Jonathan Clements's Blog, page 14
July 28, 2025
A Teenager’s Walk Through the Stock Fund Wilderness by Steve Abramowitz
Two roads diverged in a wood,
and I took the one less traveled by
And that has made all the difference
--Robert Frost
The Road Not Taken, 1915
I have volunteered to teach a module on stock fund investing for students taking a new elective course at a small private high school in Sacramento. Here is a fleshed out outline of what I’m thinking about presenting. I want to educate “my kids” about the factors that ushered in the advent of the index fund and ETF and how to distinguish between the virtues and vices of their investment options. In the process, I’ll shine a light on those TV commercials showing an advisor in a tweed jacket speaking patronizingly about what to do now in a voice dripping with sincerity.
Above all, I want these 18-year-olds to feel confident and not be intimidated by advisors, brokers or their apologists. In short, I hope to add a few names to the small cadre of informed young consumers of the stock market. To be sure, nothing has been finalized after an enthusiastic handshake with the head of the high school in the spring, so all this may be the ramblings of an old fool on a belated mission. By the way, if anyone can use this article as a refresher or has a kid about to take the dive, that would be a joy.
The Road Is Long, with Many a Winding Turn
Learning how to invest in the stock market is a lot like learning how to drive. Done wisely, it will get you to where you want to go—a life of financial well-being and money for college, your first home, raising your children, and then their college. Done recklessly, investing in stocks is fraught with danger. Over the last twenty years, the overall stock market has gained an average of almost 10% a year. Pretty cool, right? But a sputtering economy and extremes of human emotion can cause this gradually rising slope to be temporarily disrupted by violent downside episodes of more than 40% a year.
After bear markets, though, the inexorable march upward resumes. How can I be so arrogant and so sure? Because it always has. Stocks have tended to finish higher over 80% of the time across ten years and over 90% across twenty. They have overcome the Crash of 1929, the dot.com technology massacre at the turn of the century and the mortgage lending fiasco of 2008.
Rolling the Dice with Individual Stocks
Buying individual stocks is risky, too risky for most of us. If management executes poorly and earnings disappoint or if the public loses confidence in its product, you will feel the pain. Boeing’s stock lost 23% in a few days following its two tragic air accidents in 2019. What could that mean for you? Well, the $1,000 your parents set aside for college textbooks is now $770.
Single-stock risk is particularly perilous. Even Apple has sustained staggering blows on the way to investor nirvana, plummeting over 50% in 2008. Sure, rooting on your individual picks is challenging and fun, but serious investing needs to be more than that—certainly so when replenishing your tuition savings account or beginning to save for a down payment. Many have said that diversification js the only free lunch on Wall Street.
What’s a Mutual Fund, Anyway?
Let’s say your mom would love to have a second home in Tahoe, but she only has half the money needed for the down payment. She enlists two women friends to invest 25% each into a chalet. Your mom owns 50% and each of her friends owns one-fourth. The three partners will divvy up any gain or loss in the value of their mountain retreat according to their proportionate share. A mutual fund works much the same way. People pool their money to buy stocks, with each person owning the percentage of shares represented by the size of her investment.
Cost: The Achilles Heal of Professionally-Managed Funds
The modern era of mutual fund investing that began in the 1920s solved the problem of diversification by providing instant ownership of a large number of stocks. Until the 1980s, virtually all mutual funds were actively-managed by a professional stock picker. His mission was to replace stocks deemed overvalued with those believed to be undervalued to maximize the fund holder’s profits.
This oversight freed investors from having to monitor developments in their individual stocks, opening up time for leisure pursuits or, of course, (ugh!) homework. The aura of professional supervision is particularly attractive to individuals---including many students—without the time, ability or desire to manage their own finances.
But hold it. These features of the active mutual fund must be weighed against a stark disadvantage. The prodigious costs of maintaining a mammoth research division to turn up ideas for the portfolio managers have proven a stubbornly high hurdle for them to clear
Index Funds: The Portfolio Manager Has No Clothes
Until the mid-1970s, the commonplace assumption was that portfolio managers’ trading skill enhances the performance of their funds. It was a slam dunk. After all, many of them had Ivy League pedigree and most were educated in elite business schools. It was around that time that several market observers began to question the seemingly unassailable conviction that the quality of professional management determines the success of a mutual fund.
