401k Plan Borrowing is Discouraged
401k Plan Borrowing can be a mistake much larger than the amount borrowed. Fred Barstein, Founder and CEO of The Plan Sponsor University (TPSU) and TPSU Adjunct Lecturer Daniel Bryant, Managing Director and CEO of Sheridan Road, explain challenges of borrowing that go far beyond 401k borrowing in this Fred Talk. Mr. Bryant discusses a behavioral finance concept which he refers to as Borrow Less Today.
Full Transcript Here
Fred Barstein with 401KTV, here with our weekly Fred Talks. We’re here with renowned industry advisor Daniel Bryant from Sheridan Road, CEO and founder. And a real thought leader.
Today, at a program that you conducted here at the University of Denver, you referenced the book Save More Tomorrow, which is a brilliant book by Professor Shlomo Benartzi at UCLA. But you’ve got a little bit of a different take on that. What is the take that Sheridan Road and your financial wellness group does?
Well, I think we, Fred, have looked at behavioral economics in a much broader spectrum. If you look at what Richard Thaler and Shlomo Benartzi have created over the last 15 or 20 years, it really covers one half of the full equation.
If you think about the inventiveness of Save More Tomorrow, to help people have better outcomes in their retirement programs … We think that in order to actually achieve those better outcomes in the future, you actually need to lower your financial precarity, or financial anxiety, today. In order to do that … In order to save more tomorrow, you actually need to borrow less today.
Borrow Less Today is a trademark phrase and systematic approach that we’ve taken with a number of behavioral economists. We’re doing some primary research right now to prove that if you in fact provide the financial wellness tools that enable people to borrow less money today, or pay back their loans in a more systematic way today, they’ll lower their financial anxiety. They’ll increase their productivity, which ultimately will enable them to save more tomorrow.
There is a difference between good debt and bad debt, right?
Can you explain that?
I think what we’ve looked at is really … Well, let me answer the question a couple ways, but if you look at where most people, historically, have realized the biggest financial anxiety in their lives, has been the middle part of their career, in their 30s and 40s. When they’re bombarded with a myriad of financial issues.
When in fact, today, when people are entering the workforce, they have this huge debt overhang, the $1.5 trillion worth of student loan debt. So they’re entering their working careers, right out of the gates, in a really bad situation. It’s hard for them to really focus on their careers. It’s hard for them to repay their student loan debts on their current income.
Our view is that student loan debt, obviously, is a necessary evil-
It’s bad debt.
It’s bad debt.
What’s good debt?
Well, I’m not exactly sure where we’re going with-
Maybe the … like home mortgages, and that kind of thing?
Absolutely. Right. We look at bad debt as credit card debt, student loan debt … Obviously, longer-term investment related debt, which would be mortgages, things of that nature, which are tax-deductible … Those sorts of things, obviously are on the positive side.
But our view is Borrow Less Today needs to be ingrained in the employer. It needs to be ingrained in the economists that are looking at the behavioral side of things. And we think that Shlomo Benartzi and Richard Thaler will embrace the work we’ve done on Borrow Less Today.
So when’s the book coming out, Borrow Less Today?
We’re working with a couple of professors, Jonathan Zinman and [Neal Carlin 00:03:52], at Dartmouth College and The University of Chicago, with regard to this program. You’ll see something by the end of the year.
Right. Check your Amazon for Borrow Less Today.
Very good. Well, just say you heard it first on 401KTV, from our renowned lecturer and advisor Daniel Bryant. Stay tuned for more Fred Talks.