Sushi Money

     Are you suffering from too much choice regarding saving and investing for retirement?  I know I have at times. Too many funds, brokerage accounts, stocks, and questions about our “portfolio”… especially the 401(k).  And we are not alone!  Barry Schwartz, in a talk on the Paradox of Choice, cites too much consumer choice as a problem in society today.  In one example, he cites statistics that show how, with a 401(k) for example, for every 10 funds offered as choices, participation rates decrease by 2%.  A 401(k) plan that offers a choice of 50 funds suffers from 10% less participation simply due to the complexity of choice!  (You can view the video yourself at the link below).

    How about another example?   Let’s say we’re in the market for an mp3 player.  We go to the local big box electronics store thinking we probably know what we want, but we want to see the choices.  Holy cow!  Many brands and versions, but which is the most popular?  Easy question, it’s the iPod.  We look at all the choices, and then head to the gleaming white and mutli-colored rectangle.  Why?  I think it’s because of simplicity.  Apple found long ago that if you do a few things very well, market it correctly, and remain consistent, consumers will respond.  I believe the iPod and many other Apple products are so successful because of their simplicity and the fact that what they do, they do very well.  With an iPod you know what you’re going to get for the most part.  It’s sleek, intuitive and Apple doesn’t reinvent the wheel everytime someone wants to do something new with it.  They let other manufactures complement Apple products with a variety of endless components. 

    In many ways, we can do the same thing with our financial management and retirement planning.  Instead of staying paralyzed by too much choice, we should make a few simple decisions and let it go.  That’s why so many “life cycle” or “life strategy” mutual funds have come along and continue to increase in popularity.  It’s a one-stop shop for saving and investing over time, with automatic re-balancing by the mutual fund company. 

• One of the most important factors for the consumer to decide is risk tolerance.  How conservative or aggressive do you want your savings to be invested?  (See the end of this post for some worksheets and more info about risk tolerance.)
• Another element of maintaining a simple approach to saving and investing is to automate the process.  If it’s a 401(k), simply sign up for payroll deduction, matching, etc. and let it work it’s magic.  If we’re investing on our own… do the automatic ACH transfer thing, and let it go.  Simple is good.  
• Many “target-date” retirement mutual funds offer simple choices.  You just pick a plan based on your approximate retirement years, e.g. 2025 fund or a 2030 fund, and you keep on investing.
• What’s the most important thing about saving for retirement?  1) Starting a saving and investment program and, 2)  Staying with it!  As the chart below clearly shows, Defined Benefit pensions (the old traditional pension) have continued to decrease over the years, and achieving financial security in retirement is now the responsibility of the worker.  We must save consistently for retirement. 

     Besides, so many employers provide matching funds for the defined contribution, or 401(k) type of plans these days that we are giving up free money if we don’t sign up!  We tend to think no one would do that… but average participation rates have remained around 55%-60% for many years.   The provisions of the Pension Protection Act of 2006 are intended to foster automatic enrollment of new employees, with the ultimate hope of increasing pension-based financial security for worker’s retirement years.  It looks like the PPA provisions are having a large impact because participation in 401(k) type of plans is increasing, as well as diversification by employees within the sponsor’s plans. 

     It used to be that most 401(k) participants invested primarily in company stock… not any more.  People are more likely to use a mutual fund or plan from a company such as Fidelity or Vanguard- especially the life-cycle or target date retirement funds.  If you have a choice, why put all your eggs in one basket and invest only in company stock?   But getting started and enrolled is still the most important thing.  Many people think they “can’t afford it” right now, or need the money for something else.  When it comes to retirement, I think we can’t afford to not save for the future.  No one else is going to do if for us.    Social Security, if it’s still viable in 20-30 years, will not provide an adequate income for retirement.  It is simply a supplement to retirement.  We won’t even talk about healthcare costs that retirees will continue to face.

   Here’s the link to a great video with Barry Schwartz on the Paradox of Choice: Why More is Less.  It’s pretty long- about an hour twenty minutes to watch, or you can read his best-selling book:

The Paradox of Choice: Why More Is Less

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