A co-founder of TaskRabbit has launched a new 401(k) platform designed to improve 401(k) participation.
- Cut actively managed funds out, presumably people aren’t participating in these plans because they’re too expensive
- Improve the paperwork / process; amen, anything corporate IT designed sucks
- Use big data to have a more responsive process; or so it seems by reading into the article
They’re getting it wrong
It’s actually quite easy to dramatically improve 401(k) participation. All companies need to do is make them opt-out instead of opt-in (NY Times or National Bureau of Economic Research). No need for new platforms, new companies, and certainly not new technologies. Not convinced? Here’s a list of seven low- or no-cost ways to increase 401(k) participation.
Don’t get me wrong. I’d love an easier to use platform. And, I get that I’m not the target market as I max-out my 401(k).
The thing is, lack of participation is not a technology problem.
It’s a human problem
I have this joke when talking about The Elephant in the Room has a Paycheck:
You know how Americans travel overseas, right? When someone tells them they don’t speak English, how do the American’s respond? They talk louder and slower (but still in English).
It’s the same thing financial services companies do. When people opt out of their products, what do they do? They do the same things they’ve always done, only louder and slower.
Guideline Technologies may create a better platform, but they’re still talking about mutual funds and the same old metrics for measuring success. Diversify. Growth funds. Watch your costs.
These are all good points, but no one freaking cares.
No matter how beautiful their platform is and how much they lower costs, the following is still most people’s experience with 401(k)‘s:
Step 1: Look at starting balance for the month. (Let’s make up a number: $5,000.)
Step 2: Put in 10% of paycheck pretax to 401(k). (Let’s make up another number $500 a month — that assumes a $60K salary.)
Step 3: Look at ending balance, realize it’s lower than starting balance even though they added $500.
So, maybe it’s not lower, but it’s not always going up. And, it’s impossible to understand why. Which, to most non-professional investors, feels like a random result. They put money in, and sometimes they have more, sometimes they have less.
Random results do not reinforce habits. Simply put, there are three parts to habit formation: the cue, the routine, and the reward. When the routine is rewarded, the cue will successfully trigger the routine. When the routine is not rewarded, we have to push through to keep up. That’s the tension against people participating. Making it easier will certainly help to a point, but we know how to increase participation if that’s all we’re trying to achieve — opt-out plans.
What we want to do is have people participate willingly. Joyfully. And that’s not going to happen until we start measuring success differently than we do today.