These renegades constructed an index fund consisting of all the stocks in the S&P 500. No portfolio management or trading was done, so that the fund’s holdings were fixed. As you might imagine, these skeptics were ridiculed as naïve and traitorous by brokers and advisors whose livelihoods were on the line.
But the early results with the index (or passive) fund were encouraging and stimulated considerable academic research. Over the last twenty-five years, literally hundreds of studies have confirmed that gains from actively-managed mutual funds generally do not exceed those for similar index funds. In fact, the results for index funds often eclipse those with portfolio managers. In 2024, active funds surpassed the S&P Index fund less than 25% of the time.
Just how cheap are index funds, anyway? They usually cost about one-third as much as active funds and fees for many of the largest passive funds are so low as to be incidental. Let’s bring that notion closer to home. Say your parents have socked away $50,000 toward your first two years of college tuition and associated expenses and put half into a savings account. They allocate the remaining $25,000 to Vanguard’s S&P 500 Index fund. What is their total annual cost? $1,000? Nope. $500? Uh-uh. Try $10 (not a typo), folks, and that includes all operational and administrative expenses in addition to the management fee itself.
Passive funds are no longer the poor kid on the block. In response to investor demand, thousands of index funds have been launched, ranging from highly diversified broad market indexes like the S&P 500 to specialized offerings in areas like aerospace and real estate. With a boost from the financial media and grudging acceptance by the formerly disdainful professional establishment, a cadre of informed mutual fund consumers has been born. I want you to be one of them.
The ETF Is Not The New Model Jaguar
By the turn of the century, the actively-managed mutual fund was fast becoming a dinosaur. Its egregious management fees were exposed by the more efficient index fund and savvy consumers were transferring their assets from one to the other. Asset management companies, which had gorged on their expensive actively-managed funds for seventy-five years, were hemorrhaging money and shedding investors. At the same time, developers of the index fund were emboldened by its stunning success. These two unlikely bedfellows were scrambling for a new consumer-friendly product. They found it in the exchange-traded fund (ETF),
The ETF structure has several advantages over active management and even the index fund, which is actually a subclass of the mutual fund. Though much cheaper, index funds carry other baggage of their active counterparts. Passive funds cannot be bought or sold during the market day, but only at the closing price. They are also subject to the annoying restrictions often placed on mutual and index fund investors, though limitations on the number of times you can return to a fund you recently exited would typically not apply to long-term holders of index funds.
By contrast, the ETF wrapper goes way beyond the features of actively-managed mutual funds. Since the ETF is just a new way to package passive funds, they are likewise cheap. No buying or selling occurs in either index funds or ETFs, which also share favorable tax treatment not accorded their active brethren. ETFs are also more flexible than mutual funds and passive funds, allowing trading whenever the market is open, just like a stock.
Does all this good come with any bad? Well, the flexibility of the ETF has come under scrutiny for its susceptibility to the kind of frenzied trading that gives rise to the speculative juices. Ironically, rampant short-term trading may well be deterred by the rigidity of mutual funds’ transaction rules. And to be sure, ETF trades take place in an auction-like market with a spread between the bid and ask prices, whereas mutual and index funds are bought and sold at the closing net asset value. The friction of the ETF is a cost that makes them less amenable to accumulating or withdrawing shares repeatedly in a college savings or retirement plan.
Despite these reservations, the ETF is one of the most successful financial products ever created. Although not yet a topic of conversation at the local club, the ETF has become the darling of the investment community. By the end of 2024, assets in ETFs represented fully one-third of those in all stock funds.
As of mid-2025, there were about four-thousand ETFs in the U.S. and ten thousand internationally. Similar but in many ways superior to index funds, they facilitate investment in widely followed market benchmarks like the Dow and S&P, as well as tap into thematic trends like biotechnology and real estate. ETFs exist for expressing values through investing, like religious beliefs and sustainable farming. Learning how to invest through funds reflecting personal interests is a great way for you to get started. Remember, diversification and time are on your side, so save, invest and be patient.
