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Financial Fitness: The Good, The Smart, and The Steady

Fifty years ago, exercising for fitness wasn’t “cool” and it wasn’t popular. But beginning in the 1970s, a consumer revolution fueled by fitness enthusiasts like Jane Fonda and Richard Simmons—and propelled by a new technology, home video—made fitness a part of popular culture.

Today, new digital tools like the Fitbit have further popularized fitness by giving users improved access to information and immediate feedback. Setting targets and measuring performance and well-being have never been easier, turning exercising into a more positive and engaging experience.

A similar revolution is needed to engage individuals in saving for the long term. Saving for retirement should be an engaging consumer experience rather than a bewildering experience full of numbers, details and fine print. It can be made achievable and interesting through simplified language, useful tools and the ability to track progress in real time.

Although the financial services industry must help lead such a revolution, employers have an absolutely critical role to play given their long history of bringing vetted products and services to their employees, as well as their vested interest in easing their employees’ financial worries in order to reap significant productivity gains. Government, too, must help spur the revolution by expanding pension coverage and individuals’ access to savings programs and products. Here are some keys to these financial fitness goals.

What Does “Good” Look Like?

Employers today are scaling back on defined benefit commitments, governments are looking for ways to close future gaps in their unfunded promises, and individuals are bearing an increasing share of the responsibility for funding their own retirement savings.

In such a world, it is more important than ever that individuals be given the help and tools they need to plan for and achieve long-term savings goals. We believe a consumer revolution in financial well-being could be instrumental in helping both individuals and societies meet their savings goals. But we are also aware of the potential this creates for marketing costly and poorly designed products—the equivalent of the fraudulent health and fitness equipment or fad diets featured in late-night infomercials—to consumers.

Mercer’s view is that governments and employers have an important role to play in helping individuals recognize what “good” looks like when it comes to savings products, advice and financial decisions. Both governments and employers have the responsibility to do so, and they have much greater capacity than individuals do to assess products, gather information and discriminate among financial intermediaries. The payoff for both is a more financially secure and productive workforce and society. And this involvement will help create a virtuous circle that rewards quality financial intermediaries and products, penalizes practitioners of “churn and burn,” increases trust, and creates a greater appetite among individuals for appropriate levels of risk to build sufficient long-term savings.

To be clear, we’re talking about doing more than just increasing individuals’ financial literacy. Our research has found financial literacy does not show a strong correlation to financial wellness. In fact, higher engagement and subsequently high financial wellness is achieved through having or perceiving “financial courage.” That is, individuals who have or perceive they have confidence in making financial decisions are more likely to engage with their finances and report higher levels of financial wellness. Helping people to have financial courage, giving them access to smart tools, default options and guidance can meaningfully help them achieve success.

Creating a consumer revolution in financial fitness will go a long way toward closing the long-term savings gap.

Smart Systems for Success

We believe creating a consumer revolution in financial fitness—combined with providing greater support to individuals in making sound saving and investment choices—will go a long way toward closing the long-term savings gap. However, given the many priorities competing for an individual’s paycheck and the primacy of the immediate over the long term, voluntary contributions to long-term savings simply may not be enough.

In fact, the pension systems that are among the highest ranked in terms of adequacy, sustainability and integrity according to the annual Melbourne Mercer Global Pension Index—which includes those of Denmark, Netherlands and Australia—are designed to make saving contributions compulsory, both on the part of individuals and of employers on behalf of their employees.

In addition, pension systems are increasingly considering how they encourage or incentivize individuals to invest, manage and draw income post-retirement rather than withdrawing all their pension funds in one lump sum. This can help improve financial security throughout an individual’s lifetime. 

The appropriate investment options and mix for those saving in retirement plans should also be considered when designing long-term savings systems. A number of intelligent design principles can be used to create the appropriate combination of growth and defensive investments to produce superior retirement outcomes.

For example, the smartest of these products are designed to allow investments to continue to grow during retirement. Rather than being fully invested in cash or de-risked on the day you retire, they look beyond your expected retirement date to ensure that savings can continue to accumulate even as they are being drawn down.

Steady As We Go

As societies age and the nature of work continues to evolve, it is clear that old notions of work and retirement will need to give way to a spectrum of new possibilities for when and how to work and what it means to retire. Societies, employers and individuals will all benefit from greater acceptance of and more accommodation for working later into life.

Indeed, we are all stakeholders in getting this right. Societies, employers and financial intermediaries have much to gain by taking immediate action to address the looming long-term savings gap. Stable and prosperous societies depend on citizens with the confidence to consume and spend during their working years and throughout their retirement.

Only when a significant portion of the population is out of poverty, financially secure and able to contribute can a society innovate and grow. In addition, societies that do not address the long-term savings gap risk a growing wealth divide and decreasing social mobility that could spark unrest and damage the social fabric. The good news is that with the application of creative and strategic thinking, we can bend this trajectory and transform the future for individuals and societies. A financial fitness revolution is just the beginning.

Renée McGowan

Chief Executive Officer, Asia, for Mercer

Renée McGowan is chief executive officer, Asia, for Mercer, a leading global consulting firm advising organizations on the health, wealth and career needs of a dynamic and changing workforce. Renée is the executive sponsor for the World Economic Forum’s Retirement Investment Systems Reform Project.

Rich Nuzum

Wealth Leader, Growth Markets Region for Mercer

Rich Nuzum is the wealth leader for Mercer’s Growth Markets Region encompassing Africa, Asia, Latin America and the Middle East. His specialty is in strategy setting for large investors. During the past 25 years he has provided investment advice to clients in more than 20 countries.

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