A truly simple way to make 401(k)s easier

Having to pass a financial literacy test would help everyone

Does saving for retirement overwhelm you? You’re not alone. Sixty-three percent of Americans haven’t enough savings to cover a

$500 emergency bill, let alone prepare for retirement’s longterm needs. Folks want to save, know they should, but they are overwhelmed by convoluted options, complex tools and financial jilting-jargon. How can we fix this?

One conventional but inadequate answer: increased access to retirement programs, such as

401(k)s. Example: Six states launched government plans for workers without an employer plan (California, Connecticut, Illinois, New Jersey, Oregon and Washington). Yet even having access to 401(k)s and their provider’s financial resources, most people find it all way too confusing.

My firm recently sponsored a broad “retirement readiness” survey of 401(k) participants. The results stunned me. More than 71% failed a very basic 401(k) quiz.

Few knew how much of their salary they should save. Seventyseven percent said their 401(k) information sources (employer and vendors) don’t help them feel in control of their financial future. More than 25% claimed the lack of information and support turned them off from saving.

Better financial literacy could help if it got workers to understand, plan, save and invest better. Online tools abound but hardly help. They mostly target those thinking they already understand everything, alienating everyone else. One survey participant tried an online budgeting

Firms with 401(k)s whose participants pass the test could get a tax break. The better the scores, the bigger the carrot!

tool and blew his stack when every variation showed him retiring broke. Another used an online retirement calculator to ballpark her 401(k) contribution range but hadn’t a clue that saving slightly more each month compounds into hugely more later on.

Calculators help but can’t replace knowledgeable insight. Some observers say the brokerage industry should reinvent itself to be more little-guy service-oriented. Noble aim, but it won’t happen. Self-driven reinvention requires accepting something is wrong. Most brokers don’t. Why? They’re making good money.

Others call for new regulations to force employers or vendors to beat employees into absorbing a financial education. Beating peo- ple over the head works only in boxing — where someone always loses. You might stagger through training — but end up hating it all. High school classes? Never! This isn’t as enticing as, say, sex education. Like civics was? Fughetaboutit!

As Uncle Sam contemplates our future, envision another way. Instead of more of the same, regulations and mass browbeating, why not devise a financial literacy test and incentivize folks to pass it? Firms with 401(k)s whose participants pass the test could get a tax break. The better the scores, the bigger the carrot! To motivate employees to enroll and study, companies can dangle goodies and giveaways. Happy stuff! Firms are generally great at this.

We already have the necessary infrastructure. It could piggyback on the electronic tests securities industry folks must pass. Committees write the tests, third-party test centers administer them, 401(k)ers show up, present an ID and take a computerized test. The IRS, employer and you get the grade instantly. Done!

The 401(k) administrators could unite to tackle this — starting with documenting what employees don’t know but should — covering all the basics but more extensively. Then they write the test and create the curriculum.

Think how much better off you’d be if you had to cough up fewer taxes for the retirement of your deadbeat neighbors! When folks fathom the magic of compound growth, they save more. When they see the huge impact of getting just a bit higher long-term returns they, in-the-bone, believe what better asset allocation accomplishes for them. It will make us richer, importantly wiser and surely happier in retirement.

Tell Congress: Stop yakking about the savings gap and let fiduciaries help folks do something about it.