Active Management Descends on the ETF
You’d better look now because they’re coming. The established asset gatherers were hit by a double-whammy. First, their lucrative actively-managed mutual fund model was overrun by the proliferation of index funds of all stripes. And then the entire mutual fund design—including the subclass of index funds—was supplanted by the entirely new ETF structure. But don’t sell the enterprising fund providers short. As investors fled their costly and outmoded mutual funds for streamlined ETFs, the big boys needed a new gig. Ever inventive, they fashioned a new version of the ETF with, of course, active management.
All those portfolio managers who failed to outrun passive funds were retooled to pilot ETFs artfully priced between the cost of the mutual fund and index ETF. The marketing allure of a relatively cheap ETF combined with button-down surveillance has been breathtaking. In the last two years, new active ETF offerings have far surpassed those for index ETFs. The revamped ETF has also been stealing market share from its predecessor.
The Showdown
Whether the relocated portfolio managers will be able to tease out better results than they did steering their mutual funds seems a stretch. Unfortunately, since very few active ETFs have been around for more than a few years, little academic study comparing their performance against passive ETFs has been done to deliver a verdict. Until more research is available, we won’t know if the active ETF is indeed the Holy Grail or just another fool’s paradise.
The post A Teenager’s Walk Through the Stock Fund Wilderness by Steve Abramowitz appeared first on HumbleDollar.
A Personal Encounter with the Psychology of Money
It all started when I was setting up a 10-year fixed-term annuity before retirement. I had initially decided on a purchase amount and, to fund it, liquidated some of my developed world index tracker. I moved the cash into my Vanguard money market fund to keep the money safe prior to the annuity purchase.
After more research and some analysis, I decided to purchase a smaller annuity, leaving me with approximately $120,000 still sitting in my money market fund. Because of market behaviour this last while, I kept putting off reinvesting the money back into the original fund it came from.
I've looked at it nearly every other day for the last three months, and I couldn't pluck up the nerve to simply reinvest. It's absolutely ridiculous, and the annoying thing is I knew I was being pretty dumb and needed to get a grip, but man, was it hard!
I got a severe case of status quo bias with a large helping of loss aversion, all wrapped in a blanket of analysis paralysis, and I'm here to tell you it's as real as a brick wall and nearly as hard to knock down. I was literally mentally stuck and couldn't execute a simple financial transaction for three months—unbelievable.
I think this experience has really hit home that financial decision-making isn't purely rational, even with my strong business and financial background. Emotions, biases, and an irrational fear of making a "wrong" move overrode my logical understanding. I guess this is why personal finance is often called personal as much as finance.
I'm really annoyed with myself, but at least I've eventually taken the plunge back into the market. The next time I hear someone talking about behavioural finance, I'm actually going to hear them and internalise it as best I can.
I guess you have two options: chuckle at my self-inflicted misfortune, or perhaps take it on board and reflect on how a reasonably financially self-assured and experienced investor got blindsided by the psychology of money. I suggest the latter.
For my own sadness and everyone else's benefit, I just asked Google Gemini to tell me the opportunity cost over the last 90 days. $11,500– that's how much my indecision has cost. I'm now going to sit down in a dark room for a few hours. Have a good day.
The post A Personal Encounter with the Psychology of Money appeared first on HumbleDollar.
A Personal Encounter with the Psychology of Money.
I've been in a bit of a financial funk these last three months, and I've finally managed to overcome my heart and listen to my head. I'm really surprised how difficult I've found it, especially with my business and financial background. I mean, truly difficult.
It all started when I was setting up a 10-year fixed-term annuity before retirement. I had initially decided on a purchase amount and, to fund it, liquidated some of my developed world index tracker. I moved the cash into my Vanguard money market fund to keep the money safe prior to the annuity purchase.
After more research and some analysis, I decided to purchase a smaller annuity, leaving me with approximately $120,000 still sitting in my money market fund. Because of market behaviour this last while, I kept putting off reinvesting the money back into the original fund it came from.
