But is the inertia in retirement savings always a bad thing?
Most people probably know that part of Issac Newton's first law of motion describes inertia: “Unless action is taken, the static object tends to remain stationary.” What most people don't know is that when Sir Newton wrote this, he turned to his assistant and commented: “This may one day be bad for retirement savings.” OK, the last part may be the pseudo-scripture.
I have always regarded inertia as a barrier to retirement savings. Something that must be overcome. After all, Brigitte Madrian and Dennis Shea's influential 2001 paper states that 401(k) participants are much like those who rest. For example, if the default value of 401(k) is unattended and the workers have to go to the HR to start saving, then they will delay registration. Instead, if the default value is saved (i.e., automatic registration), the worker may continue to save…it is usually a good thing. Again, once automatically enrolled, people stick to their investment choices and contribution rates of admission. If these options are not properly set (e.g., low-risk investment choices are smaller, automatic registration may not be that useful. Now setting savers on the right path to automatically register, contribution automatic upgrades, and investment choices such as target date funds are considered best practices. If not followed, the first law of physics and obviously human behavior – can bring people back into savings.
So when I saw some recent research by my colleagues at the Retirement Research Center at Boston College, I was surprised to find that inertia can serve well in at least one case. (This study is part of a broader initiative in partnership with Jackson National Life Insurance.) The authors of the study are interested in two questions. First, how do old depositors view potential stock returns and risks? Secondly, will these views affect their behavior? To answer the first question, the author used the latest survey of retired savers aged 48 to 78, with at least $100,000 of investable assets by Greenwald and colleagues. The researchers asked these people about their perceptions of market returns and their preference for risk. To answer the second question, the author then examined two major economic household surveys – Health and Retirement Research and Consumer Financial Survey – See how people like the Greenwald survey participants actually invest.
On the first question, the study found that people view the stock market with pessimism. Many people say they hope future stock returns are reduce A higher historical average than they expected them. The survey also found that this pessimism is reflected in people's preferred asset allocation. Figure 1 shows three lines representing the recommended “sliding path” for holding stocks (i.e., risky assets) used in the Morningstar Life Assignment Index. The construction of these indexes is consistent with the distinction between the three types of investors through their risk preferences (conservative, moderate, aggressive) and should be consistent with economic theory. The figure also plots the points (median) and beard (25Th To 75Th Percentage) Representative Greenwald survey how participants are like invest.
The graph shows that for participants in the survey prior to retirement, the required asset allocation is lower than the most conservative glide path. Even relatively aggressive retirees – 75-year-oldTh Percentile – barely makes it higher than the conservatives. If these savers behave like they say, their pessimism will lead them to give up valuable rewards.
So, will depositors act in this way? no. Although survey participants said they expected an average of about 37% of investable retirement savings savings in HRS and SCF, the comparable numbers were 48% and 43%, respectively. In fact, the HR number is very close to what Morningstar's medium glide path suggests. Why is this riskier than the required allocation? The simple fact that most of these people are dragged into the target date fund and stayed in it. inertia.
Before reading this research, I might think it is important to constantly promote people to check their investment options and make sure they are satisfied with them. Regarding other investment features, such as fees, this may still be a good advice. But, at least in terms of risk, inertia seems to have taken people on the right path.
