Professors Richard H. Thaler and Shlomo Benartzi provide a compelling case for the potential of behavioral economics and “choice architecture” to increase the scope and scale of society’s retirement savings (“Behavioral economics and the retirement savings crisis,” Summer 2013). If society decides to follow the guidelines suggested by the professors, special care and vigilance needs to be devoted to the “automatic investment” element of any such plan. Nudging millions of people and billions of dollars into the market will boost retirement savings, but that gain can be significantly eroded by excessive and unnecessary fees from the investment management industry. The effect of fees on market returns over a lifetime of savings can be enormous, and therefore fees should be minimized. Wall Street certainly won’t object to the new customers, but will undoubtedly seek to water down the criteria for “qualified default investment vehicles.” Perhaps Thaler and Benartzi’s next paper topic should be choice architecture to steer folks into saving vehicles that minimize fees.
Another interesting angle would be an expansion of their research to the small business sector. The methodology employed in their survey covered 13 of the 25 largest 401(k) plans in the country. From my vantage at Employee Fiduciary, an independent 401(k) record keeper for small businesses, I can attest to the nimbleness and frugality of many small firms. So much so, Professors Thaler and Benartzi might be surprised at how efficient and innovative small business owners can be.
Greg Carpenter, ’84
CEO, Employee Fiduciary