I've looked at it nearly every other day for the last three months, and I couldn't pluck up the nerve to simply reinvest. It's absolutely ridiculous, and the annoying thing is I knew I was being pretty dumb and needed to get a grip, but man, was it hard!
I got a severe case of status quo bias with a large helping of loss aversion, all wrapped in a blanket of analysis paralysis, and I'm here to tell you it's as real as a brick wall and nearly as hard to knock down. I was literally mentally stuck and couldn't execute a simple financial transaction for three months—unbelievable.
I think this experience has really hit home that financial decision-making isn't purely rational, even with my strong business and financial background. Emotions, biases, and an irrational fear of making a "wrong" move overrode my logical understanding. I guess this is why personal finance is often called personal as much as finance.
I'm really annoyed with myself, but at least I've eventually taken the plunge back into the market. The next time I hear someone talking about behavioural finance, I'm actually going to hear them and internalise it as best I can.
I guess you have two options: chuckle at my self-inflicted misfortune, or perhaps take it on board and reflect on how a reasonably financially self-assured and experienced investor got blindsided by the psychology of money. I suggest the latter.
For my own sadness and everyone else's benefit, I just asked Google Gemini to tell me the opportunity cost over the last 90 days. $11,500– that's how much my indecision has cost. I'm now going to sit down in a dark room for a few hours. Have a good day.
The post A Personal Encounter with the Psychology of Money. appeared first on HumbleDollar.
Let’s revisit the pros and cons of relocating upon retirement
A few weeks ago I wrote about relocating upon retirement and concluded it isn’t for us.
This summer we are getting to test that conclusion. We are spending the entire summer at our place on Cape Cod, which means several months away from our routines, church, friends, golfing buddies and mostly family. I suppose if we moved here we would become accustomed to many things, but not being six hours away from family, let alone a three hour plane ride, if, as many friends have done, we moved to Florida.
Our daughter and family came for 10 days, but they left - with their 80 lb dog who I also miss. One son and family are coming in August for a week. Two other families don’t come because they don’t like the drive.
Relocating out of financial necessity is one thing as is the quest to be near family, but beyond that it takes serious consideration in my opinion.
I’ve heard people say it’s about the weather, but the reality is no matter where you go, there will be weather issues of one kind or another at some point in the year, cold, snow, extreme heat, (it’s 109 in Phoenix as a write this and 96 in Lakeland, FL) hurricanes, tornadoes, drought - except maybe Hawaii, but then you might find lava in your backyard 😢
Several friends and relatives have sought the best of both worlds. They have homes in NJ and condos in Florida and have become Florida residents thus avoiding NJ income taxes, but increasing the weather risk and paying outrageous premiums for property insurance. One friend just sold his condo in Florida after the ocean spent time in the building lobby for the second time - but others didn’t seem to care, it sold quickly.
One person in NJ told me they moved to Florida to avoid inheritance taxes, but neither state has such a tax applicable to family members and charities. I hope that wasn't their primary goal.
Moving is a big deal anytime, but relocating to another state on top of the life changing event of retirement is a bigger deal I would think.
Roughly 25% to 33% of retirees move after retiring, according to studies by the U.S. Census Bureau and retirement-focused surveys (Center for Retirement Research at Boston College).
The majority of retirees who move tend to stay within their current state, often downsizing or moving to more affordable or accessible housing. About 15% of movers choose to relocate to another state.
What are your thoughts, plans about relocating upon retirement? And if you have already relocated, how has it worked out? Was it the change you expected?
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YRefy
I have heard and seen many commercials for YRefy.
Is anyone familiar with the company or invested in it?
Our investments are all in stock index funds but we do have extra monies that I'd be willing to invest in something with a higher return than it money market accounts
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The Very Last Time? Nope, Just Glad It’s All Over!
We often read those poignant articles about never truly knowing when we're experiencing something for the very last time—that final hug, or the last time we carry our child. A bit sad, I tend to skip them. But I've been thinking from the opposite viewpoint: those "OMG, thank goodness I don't have to do that again!" moments.
