November 1, 2012  

Help troops save

Simple fixes can put them on the right financial road

It is military leaders’ responsibility to take care of their troops, and that includes setting them up for success when they leave. Many of today’s veterans struggle to reintegrate into American society — some 40 percent, according to one 2010 study — and their difficulties are exacerbated by financial woes. At the extreme end, researchers have found that finances played a part in the majority of veteran suicides. We should do more for our troops. One way is to better set them up for financial success.

For the 17 percent of service members who reach two decades of service, a government-funded retirement program provides a good financial cushion upon separation. Everyone else receives no such compensation. Still, all may participate in the Thrift Savings Plan. Similar to 401(k) plans in wide use in the civilian world, the TSP allows federal employees and uniformed service members to invest money for retirement while deferring the taxes. But only 30 percent of troops bother to enroll in the TSP; fewer still take full advantage of this straightforward way to improve their financial health.

We propose a few simple changes to put service members on the path to saving for retirement.

We would start by automatically enrolling all service members in the TSP when they begin their service. The federal government already takes care of its civilian employees in this fashion. Federal employees are automatically enrolled into the TSP at a rate of 3 percent of basic pay. We propose following the federal lead and setting the initial rate of contributions at 3 percent of basic pay. To minimize risk, the default investment vehicle would be the G Fund (U.S. Government Bonds). Yet service members would be encouraged to choose a Lifecycle Fund commensurate with their age and retirement horizon. They would also retain the option to create a customized portfolio.

Beyond the initial enrollment, we propose that service members would also be enrolled in a “Save More Tomorrow” program, which would automatically put 20 percent of each future pay raise into the TSP, gradually increasing their effective savings rate to 10 percent. This is a commitment device that uses the human tendency to hyperbolically discount — that is, to weigh future dollars less than current ones in making plans. A 2004 study of a civilian company that had a similar Save More Tomorrow program found that after four years, employees in the program were contributing 13.6 of their pay toward retirement, double that of other employees.

Overall, these changes in defaults would vastly increase the number of service members investing into the TSP. The results of the decision to automatically enroll federal employees show just how sticky these kinds of defaults are: While all are allowed to opt out of the TSP, only 2.4 percent do.

We should also intervene to increase participation of current service members, as well, by directing them to visit the myPay website and update their retirement savings preferences, where they will encounter a similar choice architecture to that for incoming service members.

Beyond that, we propose a combination of social proof and self-perception theory to reinforce investing behavior and encourage increased investment. Personalized feedback should be added to the quarterly TSP statements that compare the service member’s total TSP savings to that of their peers, displaying the average and top decile in a particular demographic (e.g. pay grade, time in service). The document would refer to the service member as an “investor” throughout the TSP statements and display a complimentary thumbs-up on statements when they are above average within their demographic. The feedback will be prominently placed at the top of the quarterly TSP statement, and pop up quarterly in myPay in a graph that is easy to comprehend. The energy industry has tested a similar feedback mechanism through its Opower alerts and reports, and caused behavioral changes that reduced energy consumption by 2.5 percent per household.

Financial insecurity is a big part of the stress of re-entry into civilian life. This low-cost intervention uses behavioral science and modifies choice architecture to nudge service members to responsibly invest their own money, placing them in a better financial position when they leave the military. In short, it’s doing what’s best for our troops. AFJ

MAJ. STEPHEN C. FLANAGAN is an instructor in the Behavioral Sciences and Leadership Department at West Point and a recent graduate of Harvard University’s Kennedy School of Government and Harvard’s Graduate School of Education. MAJ. NICHOLAS MUMM and CAPT. PAUL THOMAS are Army strategists at the Pentagon and recent graduates of the Kennedy School of Government. The views expressed here are those of the authors and do not necessarily reflect the position of the Department of the Army or the Department of Defense.