Olivia S. Mitchell and Stephen P. Utkus, Editors
reviewed by Jon Ford, CFP®
This is a book you'll want on your shelf if you wonder about the condition of retirement funding research. It is a wonderful summary of why people save or don't save for the future, and it speaks right to the heart of many of our frustrations with clients' failure to follow through with our masterfully developed and clever savings recommendations.
Usually when reviewing a book assembled by editors, I search for continuity and linear sequencing that help the reader move from one topic to the next. In this case, such coherence would have done a disservice to the book and its contributing authors. Each writer seemed to approach Pension Design and Structure in isolation from the others, but with an enthusiastic passion for providing clear and research-based recommendations.
The authors come from many different backgrounds, each contributing to the broad-spectrum flavor of the book. Chapter six is written by three MBAs associated with the Vanguard Group, who summarized "Money Attitudes and Retirement Plan Design," using survey data and "cluster analysis" as the applied statistical methods. The next chapter, "Employee Investment Decisions about Company Stock," was written by academicians whose analyses include such mysterious statistical methods as a "Tobit regression equation" and "logit regressions" to illustrate probabilities of occurrences when trying to boost stock option participation by employees.
In spite of the unfamiliarity of these methods of analyses to most financial planners, each chapter in the book leads a reader toward a more comprehensive understanding of why financial planning methods encounter success or failure.
In this respect, the Editors did their duty—they presented a document that was rigorous in presentation and incredibly helpful in its many and variously framed conclusions.
Pension Design and Structure consists of four parts, each with four chapters. Part I leads off with a discussion by the editors of what has already been learned from behavioral finance about retirement plan design. The next three chapters discuss employee motivation problems, risk perceptions and behavioral portfolios. Each chapter richly supplies thoughts and actions founded on the results of the respective investigations.
The chapters in Part II discuss the importance of limiting the number of choices available to employees in their retirement plans, the influence of money attitudes, company stock decisions, and the effect of social relations on retirement savings decisions.
Part III focuses on consequences of retirement planning education and seems to take a lesson from historical literature related to the psychology of learning. Chapters in this section discuss the effectiveness of financial education, sex differences to consider when presenting to men and women, bridging the gap between the need for retirement security and defined-contribution plans, and principles of adult learning.
Part IV reviews implications for retirement payout and could be misunderstood as the only weak link in the presentation. The chapters focus on making the transition from saving to spending. The word "annuity" is used often and although an annuity could be viewed as an insurance product, it seems more to the point that the authors are instead discussing the importance of developing a goal of providing retirees with a predictable stream of income, which can be accomplished by using various types of balanced portfolios.
Jon Ford, CFP®, is president of Commission-Free Financial Planning Solutions Inc. in Cedar Falls, Iowa.
Oxford University Press Inc., 2004
$69.11 (Hardcover: 294 pages)