It may be stating the obvious, but people who work in the pension industry tend to have an affinity for things financial, at least one would hope they do (on many levels). This being the case, they are often mystified by the apparent disengagement and disinterest displayed by so many defined contribution pension plan members. What is needed, the pension professionals argue, is better member education. Once people understand how their pension plan works and the implications of their decisions, they’ll start showing more interest.
But imagine telling a financially focused actuary or investment manager or administrator that their retirement security depended on building a good art collection. “Don’t worry,” you’d say, “the key is to choose the right mix of art based on your personal circumstances and preferences. When you’re younger, you can afford to take greater chances investing in unknown artists whose work could one day become highly collectable. As you get closer to retirement, you’ll want to begin shifting into more of the classics that are less likely to lose value and more readily saleable. We’ll bring in some art experts to explain the basics. We’ll even provide online modelling tools to let you see the impact of, say, increasing your weighting in post-modern abstract mixed-media.”
But, they might say, “I don’t like art. I have no interest in learning about it. Why does my future retirement security have to be tied to my art expertise? Besides, what if I go along with all of your art education and still make bad choices? Or, what if I make all the right choices (or pay an expert to make those choices for me) only to find the value of my collection is wiped out by changing fashion or an art market meltdown? It all seems like smoke and mirrors to me. And, by the way, how big a profit are you making from buying and selling the pieces in my collection, and what will you charge to house it? All I want is to retire with dignity. Is there any other way?”
Okay, I know you’re thinking this is a bit of a stretch. But isn’t there a fundamental flaw in a pension plan design that rests on the forcible financial education of an apparently apathetic and under-engaged majority? This is not to say we should back off on the current push for greater financial literacy. The point is that we also need to push ahead with a more intelligent approach to plan design.
If the DC model is to be more than a failed experiment, we need to bridge the divide between those who run the pension industry and those who need a pension. Putting plan members first, providing meaningful contribution levels and developing “hands-free” products with better outcomes would be a great place to start. But, enabling legislation promoting a more “creative” approach to plan design (such as single-employer target benefit plans) is the only real way forward.