It’s a watershed moment in many ways, but what’s been left unsaid is the genesis of this new approach. Years in the making, the bill — the Automatic Retirement Plan Act — was actually inspired by a partnership established 3,600 miles away from Washington, D.C., in the United Kingdom. The UK first mandated workplace savings in 2012, and The People’s Pension — a large, not-for-profit, multi-employer defined contribution (DC) plan — now helps 3 million British citizens save for retirement. The People’s Pension brought in State Street Global Advisors to manage citizens’ assets based on a belief that the indexing pioneer’s focus on understanding the hopes and fears of their savers, track record of innovation, and cultural alignment made the firm a good fit.
The Science of Human Behavior
As the principal asset manager for The People’s Pension, State Street Global Advisors wanted to better understand people’s savings and retirement consumption behaviours — and in 2015 it undertook a sophisticated longitudinal study,2 co-sponsored by The People’s Pension, that involved an in-depth examination of the challenges and behaviours of around 100 people over the course of a year. Study participants were asked to blog and record short videos as they wrestled with their transition to retirement.“
Over time we really got to love the people in this study,” says Nigel Aston, global head of DC proposition and strategy. “In the process, you learn not only how people feel about their savings, you also get a much richer picture of how we make decisions and what actually spurs us to action.”
They found some surprising conclusions. For one, despite a historic industry focus on regulated financial advice, people were getting their insights from very different places. Nigel points to one blog post gathered during the study in which a man describes a retirement “brainstorming session with the lads in the pub.” Nigel adds, “The study also showed that fear of not saving enough is less motivating than previously believed.” And while the study found people exhibit very different behaviours as consumers — how they spend their money — “As savers, we tend to be more similar to one another than we might imagine,” Nigel says.
The most important conclusions forced State Street Global Advisors to take a hard look in the mirror. “Our industry often tries to funnel people into decisions 10 or 15 years before they retire,” Nigel says. “Our research showed we need to be responsive to the changes that happen during our lifetimes, even after retirement — marriage, bereavement, employment changes, health issues. As a result, we’d recommend a ‘keep your options open’ approach with asset allocation and income options that,” as Nigel puts it, are “flexible enough to adapt to those changes in life circumstances over time.”
Tackling Retirement at Scale
With private sector employee participation in retirement plans in the UK soaring by 20 percent in less than two years,3 State Street Global Advisors began to wonder whether some of the insights learned “across the pond” could benefit another market: the United States, which is beset by low savings rates and serious gaps in access to employer-sponsored retirement savings programs, but with little political appetite for a European-style mandated program.
Even still, Melissa Kahn, who heads up retirement policy strategy in the American market, believes a pragmatic approach might work in the US — particularly one focused on small businesses, which policymakers support and where half of all workers do not have access to a savings plan. “The 401(k) is hardly perfect,” she says. “But we can’t let the perfect be the enemy of the good.”
From Inertia to Action State Street Global Advisors began a full-fledged retirement education campaign targeted at policymakers, including a 2016 open letter to Congress penned by then CEO Ron O’Hanley urging workplace retirement savings coverage for all Americans and an extended series of meetings with members of Congress on both sides of the aisle. The legislation introduced by Rep. Neal, the ranking member of the House Committee on Ways and Means, requires private employers to auto-enroll all workers in a retirement plan. Thanks to a combination of automation and default investment solutions similar to those in the UK, and an array of tax credits and incentives to encourage small businesses to offer affordable savings plans, Melissa believes that Neal’s bill has growing support. More important, it is helping change the tenor of discussions inside the Capital Beltway.
“It’s not unlike what we learned about inertia in our studies of human behavior in the UK,” she says. “When you change the conversation from one of fear and inaction to one about education and what is achievable, new things become possible.” Even in today’s fractious political environment? Melissa laughs and adds, “Particularly in this environment.”