Sure enough, I just invented the term “reverse thrust”. But here’s a definition:
A reverse alert is the bottom line, interruption, or similar feature of a policy by a government agency, educational institution, employer, or similar entity that has the unintended effect of directing individuals to behavior that is unwise for their particular circumstances.
This is a bit of a mouthful and somewhat clumsy. But let’s start by explaining “regular” alertness, a concept from behavioral economics popularized by Richard Thaler and Cass Sunstein in their book of the same name and defined as follows (for each Wikipedia):
“A nudge, as we will use the term, is any aspect of a choice structure that changes people’s behavior in a predictable way without preventing any choices or significantly altering their economic incentives. To count as just a nudge, the intervention must be easy and cheap to avoid. Alerts They are not mandates. Placing fruit at eye level is a nudge. Banning junk food is not.”
The “classic” alert is the use of auto-enrolment and auto-escalation in retirement plans; “Auto-enroll” means that when a worker is first hired at a new company, they are automatically enrolled in the company’s 401(k) plan with a modest contribution rate and age-appropriate investment portfolio, but are informed that they can opt out at any time and no contributions will be made if Unsubscribed quickly enough. “Auto-escalate” means that each year, the contribution percentage increases, usually by one percentage point, until it reaches a higher level such as 10%. Again, there are no strings attached and employees can reduce their contributions but ideally this increase occurs at the same time that increases are given so that the worker does not feel the cost of the increased contribution. Both automated mechanisms aim to overcome the inertia that would otherwise inhibit retirement savings, compared to individuals who need to fill out forms or start an account online.
So far, so good. Auto-enrollment and auto-escalation are becoming popular, and indeed they are now mandatory for new retirement savings plans under the new Secure 2.0 legislation.
But there can be unintended consequences to alerts. I raised this issue in my previous article on the minimum age for an RMD potentially serving as a “motivation” for retirees to believe they should avoid spending their savings, even when it is financially wise to do so, especially in order to delay the start of Social Security benefits. The actual amount of RMD amount each year is certainly an alert as well, making some more conservative and others more aggressive in their spending less than what is appropriate for their personal financial situation.
Even on auto-enrolment, while it’s true that researchers have proven that adding auto-enrolment increases the savings rate when a company makes the change, at the same time, we know there are other savers who were supposed to save more than hypothetical amounts. But as far as I know, this is difficult to quantify, and we don’t know how much savings are “lost” due to the reverse push effect even if the alert-based savings increase is larger.
There are certainly other “reverse alerts” too, if you stretch the idea into sills, trim, and design idiosyncrasies that were never intentionally designed that way. When pre-qualifying a potential buyer, the mortgage lender calculates the maximum available mortgage amount. How many people are being pushed back into spending more on their homes than they would otherwise, even if it would be financially wise, in their individual circumstances, to borrow less?
Or consider something simple like University admission requirementseg at Illinois’ flagship, University of Illinois at Urbana-Champaign (because I’m writing from Illinois after all). Although four years each of math, social science, laboratory science, and foreign language is recommended, the reality is requirements Less: 3 or 3.5 years (depending on the intended major) of mathematics, and only 2 years each of social sciences, laboratory sciences, and foreign language. How many high school students might have taken each of these courses each year, already checking the entry requirements and being pushed back to take less?
Having said all that, when we as individuals are involved in our financial planning or other decision-making, it’s important to recognize whether a nudge or reverse nudge is part of the picture, and be diligent in considering our own circumstances. Consult a financial planner or use a good planning designer, and look at your own budget rather than ground rules that may not apply to you. This may seem obvious, and financially cautious readers will already know to be wary of marketing scams of various kinds, but it can be difficult to spot a back-alert as these come from “official” sources and have the intent of doing good, to the part of the population that overspends or falls short. Savings without them.