A top official in the federal Consumer Financial Protection Bureau (CFPB) said educational outreach to four vulnerable populations – college students, seniors, members of the military, and low-income earners – will be integral to the bureau’s research, regulatory, and legal enforcement efforts.
CFPB’s consumer division will “work with regulators to make sure people know what they are signing” and to help “clean up the marketplace” by ridding it of abusive products, Gail Hillebrand, who heads the consumer division, said at a Massachusetts Financial Education Collaborative conference held Friday at the Federal Reserve Bank of Boston.
Citing the subprime mortgage crisis, Hillebrand said it began “one mortgage at a time” – in large part due to poor disclosure by salesmen or on mortgage forms. Many borrowers who ultimately went into foreclosure failed to realize that their payments would rise sharply after the period of the initial, discounted interest rate ended. … Learn More
The pioneering behavioral economist Richard Thaler said employers and the financial industry should increase their efforts to help people prepare financially for their retirement.
“Making it easy isn’t the most profound thing anyone has said. But if we want people to do a better job saving for retirement, make that easier,” he said last week at a Retirement Income Industry Association conference, backed by a wide-angle view of Boston’s skyline.
Thaler is co-author of the bestselling “Nudge: Improving Decisions About Health, Wealth, and Happiness” and a pioneer in a branch of economics that rejects the convention that people are “rational” when it comes to making decisions. Behavioral economists acknowledge that people are psychological beings who don’t always act in their best interest and often do downright perplexing things. One prominent example is employees who do not sign up for their 401(k) retirement plan, leaving the money from their employer’s savings match on the table.
To nudge people to save, about half of U.S. corporations now automatically enroll their employees in their 401(k), according to consultants Callan Associates, though many offer it only to new employees. Before auto enrollment came into vogue, companies gave employees the option of signing up if they wanted to participate in the plans. With auto-enrollment, they must choose to opt out of saving, a strategy behavioral economists argue helps overcome the powerful inertia of doing nothing.
But employers typically deduct only 3 percent from employees’ paychecks. Thaler said this is nothing more an arbitrary percentage that a US Treasury Department official once mentioned in passing but that has now been accepted as gospel. It’s also too low by financial planners’ standards, particularly for mid- and late-career workers. “It’s time to get over that” and raise the rate, he said. …Learn More
When health care is factored in, more than half of Americans haven’t saved enough money for retirement.
But that price tag could become more unattainable under President Obama’s proposal last week to cut $248 billion from Medicare by raising premiums, copayments, and other health costs. With Republicans also talking reform, the impact of Beltway belt-tightening is coming into sharper focus for more than 45 million Americans covered by the federal program.
It’s a good time to revisit 2010 research by Anthony Webb, an economist with the Center for Retirement Research at Boston College, which hosts this blog. Webb calculated how much a “typical” retired couple, both age 65, needs today to cover out-of-pocket expenses over their remaining lives. The numbers are shocking:
A couple needs $197,000 for future Medicare and other premiums, drugs, copayments, and home health costs;
There is a 5-percent risk they need more than $311,000;
Including nursing-home costs, the amount needed increases to $260,000;
There is a 5-percent risk that will exceed $517,000.
To arrive at the estimates, Webb simulated lifetime healthcare histories by drawing on a national survey of older Americans. The difficulty for individual retirees who might want to use these estimates, however, is that their actual spending will vary widely depending on how long they live and their health outcomes. That’s where the risk comes in.
In this video, Alicia Munnell, director of the Center, interviews Webb about his research. To read a research brief, click here.
Which profile describes the most common victim of investment frauds like Bernie Madoff’s?
a. Tech-savvy young adult
b. Man over 50 earning high income
c. Elderly widow on fixed income
Widow, you say? That’s the stereotype, said Laura Carstensen, founder of Stanford University’s new Research Center on the Prevention of Financial Fraud.
“The old woman who’s demented and living on her own, and the guy who knocks on her door and sells her the policy – that does exist, but it doesn’t represent older people,” she said. Older people who have a history of long-standing relationships are often better at determining who they can trust, she said.
The correct answer is b: Man over 50 earning high income.
Fraudsters feed successful men’s egos by appealing to their investment savvy, enticing them to get into a deal others might not understand. By building up their egos, a fraudster ensures that the victim isn’t thinking clearly when he agrees to invest, said Doug Shadel, a member of the Stanford Center’s board who co-authored the AARP Foundation National Fraud Victim Study.Learn More
I keep bumping into Tim Maurer’s videos – he’s an active tweeter – and decided to share the fun. This Baltimore financial planner’s clients include a lot of 30-somethings, so he produced a series of humorous 90-second videos that knock down the barriers to understanding the basics of various personal finance topics.
With many people either returning from or heading out on vacation this week, he suggests in this video how to eliminate the anxiety around spending money on trips.
Stockbrokers and financial advisors typically focus on the mechanics of investing – the dividend, the strategy, or past performance. When they do, investors often become overwhelmed by the conversation.
To break through that and improve their comfort level, investors should instead focus on the more important issue at hand: the credentials and character of the person peddling those investments, said Tamar Frankel, a law professor at Boston University.
“I want to shift the focus from what is being sold to who sells it,” she said.
An expert in financial regulation and fiduciary law, Frankel’s latest research examines the role of trust in various professional relationships, including the relationship between a broker or advisor and his or her client or potential client.
Frankel’s basic premise is that no question is a stupid question. Since brokers and investment advisors are not regulated by the same fiduciary standards that govern, say, employer pension funds, investors must protect themselves.
That can be difficult to do when the broker is throwing around unfamiliar terms. She recommends investors come armed – with questions – to their meetings with brokers. She has put together a deceptively simple list of questions. If the broker refuses to answer a question – his or her right – then the investor has already learned something important.
Here are three of Frankel’s 15 questions and her thinking behind them.
Question: “Are you a registered investment advisor, registered broker dealer, or both?”
Rationale: Frankel’s message here is: assume nothing. Investors should be certain that the investment advisors or brokers being considered meet the professional standards established by their own profession. Even better, check out their credentials beforehand but ask the question anyway. … Learn More
All the headlines about “financially illiterate” Americans miss something important. The language financial professionals use can be incomprehensible.
In this humorous video, David Saylor, whose job is basically “word consultant” for Invesco Van Kampen Consulting, walked around downtown Chicago and asked people to define industry terms such as “dollar-cost averaging” and “beta.”
One person got one answer right. (After watching the video, readers may need to consult Saylor’s glossary, below.) Even a seemingly simple concept – “transparent fees” – was misinterpreted. It means that fees are fully disclosed but was interpreted to mean “invisible.”
No wonder people are confused by the “Finglish” – financial English – thrown around by their mutual-fund companies, 401(k) managers, and other investment professionals, Saylor said.
His work also explores the subtle distinctions people make when the industry attempts to use familiar terms, such as “guarantee” or “nest egg.” …