July 17, 2018

401k Savers Make Little Progress

Despite the mounting pressures on Americans of all ages to save for retirement, our saving habits haven’t changed in 10 years.

The combined employer and employee contributions to 401(k)s consistently hover around 10 percent of workers’ pay, according to “How America Saves 2018,” an annual report by Vanguard, which administers thousands of employer 401(k)s and other defined contribution plans.

Retirement account balances aren’t going up either. The typical participant’s 401(k) balance is no larger than it was in 2007, even though accounts grew 7 percent last year, to $26,000, thanks to a strong stock market. The balances, when adjusted for inflation, are slightly smaller.

The growing adoption of 401(k) plans that automatically enroll their workers is having both negative and positive influences on the account balances.  Employers tend to set employees’ contributions in these plans at a low 3 percent of their pay.  This has had a depressing effect on balances, but it has been offset somewhat in recent years by a modification to auto-enrollment plans: more employers are automatically increasing their workers’ contribution rates periodically.

Baby boomers with a few short years left to save are particularly under pressure to increase their savings. The typical boomer has accumulated only $71,000 in his current employer’s retirement account, according to Vanguard. Total account balances are generally larger, however – though still often inadequate – because many baby boomers have rolled over savings from past employer 401(k)s into their personal IRA accounts.

Overall, the situation for all workers hasn’t really changed and neither has Vanguard’s message to future retirees.

“Going forward, we need to reach for higher contribution rates for more individuals,” Jean Young, senior research analyst says in the company’s video above. …Learn More

May 29, 2018

SNL’s Kate McKinnon and Kids on Money

Kate McKinnon has made a name as a comedienne with her wild and weird humor on “Saturday Night Live.” But she plays straight man to the kids she interviews about money.

This video, produced by the best-selling personal finance author, Beth Kobliner, is an effort to have some fun while improving financial literacy – an effort that seems aimed more at adults than children.

Justine, Ricky, and Jillian are the sugar that makes Kobliner’s sober advice about saving, jobs, debt, and credit cards more palatable – and this strategy just might be effective.

Watch for yourself.

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December 12, 2017

Financial Videos’ Message: Please Deal

Reflecting a lofty ambition to educate Delaware residents about financial management, state government officials put together some terrific videos.

This is not high-level finance – the speakers tell stories about real people facing up to the dimensional challenges of money and retirement.  Viewers outside Delaware might find one of the 10 online Tedx talks valuable to them. Here are three:

Javier Torrijos, assistant director of construction, Delaware Department of Transportation:
His take on the immigrant experience in a nutshell: “The parents’ sacrifice equals the children’s future,” said Torrijos, who has two sons and whose own father left Columbia for a tough neighborhood in Brooklyn, New York, in 1964 so his children would have a shot at escaping poverty. Today’s immigrants are no different. But the pervasive ethos of family above all else, he argues, is responsible for some of the Latino immigrant community’s financial instability.

When required to make the impossible choice between going to college or straight to work to support family, family usually wins. “That mentality still exists” but needs to change if Latinos are to improve their lot, he said. …Learn More

October 24, 2017

401(k) Nudges and Course Corrections

Behavioral economist Richard Thaler, winner of the 2017 Nobel Prize for economics, regards his field’s greatest contribution as showing that people are more likely to save if the saving happens automatically.

“I’m all for empowerment and education, but the empirical evidence is that it doesn’t work,” he said in a 2015 Wall Street Journal interview. “That’s why I say make it easy.”

To make saving for retirement easier, employers have increasingly turned to automated 401(k)s. Automation has taken two basic forms.  The first, automatically enrolling each employee, is pervasive and has had notable success in increasing participation in retirement savings plans.  The second form, automatically increasing the amount employees save – a concept originated by Thaler and economist Shlomo Benartzi – is catching on. It’s hoped that the second will correct a problem created by the first.