As a recent retiree, I can easily recall a few such glorious moments. Early starts, for instance, never bothered me much at the time, but the sheer relief of never having to wake at 5:30 AM, seven days a week, again can sometimes cause a sudden little jiggle around the kitchen at random moments. My wife, Suzie, just looks at me.
Then there was the relentless, 24/7 stress of running my own business. Even after just three months away, the mere thought of revisiting that pressure is beyond awful. It sends a shudder down my spine and a slight whimper escapes my mouth. I try not to think about it in company; I'm told it's not polite to whimper.
Organizing my staff and managing their often strong, differing viewpoints so everyone would be moving in the same direction could be a challenge at times. In my quieter moments, I often speculated—and agreed with myself—that it would be easier herding cats into doing something cooperative. Thank the gods that's a thing of the past. I tend to give the local tomcat a wide berth now.
I could always be relied upon to synchronize my precious days off to coincide with a minor business disaster or supplier issue that plenty of my staff could sort out all by themselves, but seemed compelled to bring me into the loop. I really don't miss that, and I still half expect Suzie to confiscate my phone for the afternoon… I'm not joking, she really did that once!
So many things I really don't miss and wouldn't want back in my life, but do you know what? My lovely staff would have got me a coffee and maybe a tasty snack. I liked that very much. Now that I have to faff about doing it myself, I really don't like that just as much.
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July 27, 2025
When an Index Fund Is Not an Index Fund
In fact, sometimes an “index fund” is not truly an index fund at all. Let’s unpack what that means—and why it matters for your money.
The Original Promise of Index Funds
When Jack Bogle launched the first index fund for ordinary investors in 1976, it was revolutionary. Instead of trying to beat the market, Bogle’s fund aimed to be the market—tracking the S&P 500 with low fees and no manager trying to time the highs and lows.
The beauty was in the simplicity:
Own a slice of everything.
Pay almost nothing to do it.
Let time and compound returns do their work.
That’s the classic index fund model: passive, rules-based, and cheap.
The Imitators Arrive
As index investing gained popularity, fund companies took notice. They started slapping “index fund” labels on all sorts of products. Some still hold true to Bogle’s vision. Others? Not so much.
Here are a few ways index funds stray from the path:
1. Too Niche to Be Neutral
Today, there are indexes for just about everything—cannabis, blockchain, space travel, even “emerging market internet.” These niche funds technically track indexes, but they often carry:
Higher expense ratios
Lower diversification
Bigger volatility
They’re not broad-market bets—they’re targeted plays wearing index labels. That’s not inherently bad, but it’s not the same as investing in the total market.
Rule of thumb: If the index is too specific, it’s probably an active strategy in disguise.
2. Smart Beta: Marketing or Meaningful?
“Smart beta” funds track indexes that are built using filters like dividends, volatility, or momentum. That sounds smart, right?
Maybe. But smart beta indexes often require a team to actively tweak the rules. That’s not truly passive. And you’re paying for it—with expense ratios 3–10x higher than a basic market-cap index fund.
If your index fund needs a research team to justify the strategy, you’re probably not getting the simplicity you signed up for.
3. Synthetic and Leveraged Products
Some so-called index funds use derivatives, leverage, or swaps to mimic an index. These are often:
Leveraged ETFs (e.g., “2x the S&P 500 daily returns”)
Inverse ETFs (betting the market will fall)
Commodities or volatility index funds
They may technically track indexes, but they behave nothing like traditional index funds. They’re for traders—not long-term investors.
4. High Fees with a Passive Face
Some funds quietly charge high fees even while hugging an index. Why? Brand recognition, distribution deals, or investor inattention. You might think you’re getting the same exposure as a Vanguard fund—but paying triple the cost.
Quick check: Compare the expense ratio. A true broad-market index fund should charge well under 0.10%. If you see 0.30%, 0.50%, or more? Walk away.
5. Tracking Error: What You Don’t See Can Cost You
Even if a fund claims to track the S&P 500, the devil is in the execution. Some funds lag the index due to poor management, bad rebalancing, or hidden costs.
