need it now and I can’t afford to save for later.” But you can find ways to cut back, even though I know it’s going to be a hardship for many. But even homeless people have cell phones, so start saving now and take advantage of whatever you have. There are IRA accounts they can open even if they don’t have an employer that offers it. I would tell the 30-year-old, “Social Security will be there, but it’s not going to provide you with a nice standard of living. And you’re not a kid anymore. Stop acting like a kid. You have to do your own adult supervision.”

You’re obviously doing well financially, and I would imagine you’ve done a better job than most at managing your own retirement fund. You’re 65 now. When do you plan to retire?


Then what good has it done you to have had so much money tied up for years in a retirement account that you have no intention of ever tapping into?

Having a retirement account is useful even if you never plan to retire because I wake up every day knowing that I work because I want to work, not because I have to work. That brings me a kind of inner peace.

Joan Banich '82 said on Jun 4, 2013

I do agree with this philosophy. As an individual consumer, it is difficult to gain enough knowledge to do my own financial analysis. There are too may options and it can be difficult to compare investments based on fees and potential earnings. Having a managed account has exceeded anything I could have done on my own.

Jim Goetsch MBA '95 said on Jun 4, 2013

Just what we need, another government agency to babysit us as part of the nanny state. Let's take away the individual's freedom to handle his money as he sees fit and force companies to follow the dictates of a government, which has a poor record of performance in Social Security, Medicare, Medicaid, and now Obamacare. Are there no conservative professors to interview at Santa Clara?

Stig Nilsson MBA '85 said on Jun 5, 2013

I enjoyed Meir's classes, but I disagree with the idea of having the goverment manage your retirement fund. Look at Social Security, which was intended to be a safety net and has been used by the politicians as a welfare fund for people who never paid into the system. The pension fund would be so huge that it would lead to corruption. It would be better to have the option to spread the investments into smaller managed funds and pay the fees.

Joanne Schwartz '82, MBA '85 said on Jun 5, 2013

Great article with some provocative ideas. I may not agree with all of Dr. Statman's suggestions, but I do agree that there is a lack of financial literacy in this nation. I chafe a bit at the notion of instituting a new government bureaucracy, but I do agree that most people would benefit from having a neutral person, whose compensation is not tied to account activity, manage their funds. It would be wonderful if people would receive financial education early in life, because the time value of money is a powerful thing.

Dena Adams Dooney '92 said on Jun 5, 2013

As an employee benefits consultant, I encourage my employer clients to promote their financial wellness benefits and encourage 401k participation, but it's a struggle. Healthcare reform is going to require larger employers to offer automatic health insurance enrollment, so why not add automatic retirement plan enrollment—Both issues are financially breaking Americans.

Summer 2014

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