CEO Matt Fellowes spoke last week at the annual Morningstar Ibbotson conference in front of a large audience of leading retirement plan providers and advisors. Matt’s bottom line was resolute: saving more money every month is the most powerful way to boost retirement security.
This bottom line stands in sharp contrast with the current consumer finance reality: U.S. households are collectively behind on retirement savings to the tune of six trillion dollars. Studies have shown that retirement savings are simply not a budget priority for most workers, across all age groups and income brackets. And the story is getting more difficult by the year. While forty-four percent of Americans listed retirement savings as their number one budget priority in 2007, just seventeen percent did in 2010.
In response to data like these, a large share of employers support automatic enrollment and escalation in their retirement plans. While these programs have been very successful at boosting savings contributions, workers faced with automatic enrollment have not been given guidance about how to reduce their spending in other areas of their budget. The result: workers do not slow down their total spending to account for their decreased take-home pay. This perpetuates a harmful cycle of employees unthinkingly contributing to their 401k through defaults, unthinkingly keeping spending constant, and borrowing to make up the difference between their income and expenses. Matt went on to explain that this is not only unsustainable for workers, but for sponsors as well. Annually, there is more leakage coming from the retirement services than match dollars going in, spread between cash outs, hardship withdrawals, and loan defaults.
Fortunately, Matt explained, this cycle can be broken. New technology and research in behavioral psychology now make it possible for Americans to contribute more to their retirement savings. In order to drive lasting, substantive changes in retirement savings and security, employers and financial managers need to change the active decisions Americans are making with the remaining portions of their paychecks. By targeting spending inefficiencies and redirecting that money to retirement savings, providers and financial advisors can help workers find the money in their paychecks to save more and protect their existing savings. Spending in almost any category can be redirected to retirement savings using HelloWallet’s paycheck allocation services.
For example, inefficiencies are abounding in the way most Americans consume products. Almost 2 percent of American salaries go to mostly avoidable bank fees, for instance. Similarly, many Americans do not compare product costs before they purchase appliances, yet prices vary greatly between retailers. By helping consumers identify these avoidable losses, that saved money can be moved into their 401k accounts and begin building interest.
Similarly, most Americans spend money they look back on and wish they hadn’t. This is why HelloWallet developed the emotional flagging system for its members’ checking account and credit card transactions. If a user buys coffee at Starbucks and flags the purchase as something they “Wish I hadn’t” spent, they will be reminded of the trade-off between that spending and their goals in the future. This function ties strongly to the Dual Process Theory, which finds that although often customers cannot think cognitively about each of their purchases, they have a gut reaction to them, which can be very powerful in subsequent behavior change.
Matt outlined two other examples of the HelloWallet app that are deeply rooted in behavioral psychology and have proven to effectively increase users’ savings. The first is peer comparison. The application presents users with peer data, about 401k savings amongst other financial components of a member’s life, in order to effectively change spending and savings behaviors. The other feature is a product of research that finds most people are not aware of how much they spend or how much they have to spend at any given time. In response to this, the HelloWallet mobile app offers location-based spending that allows users to see how much they can safely spend in a particular budget category based both on their location and on their past spending at the vendor. When faced with this information, users are much more apt to make levelheaded spending decisions.
While the current state of financial literacy can seem bleak at times, Americans today have the power to turn it around by keeping Matt’s advice in mind. With the help of retirement plan providers and financial advisors, consumers can pinpoint their unnecessary excess spending, remedy it, and turn the new cash flow into additional retirement savings.