Nudges, life choices, and UBI

I am coming to the end of two weeks on the road visiting 401k clients. This trip has been eye-opening as always and is one of the reasons I have enjoyed my 401k practice for the past 18 years. Today's meeting in Minneapolis made me ruminate even more on my 34 years in the industry.

I met with 25-year-old Preston whose 401k balance is small because he is saving a fair amount in cash. He is skittish of the market and has amassed $125,000 in cash, CDs, and a money market. Still, he is committed to socking away 15% to the 401k per paycheck. I was impressed with how much he knew about the markets/ investments/ finance in general. When was the last time I was discussing P/E ratios in a 401k meeting?

And yet for all that, Preston is something of an exception. More common are older employees with small balances. How are they going to survive in retirement? Could it be that they will never retire?

Are nudges the answer? A new study from Principal gives hard data to the effectiveness of nudges (ie, auto-enrollment) and the outcomes. To boot, "retirement plans that use automatic enrollment are at least twice as likely to achieve 90% participation versus plans that do not automatically enroll participants—with less than 10% of workers opting out of retirement plans when automatically enrolled by employers upon being hired." This sounds like a case for auto-enrollment if ever I heard one.

And yet, we cannot save folks from their life choices. Financial education, auto-enrollment coupled with auto-escalation, and 1:1 401k meetings can only go so far. The employee must want to save in order for this to be effective. I also acknowledge that it is helpful to be in a supportive environment where savings is encouraged. A living wage is also a huge part of the conversation. And finally, I am battling the ever-present forces of consumerism (iPhone 16, anyone?).

At the same time, if employees are not able to retire with dignity on time, there are costs to both the employer and the employee. From the employer's point of view, the costs of an older employee could include a higher salary, higher health insurance costs, and (qualitatively) possible frustration from younger workers who are not able to advance up the ranks. From an employee's point of view, there can be frustration at not getting to spend the "golden years" with family and friends.

This rumination in turn led me to think about some sort of safety net so that those who want to retire can do so. Might it be cheaper to fund Universal Basic Income than have folks relying on government help and emergency services? There are no easy answers to these questions but if we truly believe in "Retire with dignity" as our North Star, then let's focus on solutions.