Look at a fund’s tracking error—the difference between the fund’s return and the index it’s supposed to mirror. Consistent underperformance, even by small amounts, can compound into thousands of dollars lost over decades.
So… How Can You Tell the Real from the Imitation?
Here are 5 quick questions to ask before you invest in any index fund:
What index does it track? Is it broad (S&P 500, total US market) or niche?
What’s the expense ratio? Under 0.10% is ideal.
How many holdings does it own? Broad index funds should own hundreds or thousands of stocks.
Who manages it? Reputable firms like Vanguard, Fidelity, and Schwab have good track records.
Does it do anything “extra”? Leverage, smart beta, or niche strategies might be a red flag depending on your goals.
The Bottom Line
Index funds are one of the greatest innovations in modern investing. But the term has been stretched, distorted, and marketed far beyond its original meaning.
A fund that calls itself an index fund might still be expensive, risky, niche, or complex. If you’re investing for the long term, don’t fall for the label. Look under the hood.
Because when an index fund is not really an index fund… it could be the most expensive “cheap” investment you ever made.
The post When an Index Fund Is Not an Index Fund appeared first on HumbleDollar.
When an Index Fund is not an Index Fund
In fact, sometimes an “index fund” is not truly an index fund at all. Let’s unpack what that means—and why it matters for your money.
The Original Promise of Index Funds
When Jack Bogle launched the first index fund for ordinary investors in 1976, it was revolutionary. Instead of trying to beat the market, Bogle’s fund aimed to be the market—tracking the S&P 500 with low fees and no manager trying to time the highs and lows.
The beauty was in the simplicity:
Own a slice of everything.
Pay almost nothing to do it.
Let time and compound returns do their work.
That’s the classic index fund model: passive, rules-based, and cheap.
The Imitators Arrive
As index investing gained popularity, fund companies took notice. They started slapping “index fund” labels on all sorts of products. Some still hold true to Bogle’s vision. Others? Not so much.
Here are a few ways index funds stray from the path:
1. Too Niche to Be Neutral
Today, there are indexes for just about everything—cannabis, blockchain, space travel, even “emerging market internet.” These niche funds technically track indexes, but they often carry:
Higher expense ratios
Lower diversification
Bigger volatility
They’re not broad-market bets—they’re targeted plays wearing index labels. That’s not inherently bad, but it’s not the same as investing in the total market.
Rule of thumb: If the index is too specific, it’s probably an active strategy in disguise.
2. Smart Beta: Marketing or Meaningful?
“Smart beta” funds track indexes that are built using filters like dividends, volatility, or momentum. That sounds smart, right?
Maybe. But smart beta indexes often require a team to actively tweak the rules. That’s not truly passive. And you’re paying for it—with expense ratios 3–10x higher than a basic market-cap index fund.
If your index fund needs a research team to justify the strategy, you’re probably not getting the simplicity you signed up for.
3. Synthetic and Leveraged Products
Some so-called index funds use derivatives, leverage, or swaps to mimic an index. These are often:
Leveraged ETFs (e.g., “2x the S&P 500 daily returns”)
Inverse ETFs (betting the market will fall)
Commodities or volatility index funds
They may technically track indexes, but they behave nothing like traditional index funds. They’re for traders—not long-term investors.
4. High Fees with a Passive Face
Some funds quietly charge high fees even while hugging an index. Why? Brand recognition, distribution deals, or investor inattention. You might think you’re getting the same exposure as a Vanguard fund—but paying triple the cost.
Quick check: Compare the expense ratio. A true broad-market index fund should charge well under 0.10%. If you see 0.30%, 0.50%, or more? Walk away.
5. Tracking Error: What You Don’t See Can Cost You
Even if a fund claims to track the S&P 500, the devil is in the execution. Some funds lag the index due to poor management, bad rebalancing, or hidden costs.
Look at a fund’s tracking error—the difference between the fund’s return and the index it’s supposed to mirror. Consistent underperformance, even by small amounts, can compound into thousands of dollars lost over decades.
So… How Can You Tell the Real from the Imitation?
Here are 5 quick questions to ask before you invest in any index fund:
What index does it track? Is it broad (S&P 500, total US market) or niche?
