The tax reform debate in Washington DC revealed just how intellectually spent our elected leaders are when it comes to business and economic common sense.
But we already knew this.
Many had hoped this lack of “dynamic” thinking would have been washed away (or perhaps “drained away” would be a more appropriate phrase) with an administration headed by a successful serial entrepreneur.
Instead, we get optics that feature Republicans acting like Democrats by suggesting tax increases, Democrats pretending to be Republicans and decrying those tax increases, dogs and cats living together… it’s mass hysteria.
Imagine a Congress made up of people intimately familiar with the lives of the people affected most by the laws they’re crafting. (You don’t have to imagine it, you can read it in “If Retirement Pros Set Tax Policy Instead of Politicians, This is What We’d Get,” FiduciaryNews.com, November 2, 2017).
There’s something about practical experience that leads one to behave, well, in a practical manner.
Which brings us to the virtual debate between two industry icons.
Richard Thaler, whom I referred to last week (perhaps a bit prematurely it turns out), has long fought the academic establishment. Once scorned by university finance and economic departments, his insights have become the new standard, recognized long before the Nobel Committee conferred their award upon him.
Thaler rejected the stochastic mechanics of “rational” theories in favor of the psychological nuances of “behavioral” theories.
While best known for his “nudge” suggestion that was incorporated into the 2006 Pension Protection Act, some of his most significant work has yet to be adopted by the industry (and its regulators).
Given his familiarity with human behavior, Thaler’s response to the idea of cutting the contribution cap on retirement savings appears rather surprising.
Of course, he spent an entire career outside the establishment only to become the establishment. Given all the accolades he received following his Nobel Prize award, he’s deeply embedded in the establishment. Perhaps he’s trying to get out again.
In the other corner stands Ted Benna, aka “the father of the 401(k).” I’ve had extensive talks with Ted. This past summer he arranged for me to sit down and have a roundtable discussion with his former co-workers who were involved in setting up the first 401(k) plan.
They’ve each gone on to become significant players in the retirement plan industry. After sitting in on this conversation for an entire day, it’s quite clear their hands-on experience is right up Thaler’s alley. They’ve become quite adept at explaining how various behavioral “nudges” helped make the 401(k) go viral.
You’d think Thaler and Benna ought to be on the same page when it comes to retirement plan policies.
Alas, in this topsy-turvy world in which we currently find ourselves, they appear to be at odds with one another.
And therein lies the tale between “practitioner” and “policy wonk.” Their opposing views on the idea of cutting the retirement plan contribution cap have the making of a battle between two heavyweights.
Thaler seems to be focusing not on the impact reducing the contribution will have on the average worker, but on its value as a weapon in class warfare. There’s a big difference between political advocacy and behavioral finance. Benna, on the other hand, is wonderfully blunt. He calls any potential decrease in the contribution cap limit “pretty stupid.”
Benna’s comment reflects his years studying the behavior of 401(k) plan sponsors and participants in real life. Thaler’s seminal research, while conducted with actual 401(k) participants, nonetheless remains in the realm of hypothetical, not real.
This is a distinction with a difference.
Not convinced? Let me ask you this: If you had to lead a platoon into battle, would you choose a group of trained SEALS or a group of the top Call of Duty players?
Thaler’s view relies on a virtual reality that, yes, makes sense in a theoretical – should we say, “stochastic” – sense.
Benna’s view, on the other hand, reflects decades of watching people make hard decisions with actual repercussions. It seems like Benna embraces the philosophy of behavioral economics that Thaler has spent a career researching.