PensionReforms' summary and comments
Saving decisions are about providing for the future - giving up consumption today in favour of consumption tomorrow.  They require good information about the why, the when and the how.  That's an almost impossible task for individuals to acquire for themselves so they need help, both to understand what's involved and the choices faced.

Providers of financial services cannot assume that their prospective customers are financially literate:  "This raises concerns about how to communicate information effectively, particularly to those who need it most.  Given low numeracy and low literacy, it may be useful to consider more effective ways of communication."

In past, simpler times, there were many fewer choices but things are now different:
"Given the increased complexity of financial instruments, the evidence of illiteracy raises the question of whether consumers will appreciate and take advantage of the opportunities offered by financial markets or more easily fall prey to scams or unscrupulous brokers."

The report suggests that, while financial education programmes might have been tested against specific outcomes, "[n]o studies definitively provide an evaluation of the costs of financial education programs and, without that information, it is not possible to estimate a return on financial education programs.  Moreover, as previous studies show, few employees ever attend education programs and of those who attend, many do not modify behavior, at least in the short run."

The report does not suggest abandoning financial education programmes but more seems needed.  Here are the report's suggestions:
. ".default options are clearly an effective remedy. Defaults are the most powerful and innovative programs in the field of saving and pensions and they should be exploited."
. Requiring individuals to "renew" their selections annually or when they change jobs.
. Requiring individuals to obtain basic financial knowledge and a "financial license" before they are allowed to "contribute to pensions, invest pension assets, or borrow to buy a house."  The report draws an analogy with drivers' licences.  If taxpayers might be asked to compensate individuals for the consequences of bad decisions (through, say, income support in old age) then perhaps taxpayers need to mitigate the risks in a similar way to the approach taken for vehicle drivers.

The report recognises the potential dangers of default options:
".the design of defaults is crucial; low contribution rates and investment in too-conservative assets may eventually offset the benefits of default enrollment in saving programs.  Moreover, since close to half of private-sector workers do not have pensions, it is important to expand automatic enrollment to other saving instruments."

Consumers face considerable competition for their saving dollar:
"It is also important to recognize that, while the private industry is spending millions of dollars every year advertising products to entice consumers to spend more, relatively little is spent in encouraging people to save and provide for their future.  However, if consumption is excessive and saving too scarce, taxpayers may be asked to support those who have not provided enough for retirement.  Thus, the government may have to think of ways to engage in marketing campaigns." 

PensionReforms acknowledges the report's starting point - the hugely complex arrangements, private and public, that together comprise the financial services industry in the US (and elsewhere).  If it is difficult for advisers to follow then pity the poor citizen.  We should not be surprised to hear that, in the face of such complexity many do nothing.

PensionReforms suggests it is appropriate to take a step back before applying further regulatory fixes to what is already a heavily regulated environment.  Taking just the retirement saving decision as an example: at present, employees who choose not to join a subsidised 401(k) or other scheme are giving up remuneration (the value of the subsidy) and are also passing up the chance to be paid by other taxpayers to save (the tax breaks on favoured saving arrangements).  The 'price' of those concessions is complicated rules imposed by both the employer and taxpayers as to how much can be contributed, where it goes and when and how the money emerges at the other end.  Weighing up all these rules and the trade-offs involved apparently obscures the financial advantages of joining so fewer than 50% of eligible employees do that.  So what really is the problem here?

PensionReforms thinks it might be more fruitful to think about the following:
-   Removing all tax advantages from retirement saving programmes of all kinds.  That will allow all the rules to be disposed of as well.
-   Employers can then wonder why employees who join subsidised saving programmes are paid more than those who do not.  They might conclude that such a distinction can't be justified.
-   Then financial services providers (and employers) can design their marketing and communication programmes that let savers understand why they should save (if they need to).  It's for the best reason of all - they can help achieve whatever future financial goal savers decide is relevant to their needs.  That is actually a fairly simple message.

Default options are not, in PensionReforms' view, the answer.  They are more a symptom of what's wrong with the way things are presently organised.  (File size 135 KB; 44 pp) 381