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Rationally Irrational


The best solutions respond to both rational and irrational actions!

A few days ago, I stumbled over a recent controversy regarding a recent Investment Company Institute study.1

Dr. Alicia Munnell offered her opinion that the, “(ICI) study… seems to (say), ‘Don’t worry if young people and others aren’t saving for retirement. Retirement saving isn’t high on their agenda. They will start saving when they feel they need to.’ …participation rates are not improving… contrary to the thrust of the ICI study, continuous saving is important across the earnings distribution. It is not enough for people to start saving when they feel the need to. At current 401(k) contribution rates, intermittent saving simply will not produce adequate resources...”2

I have to say I agree with Dr. Munnell. Given turnover trends, modest coverage and participation rates, gig economy activity, periods of unemployment, etc., it is irrational for any worker, young or old, low or high paid, to forego participation in employer-sponsored retirement savings plans or Individual Retirement Accounts (IRA).

Peter Brady, one of the authors of the ICI study, responded, “Economic data make it clear: younger and lower-paid workers don’t place the same priority on retirement savings… (Dr. Munnell) apparently believes they are irrational… The key takeaway from our paper… is that more people benefit from employer plans than is commonly understood… the most widely cited statistics undercount participation… many younger and lower-income participants who are not participating in retirement plans today will do so later in their careers or have a spouse who participates… workers may rationally choose to delay saving for retirement until their earnings are higher and other priorities—education, starting a family, buying a house—have been taken care of. … The incentives faced by both employees and employers should be taken into account…”3

I have to say I also agree with Mr. Brady. A worker would not be rational if she saved for retirement and chose to forego current financial demands. Plan sponsors also tend to focus retirement savings plan features on older, longer service, higher-paid workers; they know most younger, short service, lower paid workers won’t remain with them until retirement.

What? Can workers and plan sponsors be both rational and irrational at the same time? Absolutely!

For workers, that’s possible simply because what’s most important isn’t always what’s most urgent. It is irrational to forego the tax preferences, employer matching contribution and other features of your employer-sponsored retirement savings plan. But, at the same time, it is rational to first address your most urgent financial needs – rent, food, medicine, transportation to work, etc.

For plan sponsors, plan designs are irrational if they fail to anticipate and accommodate the needs of workers of all ages, wages, circumstance – younger workers, those living payday to payday, new hires. But, at the same time, these are retirement savings plans, so it is rational for plan designs to limit liquidity and to focus accruals and attention on workers most likely to become retirees.

Can your plan design be flexible enough so every worker can meet their most urgent and most important needs? Yes, it can. However, to do so, your plan must incorporate features which some would say are rational and others would say, irrational!4

1P. Brady, S. Bass, Who Participates In Retirement Plans, 2016, ICI Research Perspective, August 2019, Accessed 9/2/19 at:
2A. Munnell, This recent report suggests steady saving for retirement is not important, Marketwatch, 8/17/19, Accessed 9/2/19 at: P.
3Brady, Critics Claim Retirement Savers Aren’t Behaving Rationally. The Data Say They Are. 8/22/19, Accessed 9/2/19 at:
4J. Towarnicky, The “Elephant” In the Retirement Savings Room, 8/5/19, Accessed 9/2/19 at: See also: Impediments to Saving for Retirement – Part 2 - The Solution? The Right Kind of Liquidity, 11/9/18, Accessed 9/2/19 at:; See also: It is Not Borrow to Save, But Save to Borrow! 10/9/18, Accessed 9/2/19 at: