September 2010
Opting Out
Two studies about human behavior with similar results caught our eye the other day. One was an analysis of employee participation (or lack thereof) in 401(k) plans conducted by Harvard economics professor David Laibson. After extensive testing and study, his team concluded:
- Education is an ineffective way to change investor behavior. Workers that attended an educational workshop about the benefits of their 401(k) plan, with very few exceptions, did not enroll in the plan. This was even true for those who specifically said they knew they weren’t saving enough, and that they planned to save more in the future.
- Financial incentives don’t seem to work very well to change peoples’ behavior. 401(k) plans with company match, or paying employees to attend workshops, did not substantially increase participation. Thousands of workers over age 59-1/2 were not participating in their plan, even though they could make their contribution, get the match, and then immediately take their money back out without any penalty.
- The very best way to encourage good behavior is to make it the default. The Laibson group (and others) identified a remarkably successful strategy: automatic enrollment. When the default option was participating in the 401(k) plan, and the workers had to affirmatively opt out, participation rates jumped to nearly 100%. In other words, they removed the effort of taking positive action and replaced it with a hassle factor for opting out of the behavior. Interestingly, the default settings on worker contributions didn’t seem to matter very much; workers tended to passively accept defaults up to around 15%.
Thus, we need to find ways to make savings and budgeting as automatic and easy as possible for ourselves, our employees and our clients. Important decisions can be hard, so let us help you make the really important ones.
The second study looked at the percentage of people, in different countries, who have agreed to donate their bodily organs when they die. Here is an excerpted list:
Opt In |
Opt Out |
||
| Denmark | 4% | Belgium | 98% |
| Germany | 12% | Austria, France, Hungary, Poland, Portugal | 100% |
| United Kingdom | 17% | ||
| Netherlands | 28% | ||
Why would the response be so different among very similar societies? All the countries with the higher donation rates required you to check a box on your drivers license application if you did NOT want to donate your organs at your death; the other countries required you to check that box if you DID want to donate. Faced with the need to make a complex decision, people in all the various European countries chose the same solution: to not check the box. “If the decision feels complicated,” Duke professor Dan Ariely said, “we tend to let the people who designed the box choose for us.”
So if you want to encourage a certain behavior in people, make it as easy as possible. If a decision is complicated, set it up so the “good” choice is the default. Silver Oak advisors can assist you.
IDA Tax Credits
In 1999 the Oregon legislature created the Oregon Individual Development Account (IDA) Initiative. This ongoing program helps hard-working Oregonians, living paycheck-to-paycheck, move into the middle class. The program is overseen by Oregon Housing and Community Services and the Oregon Department of Revenue, and is administered by Neighborhood Partnerships (NP). NP is a state-wide non-profit organization, whose leadership and resources support the creation of affordable homes and economic opportunities for low-income Oregonians.
As part of the Initiative, the state offers an IDA Tax Credit, which creates match funding for participants that successfully complete the program. The IDA Tax Credit begins with your contribution to Neighborhood Partnerships. Seventy-five percent of your contribution becomes a credit on your State of Oregon income tax return. For example, if you as an individual made a donation of $1,000 to the IDA Initiative, you would be qualified for a tax credit of $750 against your state income taxes. The tax credit directly reduces the state taxes that you would otherwise pay (even better than a tax deduction).
More than 95% of the donations received go directly to IDA program participants to help them launch new businesses, purchase first homes, or advance their education. IDAs are a proven, effective tool for building hope and stability in our communities. Qualified participants set savings goals and make monthly savings deposits. Every dollar a participant saves is matched by three dollars of tax credit funds. These accounts provide an opportunity for low-income people to learn the financial skills they need to earn more money, give back to their communities and build Oregon’s economy. According to research conducted by Portland State University’s Region Research Institute, 12 months after purchasing their asset, 59% of participants use a budget to monitor their expenses, and 41% are continuing to make regular deposits to their savings.
IDA Tax Credits can be purchased with cash, or the transfer of stocks or mutual funds. For more information, see the website www.neighborhoodpartnerships.org or contact Cynthia Winter at 503-226-3001 x 101.
The Simple Pleasures
One of the biggest take-aways from the recent market meltdown for many people was the rediscovery of many kinds of fun that don’t cost money – a lot of the things that people did years ago before the advent of 3D movies, gourmet restaurants, traveling soccer teams and endless consumerism. One financial planning firm took a poll of its clients, asking them what kinds of fun things they had rediscovered while they were tightening their belts. What they found was that many people were having MORE fun with LESS money, simply by being creative.
The lesson is something that we somehow manage to forget from time to time: that the world is full of endless possibilities for fun and pleasure and satisfaction and beauty, and some of the most interesting cost us nothing. In fact, the shared togetherness of many of the rediscovered activities makes them superior to how many people were spending their time before the market dropped.
It would be a shame if we learned these important lessons and then let our rediscoveries slip away now that people are feeling a bit wealthier again. They call these the “simple” pleasures, but there’s nothing simple about being creative and really looking at the beauty and possibilities of the world around us. It’s possible that we can be thriftier AND enjoy life more if we use our minds and hearts and each other to bring pleasure and fun into our lives.
“The best things in life aren’t things.”
Upcoming Workshops
Our next workshop focuses on how best use the 529 college savings account to save for upcoming expenses and will discuss the recent changes to the Oregon College Savings Plan and alternative saving strategies. The workship will be held on:Saturday, September 18, 9:30 to 11:30 am
Seating is limited; please RSVP to Linda at (503) 242-1715 or register on our website.