Promoting Lifelong Financial Security

Presentation before the Oregon Retirement Savings BoardDecember 14, 2015

John ChalmersAbbott Keller Professor of Finance

Lundquist College of BusinessUniversity of Oregon

Oregon Retirement Savings Board:

• More than 600,000 Oregonians currently lack access to a retirement savings plan at work.  

• By offering a simple, work-based retirement plan, we can reduce the number of people retiring into poverty.

Goal set by the ORSB

Life Cycle Finance

• Tuition• Student Loans

Education

• Debt Repayment• Savings and Investment

Choices

Career

• When to Retire?• Health Costs• Spending Choices

Retirement

Consumption (Housing, Medical, Food, Entertainment, etc)

Life Cycle Finance

• Tuition• Student Loans

Education

• Debt Repayment• Savings and Investment

Choices

Career

• When to Retire?• Health Costs• Spending Choices

Retirement

Consumption (Housing, Medical, Food, Entertainment, etc)

Education

Education is an investment in people

Enhances the ability of citizens to take care of themselves and help others as well

Programs like PathwayOregon are important:At the UO academically qualified, Pell-eligible Oregonians will have their tuition and fees covered. And receive the support they need to succeed, from orientation to graduation.

Life Cycle Finance

• Tuition• Student Loans

Education

• Debt Repayment

• Savings and Investment Choices

Career• When to Retire?• Health Costs• Spending

Choices

Retirement

Consumption (Housing, Medical, Food, Entertainment, etc)

Career – saving for later

• Make savings happen

• Defaults with opt out provisions

• Others:• Matching plans• Education• Advice

• Invest savings well• Stock market

participation is important

• A well designed default with opt out provisions works here too

• Low fee target date fund

Evidence: Invest Savings WellQuestion: what works to help investors Invest Well? (see Chalmers and Reuter (2015))• A personal advisor? • A well designed default investment?

Get Advice?Yes

Get Advice?No

Want Advice?

Yes

(Y, Y)Advised and

follow it

(Y, N)Target-date fund

default

Want Advice?

No

(N, Y)Unsolicited

advice

(N, N)Self-directed

If no advice, what happens?

Evidence: Invest Savings Well1) Who chooses to invest through a broker?

• Users of advice are younger, less educated, have lower salaries, less likely to be business school or economics profs.

2) How does demand for default investment change when investors cannot invest through brokers?

• In the OUS, the advice channel was removed from the set of possibilities for new employees in 2007.

• We found that those that we would have predicted to choose advisors (less experienced/less education) were more likely to take the default investment after the change

• Good news for policy – as long as the plan administrator chooses a default investment that makes sense!

• A money market fund would be a poor default• A low fee, well-diversified target date fund would be a good choice

3) What is the impact of broker recommendations on their clients’ portfolios?

• Low fee target date funds outperformed investors who received advice, and self-directed investors in our sample

Life Cycle Finance

• Tuition• Student Loans

Education

• Debt Repayment

• Savings and Investment Choices

Career• When to Retire?• Health Costs• Spending

Choices

Retirement

Consumption (Housing, Medical, Food, Entertainment, etc)

Retirement –

• Retirees trade off two risks • Running out of money• Not enjoying retirement by not spending

• Life annuities reduce these risks by:• Monthly payments that last for as long as you live• Providing a higher return while living (mortality premium) in

exchange for giving up access to funds after death

• Annuities are confusing – • providing easy access to a fairly priced annuity product is of

great value to retirees as part of a comprehensive plan for Oregon

Retirement -- Evidence from Oregon

• Annuitization is chosen by 85% of PERS retirees – PERS is priced attractively though retirees seem to be price insensitive

• We believe annuitization will be chosen frequently if made easily available and at a reasonable price

• A plan that makes high quality private market annuity products available with some guidance at the time of retirement will further the ORSB’s goals

Retirement --Life Expectancy is Increasing

Marketing Savings

• How to sell ?

• With some of my finance and marketing colleagues at the UO, we are embarking on a project to assess the messaging of savings

• Nature of the message (tell you what to do vs. not)• “Closeness” of the message provider (age, profession,

gender, ethnicity)