Passive Serial Material and Illiquid

By Arjan Schütte

The streets are not passive today, but let me take you to a more innocent and also very important conversation. About the only snail mail my kids get are their bank statements from First Republic Bank (sad state of affairs, really). Just yesterday, our eight year old ripped open the envelope addressed to her with relish. It was the satisfaction of feeling her money is safe in some impenetrable, benevolent institution, in a fortress. My kids earn something like 8 cents in interest every statement, but the experience of seeing it accrue is oversized.

Americans are hoarding cash now, prompted by the epiphany of pandemic fear of uncertainty. I hope it lasts. And I hope all of our kids are watching closely. It’s staggering to me how big an influence our parents are on our saving behavior. Lifelong savings advocate, Andrea Lavere, affirmed this, “parents’ behavior dominates most external education.” So, if you are a parent, please have (another) conversation about saving with your kids today. Open an account for them (use Greenlight or Current if your bank is fussy). These simple things could prove much more valuable than the tens of thousands you should be stuffing into their 529 college savings accounts. OK?

One reason why parents have not modeled great savings behavior to their kids is because they are poor savers themselves. They’re financially not responsible, living on the teat of credit. Undoubtedly, there are too many of those. To me, what’s more interesting are the parents who didn’t model great savings behavior while they themselves were saving in the best possible way: passive, material, serial, and illiquid.

My friend and consumer finance bad-boy (and CEO of Better Mortgage), Vishal Garg, pointed out, “low cost fixed rate home finance generated more wealth for the middle class in America than all the savings schemes combined together x 100.” Home ownership is not the icon of the American Dream for nothing. It is forced savings. It’s passive — you’re making payments to have a roof over your head, not to “save” per se. It’s material — my knock on Acorns is that most of their customers don’t invest very much, ever. It’s serial — real saving comes from ongoing contributions, not a one time lump sum. And it’s illiquid — if your savings are too accessible, you’ll drain them too easily. To be sure, the flip-side is a problem as well, and companies from Easy Knock to Noah are helping people tap some dollars from their homes — but at the real risk of tapping your only and your largest asset.

This brings me to the second form of powerful invisible savings that our kids could well never witness: employer pensions and retirement plans. Like the home, the paycheck has been a place from which significant middle class wealth has been created. Despite the demise of private pension programs, still trillions of dollars are held in public pensions for the benefit of public retirees. The boomers were the last to really participate in private pensions at scale and a combination of short-termism and globalism left millions of broken promises.

401k plans remain intact today, but not without their own casualties. In fact, a number of innovators have made 401k faster, easier, and smarter than the clunky programs that still feel like they’re running on DOS, replete with Microsoft Word forms, wet signatures and garbled excuses for websites that really do beg the question how so many people suffer the indignities of using them (Core, which is cost conscious, uses such a generically named provider, to remain nameless lest they throw us out). ForUsAll, Guideline and VestWell are three examples of fresh air here. Their innovations, the introduction of low cost index funds and ETFs, and the brilliant idea of “opt-out” have contributed to a significant participation in pre-tax 401k’s across the land, to the tune of $6 trillion, about 20% of all current retirement assets.

Here’s the 401k tragedy, not commonly understood, and recently aggravated: 401k are linked to employers, not portable. And for better or worse, we change jobs more often than ever before. So what happens is that often between jobs, people borrow from their retirement savings. The 10% penalty — not familiar to many — is a rounding error to the loss of decades of compounding that younger people will forego in the process of seeking much needed short term liquidity. To add insult to injury, congress has effectively doubled the amount we can borrow from our future selves to help with Covid-19 impacts. This will have a huge ripple effect on our ability to retire. 401k, and other such programs, are important, but inferior: they are passive (especially when presented in an opt-out fashion), but not always. They can be material, especially if you participate to the max, but often are not. They’re serial (the typical setup withdraws some from each paycheck), but their longevity is often limited to shortening periods with the same employer. And for their long-term intent, they are clearly not illiquid enough.

Oracle from Omaha says, “do not save what is left after spending; instead spend what is left after saving.” We need to learn to save way more. We’re not going to learn it from the Chinese, who save lots but at gunpoint. Parents tiny acts clearly can make a big impact, and making any invisible saving visible may be important, as well. And for the doers out there, build savings products that are passive, material, serial, and illiquid.

Thanks to Andrea Levere, Vishal Garg, Schwark Satyavolu, Saar Gur, Gregg Schoenberg and Chris Larsen, among many others, for your ideas and comments on my last writing on this topic.

I'm founding partner at Core Innovation Capital. We're early stage investors in financial empowerment for everyday Americans. My personal opinions.

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