Posts Tagged "psychology"

Puzzle pieces: auto enrollment

401(k)s Stall, Post-Auto Enrollment

Seven years after Congress encouraged employers to automatically enroll their workers in the company 401(k), the retirement fix has run out of steam.

Corporate America rushed in to adopt the feature in their 401(k) plans after the Pension Protection Act (PPA) made auto enrollment more attractive by giving employers that used it a safe harbor from non-discrimination rules governing their benefits.

Immediately after the PPA provision became effective in December 2007, employee participation in 401(k)s increased.  But since that initial bump, it’s been virtually flat for years.

In 2008, participation increased to 73 percent of all employees in workplaces that offered 401(k)s, up from 68 percent in 2007, according to Vanguard Group Inc.’s new “America Saves 2013” report, which provides a decade of participation rates for its large data base of clients.

Fast forward to 2011: participation was 74 percent.  It has barely budged.  (Last year, participation was 68 percent, but Vanguard said past experience indicates this figure will rise to roughly the same level when all of its clients turn in their data). …Learn More

Photo of ostrich head in ground

Are You An Ostrich About Investing?

As the stock market approached and then broke through the 15,000 mark, did you get a little obsessed with your 401(k) balance?

You would not be alone. A novel research project recently analyzed how often investors went online to check their 401(k) accounts and found that they did so more often when the Dow was rising. What could be more pleasant than watching your wealth grow?

The researchers quantified the emotional roller coaster that our investments can take us on by looking at log-on activity during 2007 and 2008 for 100,000 401(k)-style accounts at Vanguard Group Inc. To make sure they were properly measuring investor interest, the sample included only online customers who did not receive paper statements in the mail.

Their analysis gauged how responsive these investors were to stock market swings in either direction, based on the size of one-day market moves. If the Dow increased by 1 percent in a day, for example, the total number of log-ins rose nearly 2 percent. But if the Dow fell by 1 percent, then 2 percent fewer investors checked their accounts.

This human inclination to avoid the pain of losing money has been labeled the “ostrich effect,” because investors respond by putting their heads in the sand when the market is down. …Learn More

Photo of bottom half of runners

Few Boomers Catch Up on 401(k) Saving

Only 13 percent of older workers take advantage of the “catch-up” contributions to their retirement accounts permitted by the IRS for anyone over 50, according to new data provided by Fidelity Investments.

This is hardly surprising, since prior research has estimated that only about 10 percent of all workers are contributing the maximum $17,500 per year that everyone, regardless of age, is allowed to contribute under IRS guidelines for 2013. Since the vast majority never reach that cap, the “catch-up” 401(k) contribution enacted to encourage people to save more when they hit their 50th birthday – an additional $5,500 per year – is largely irrelevant to them.

But the catch-up contribution data, which Fidelity culled from its 401(k) client database representing some 12 million workers, are yet another reminder of a fundamental problem with the U.S. retirement system: Americans simply are not saving enough to ensure their financial security in old age.

In short, members of the Me Generation don’t seem to be doing a great job of taking care of Me. …Learn More

Retirement Countdown: Sheila Downsizes

Sheila Taymore could not afford the $2,200 mortgage and home equity loan payments, the enormous heating bills, and the repairs – so many repairs – on the home she’d owned for decades.

Sheila Taymore, 60, of Salem, Mass.

But selling it was emotional: she and her first husband had raised two sons in that house in the seaside town of Swampscott, north of Boston. Her decision to move was triggered by a recent divorce and came about two years after the death of her mother.

“I walked around and cried and said, ‘Who cares about this house?’ I make all this money, and all my money was going towards my house,” said Taymore, a Comcast Cable salesperson – last year was her best year ever.

She is like millions of U.S. baby boomers struggling, often imperfectly, to prepare financially for their imminent retirement. Wall Street may tout investment savvy as critical to ensuring a comfortable old age, but less lofty decisions can be more helpful to those with too little savings and too few working years left to make it up.

Taymore is also planning to delay her retirement to age 70. That will give her a larger monthly check from Social Security and fewer years of retirement to pay for. That was an easy call, she said, because “I just love my job.”Learn More

Photo: healthcare reform

Health Reform May Impact Your Finances

Getting or keeping health insurance is central to many of the major decisions that working Americans make.

Canadian and European governments provide universal health care to their citizens, but this country has relied heavily on employers for health insurance, and only about two-thirds of them provide it. It’ll be fascinating to see how health care reform changes our decisions about work, starting a business, college, and individual finances when more Americans have access to coverage in 2014.

Research years ago established the influence of employer health insurance on the workplace. When employees are covered at work, job turnover is lower – workers know health care is a big thing to give up. There’s also newer evidence that people on the disability rolls, who receive health care as part of that federal benefit, are more likely to go back to work if they live in a state with better access to health insurance in the private market.

Retirement is another big decision driven by one’s health insurance options. Medicare eligibility at age 65 can trigger the decision, new research shows: people working for employers without any health benefits for their retirees are more likely to retire at 65, according to a paper by economists Norma Coe of the University of Washington’s School of Public Health and Matt Rutledge of the Center for Retirement Research at Boston College, which supports this blog.

“We interpret this finding as evidence that Medicare eligibility persuades people to retire, because they can begin receiving federal health coverage,” Coe and Rutledge write. …Learn More

Translating Savings to Retirement Income

Determining how much money one will need in retirement is a mathematically and psychologically daunting task for many Americans. But new research has landed on a deceptively simple strategy for prodding workers to save.

Employees in an experiment at the University of Minnesota saved more for retirement after researchers provided them with a personalized chart with information similar to that shown below. Each employee’s chart translated a $100, $200, or $500 contribution, made every other week, into the amount of income each of these contributions would generate annually once they retired. If they saved more, they could see that it translated to more retirement income.

“We think people may have a hard time making that translation from an accumulation of wealth to an income flow,” said researcher Colleen Flaherty Manchester. “They’re used to the flow because that’s what they get every month or week in their paycheck.”

The income projections, she said, are “completing the circle for them to make it clear.” …Learn More

Video: Why Stock Investors Defy Logic

The Standard & Poor’s 500 stock index has climbed steadily and surpassed its 2007 peak last week, and even sluggish European markets are showing signs of life as investors rush back in.

This interregnum between the collapse of global financial markets in 2008-09 and the next bubble – whenever and wherever that may occur – is a good time to reconsider investor behavior.

In this video, Ben Jacobsen, a finance professor at Massey University in New Zealand, discusses behavioral economics, market panics, and “strange” and inexplicable behavior.

“Most people,” Jacobsen concludes, “have a great difficulty assessing risk and what risk is.”

Check out another blog post about research confirming that people tend to rush in when the market is rising and pay dearly for stocks and then sell in a panic after experiencing large losses. Morningstar data also indicate that long-term investors have better returns if they buy and stay put.Learn More

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