Last year, 45 percent of Vanguard’s client base used auto-enrollment plans, according to its “How America Saves 2017” report.  Historically, employees were asked to enroll in their employer’s 401(k). Today, more employers are – as Thaler would say – “nudging” workers by automatic enrolling them, usually when they are hired.  Although they then have the freedom to opt out, inertia tends to keep them in the plans.

Participation in all types of 401(k)s has roughly increased in lock-step with the spread of auto-enrollment.  Last year, 79 percent of workers participated in Vanguard-administered plans, up from 68 percent a decade ago, when a new federal pension law made auto-enrollment more appealing to employers.

The irony, however, is that while auto-enrollment encourages more people to save, Vanguard partly blamed a 2016 drop in employee contributions on their popularity. The average employee contribution in all types of 401(k) plans declined from 6.9 percent in 2015 of pay to 6.2 last year, well below the 7.3 percent rate prior to the Great Recession, according to Vanguard. …
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July 5, 2016

Parents, Start Student Loan Homework!

Here’s a reminder that parents should start their homework this summer to minimize college loan repayments over the long haul. A few basic decisions can add or subtract thousands of dollars.

A little help came last week, when the interest rates on all federal student loans were reduced. Despite the declines, the rates for the PLUS loans available to parents remain much higher than the loans available to their offspring – taking out a PLUS loan will nearly double the interest paid on $50,000 over 20 years, compared with an undergraduate Stafford loan.

This is an argument for having prospective students take out the loans, rather than the parents.  As for paying them back, financial advisers tend to agree that young adults with decades of work ahead of them can share in that responsibility at a time their parents are facing retirement.  This complex family decision depends on myriad factors, including how much income the graduate can expect to earn after college and how comfortable the parents are.

There are one-time, upfront fees on federal student loans, and they are also much higher for parent PLUS loans: 4.272 percent of the loan’s principal amount versus 1.068 percent for Stafford loans for undergraduates – these fees will go up for loans disbursed after Oct. 1.

The Institute for College Access & Success has put together an excellent cheat sheet explaining the federal loan options, who qualifies for various types of loans, and the costs of each.  To see this sheet, click here.

Below is the institute’s summary of the new loan rates, effective July 1: …Learn More

November 20, 2012

Financial Education Strategies Need Work

In a September paper distributed by the National Bureau of Economic Research, Professor Brigitte Madrian and her co-authors reviewed the current state of U.S. financial education. In an interview, Madrian, a professor in Harvard University’s John F. Kennedy School of Government, provided some fresh insights into education, regulation, and the role of the financial industry.

Q: Besides low financial literacy, why do people make bad financial decisions?

A: Procrastination. Inattention – one reason people accrue credit card late fees is that they forget to pay their bills on time. Advertising – people are swayed by the marketing of financial services and products. Not all products pushed by financial advisers or financial-services companies are appropriate for everyone, and sometimes people are swayed into purchasing products that may be right for someone else but aren’t right for them.

Q: Does financial education even work?

A: I believe the jury is out. We do not have a lot of compelling evidence on the impact of financial literacy programs. There have been lots of studies on programs, but many of them are of dubious scientific validity. Of the ones that are more credible in terms of methodology, some find very little impact on financial education and a handful find financially positive effects. …

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November 1, 2012

Kids to Washington: Keep It Real

Leave it to high school kids to inject some much-needed perspective into our economic and policy debates.

In Tuesday’s election, the presidential election may come down to a few swing states. But the next president, whoever he is, faces tough challenges – topped by the massive destruction of roads and transit systems wreaked by Hurricane Sandy, a tepid economy, and the “fiscal cliff” that a divided Congress enacted to automatically cut the $1 trillion budget deficit.

This video, by students at the East Coweta High School in Sharpsburg, Georgia, was among the winners of a contest sponsored by the Council for Economic Education, a national financial literacy organization that also has state chapters.

Click here for winning videos submitted by high schools in New Jersey and Maryland.Learn More