One thing I have a difficult time with my undergraduate economics students is the presumption that state actors are interested in improving outcomes. It’s a lesson that Thomas Sowell – who considered himself a Marxist even after studying under Milton Freidman – learned only by trying to improve outcomes while working for the federal government.
SAN FRANCISCO, CA – MARCH 28: An Uber self-driving car drives down 5th Street on March 28, 2017 in San Francisco, California. Cars in Uber’s self-driving cars are back on the roads after the program was temporarily halted following a crash in Tempe, Arizona on Friday. (Photo by Justin Sullivan/Getty Images)
Sowell found improving outcomes meant there would be less need for a program. Less need meant less demand for state progra ms and jobs. Fewer jobs meant less salary potential.
In other words, it’s simply in the sane, economic interest of many state programs to not improve outcomes!
In my last article for Forbes, I covered the OregonSaves pilot initiative to force all employers who do not offer a retirement plan to enroll employees into a state-managed Roth IRA consisting of an S&P 500 Index Fund, a Money Market Fund, and Target Date Retirement Index Funds from State Street Global Advisors (SSGA).
For a 1% annual fee, investors will not be given the advice they could receive for the same fee with the help of an advisor – including if they should invest at all or address other financial priorities – but, will have what amounts to an index portfolio that costs 9-12x more than ones they can set-up online.
While personal finance experts have largely been quiet about the harm, I was able to find one comment on social media that it will be interesting to s tudy the results over time.
The experts will just wait and see what should be obvious is the making of a massive retirement plan pile up.
These new self-driving retirement accounts will be forced upon people the state claims have ‘no access’ to a workplace plan, giving keys to people who don’t have a license and hoping all turns out well.
The investor who selects the money market fund will have seen no or low returns over the last year. The S&P 500 investor could see a drop of 50% or more. The SSGA Target Date funds were selected despite not even having a three-year performance history, akin to putting a self-driving mechanism on a never before used model car! In looking at the funds that comprise the SSGA Target Date 2045 fund, something that a 30-year-old might select, 2008 would still have resulted in a loss of approximately 1/3.
Do we have to wonder what will happen when a new investor, forced into a plan, with no guidan ce and ongoing support suffers such a loss?
I can say for certain from all of the people I still meet with who jumped in and out of the market, costing themselves years and decades of savings.
But, if we need data for what should be observable by any in the field, we can look at the Thrift Savings Plan (TSP), the government’s plan that also has no advice mechanism, for answers.
Savers overwhelmingly use a safe account, rather than growth options and learning to stay the course, even while most also have significant safety in pensions. Savers under 30 on average have over 40% in the G Fund, despite being decades away from retirement, a completely inappropriate investment driven by a lack of advice.
While planning is personal, one common mistake I see with federal workers is that with their pension it isn’t difficult to pay more in tax in retirement than during their working years. This suggests using the Roth option would be better and payi ng tax today.
The TSP 2014 annual report shows an awareness that the investment options are insufficient and advice is lacking, but here in 2017 neither issue has been addressed. Outcomes are not improved. Demand for change and jobs continues.
Outcomes are not improved. OregonSaves and other state programs set outcomes back further. Demand for the state increases.
Federal savers are showing the right behaviors by saving. They just don’t have the advice they need to see the harm they may be inflicting on their futures.
As I offered in my last article, there are alternative options that involve a little less control but would improve outcomes immensely. Advice has been shown to improve outcomes by more than its cost, and advice often costs less than OregonSaves.
If financial experts and associations want to be taken seriously as a profession, my suggestion is that they start to act like experts and speak up. We have plenty of research on the harm that unsophisticated investors self-inflict by jumping in and out of markets. It’s not rocket science. The same mistakes are seen every day by those of us working with those retiring, forced into retirement, or hoping they can ever retire.
I’m not expecting much from the experts on addressing the future harms that this and the future state plans will cause, however. They seem to be of one mind on state-run plans that place products over planning as well as forced investing for those they don’t serve (and self-driving cars too, despite the problems with both cars and investment accounts crashing and self-combusting at times).
And so my best advice is that if you find yourself enrolled in OregonSaves or a future state-run investment account, contact a financial advisor. As an expert, I don’t like to make universal statements, but I can say for certain it will be worthwhile since if you didn’t need the help, you wou ld have opted-out of the plan to begin with.
At worst, you will meet someone interested in improving your outcome.