What’s the expense ratio? Under 0.10% is ideal.
How many holdings does it own? Broad index funds should own hundreds or thousands of stocks.
Who manages it? Reputable firms like Vanguard, Fidelity, and Schwab have good track records.
Does it do anything “extra”? Leverage, smart beta, or niche strategies might be a red flag depending on your goals.
The Bottom Line
Index funds are one of the greatest innovations in modern investing. But the term has been stretched, distorted, and marketed far beyond its original meaning.
A fund that calls itself an index fund might still be expensive, risky, niche, or complex. If you’re investing for the long term, don’t fall for the label. Look under the hood.
Because when an index fund is not really an index fund… it could be the most expensive “cheap” investment you ever made.
The post When an Index Fund is not an Index Fund appeared first on HumbleDollar.
Recommendations for Retirement Planning Tools
The post Recommendations for Retirement Planning Tools appeared first on HumbleDollar.
Secure Act 2.0 Reflections From Across the Pond
Almost half of working-age adults are not paying into a private or workplace pension, the government revealed this week. This headline caught my attention while browsing the BBC News website the other day, and it really made me think!
This is an awful lot of people imperiling their future lives, and with the UK's pension auto-enrollment system, now in its tenth year of operation, seeming to be pretty successful, it would suggest people are actively going out of their way to opt out of the system.
For you Yankees, auto-enrollment was a landmark UK policy, and it has helped bring millions more of the local population into pension saving. But I feel the "almost half" figure reveals that significant challenges remain in ensuring widespread financial security in retirement. It's a difficult issue that transcends national borders and most likely has some lessons for your own US Secure Act 2.0. There's no easy answer without touching on economics, psychology, and social policy.
What are the implications of not looking out for your future self? I can think of a few. Future poverty for one: A large section of the population facing retirement with only social security could lead to high levels of poverty and financial hardship in old age. This poverty can strip individuals of choice and dignity, leading to isolation, poor mental and physical health, and an inability to participate fully in society. It can mean cutting back on essentials like heating, food, or social activities. Not a good outcome, in my opinion.
Retirees with limited disposable income contribute less to the economy through consumer spending, with the knock-on effects impacting businesses and possible economic growth. A larger, less affluent retired population relying on a smaller working population can create tensions and hinder future economic dynamism. I know that within the HumbleDollar community I'm preaching to the choir, but it's still worth pointing these challenges out.
Can the US Secure Act, which makes auto-enrollment mandatory for many people starting in 2025, learn any lessons from the UK Pension Auto-Enrollment Act? The UK's "almost half" figure makes me think that even with a strong auto-enrollment system, a significant portion of the population might still opt out. Could this suggest that simply making it a default isn't a magic bullet? Similar challenges related to financial literacy, immediate financial pressures, and behavioral thinking that lead people to opt out in the UK will probably apply in the US. The Secure Act might need to consider accompanying measures to educate and encourage participation beyond just the default. I'm obviously not a US citizen, but this seems like a good start.
What other lessons can we learn? Just like the UK's issue with self-employed and multiple jobholders, your version has its own exclusions (e.g., plans established before a certain date, very small employers, governmental plans). These gaps will still leave millions without auto-enrollment. Even for those who stay enrolled, the default contribution rates might not be sufficient for a comfortable retirement. The UK faces this challenge, and the US will too. I think review of contribution rates and encouragement for higher savings are helpful. The UK is now in its tenth year and is reviewing its policy. The US will also need strong mechanisms to monitor the effectiveness of the Secure Act, identify persistent challenges, and be prepared to adapt policies over time.
I hope you don't mind me "sticking my nose in" and sharing my thoughts around your new Secure Act, and I apologize for any mistakes due to this Brit's possible lack of understanding around Secure Act 2.0. But I think the UK's situation is a good case study. I believe that while auto-enrollment is a good first step, it's not the end of the road. The implications of a large segment of any population not saving adequately for retirement are profound, affecting individuals, families, and the broader social and economic fabric. Both the UK and the US must continue to grapple with these complexities to secure the financial futures of their citizens.
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