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The patient sat on the examining table and listened to the doctor. The emergency was past, the patient was back into all daily activities and routines, the numbers looked good, the tests indicated normalcy. "You can go off the blood thinner or you can stay on it," the doctor said. "If you go off, you risk another blood clot and death. If you stay on, you risk a brain bleed and death." "I don't know. What should I do?" the patient asked. "It's up to you," the doctor said. The patient stared at the doctor. Weren't doctors doctors because they could advise you as to the best course of action? Surely this wasn't how it was supposed to go, being given a choice without any indication of what action was better?
Related: Your plan participants are listening: 4 ways to help them
What has happened with the loan provision in the CARES Act is the financial equivalent of the situation above. Retirement savers with defined contribution plans are being abandoned on the examining table, left alone to make important financial decisions that could make or break the quality of their future, yet they aren't given the training and knowledge to help them make those decisions.
It's not a new situation, unfortunately. Plan participants have had to make decisions on their own as to what investment options to pick and how much to contribute. Plan sponsors have to give them options, enough but not too much, so that participants can "choose."
Yes, "choose." Research shows most plan participants pick the first investment option given on the list, no matter what it is. This is exacerbated now thanks to the CARES Act — where participants are given the choice as to whether to take a larger-than-previously-allowed loan from their 401(k).
How many articles have you seen lately about how people should think carefully before taking out a 401(k) loan? That's a rhetorical question — the answer is "quite a few," both in the trade publications as well as consumer publications.
Will that stop people from taking out loans that they shouldn't? No. They hear that the CARES Act increases the amount of money they can borrow from their 401(k) and suddenly, even if they hadn't thought about it before, borrowing from their retirement plan seems like a good solution to their coronavirus-caused financial problems.
But two, three, four years (or more) down the road, when they either cannot pay back the loan or they manage to pay it but lose out on the greater nest egg they could have accumulated had they not taken a loan, they will have only themselves to blame. Not the politicians who gave them the option to borrow a large amount, nor the sponsors acting in good faith and offering it as a possibility.
Given the oft-quoted lack of financial literacy and acumen of the average American, there have to be many participants who don't realize that just because an option is offered, doesn't mean it should be taken. They're not stupid, they're just English majors. (Just kidding, fellow English majors.) But many adults – even those who graduated from college and might think they have some kind of "extra" knowledge about finance – have had little to no education around financial decision-making, loans, interest rates, or investing.
A little paternalism maybe wouldn't have hurt, in the case of 401(k) loans. (And granted, many plan sponsors and advisors are concerned about this issue.) But it's easier and less controversial for lawmakers to appear benevolent and let people decide to do something that might be harmful to their future. It lets them off the hook: "Hey, you made the decision, not us."
A strange kind of shaming, giving people an option without helping them see its ramifications, then telling them later they were wrong to take it. That's about as rational and kind as experts, politicians, and media telling Americans, a large number of whom live paycheck to paycheck, to have six months' worth of salary saved, to contribute 15% to their retirement plan, to pay off their credit cards at the end of every month, and to have an emergency fund: "Hey, we told you you should do this, but you didn't, so now look at the mess you're in."
The patient ended up choosing to go off the blood thinner, reasoning that they knew what it felt like to have a blood clot, but they didn't know what it felt like to have a brain bleed — thus, they could take immediate action if any symptoms of a blood clot appeared, whereas they might not know to take action if symptoms of a brain bleed occurred.
That was one way to come to a decision. They could also have considered cost of medication or some other reason.
Still, it might have helped to have a little more input from the expert in that situation before the decision was made. In the same way, plan participants might be helped to have a little more input before they make their decisions. Of course, these decisions aren't life threatening in regards to 401(k)s. But they could be life-changing, for better or for worse.
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