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Solutions for rusty minds

By Barbara Whelehan · Bankrate.com
Friday, July 23, 2010
Posted: 3 pm ET

A new study released by the Center for Retirement Research at Boston College finds that middle-age adults make fewer financial mistakes than younger or older people.

This in and of itself isn't alarming news. Our "fluid intelligence," or our ability to tackle new tasks, involves working memory, reasoning, spatial visualization and cognitive processing speed, according to the study, and this begins to decline at age 20. But our "crystallized intelligence," defined as experience or knowledge, increases with age, partly offsetting the decline in fluid intelligence. Bottom line: "Middle-age adults may be at a decision-making sweet spot," according to the study's authors.

This means we should probably focus on retirement planning long before we retire.

When we hit our 70s, 21 percent of us suffer from either dementia or cognitive impairment without dementia. In our 80s, 53 percent of us are afflicted with one or the other, and in our 90s, three out of four of us (76 percent) have lost our minds, at least to some degree.

This all rings true. But the study goes on to "explore possible policy responses to help older individuals more effectively manage their finances." And that's where things get dicey.

Paternalistic solutions

Policy solutions include the following possibilities:

  1. Strengthen disclosure requirements for financial products.
  2. Require adults to pass a test and get a "license" before being allowed to make big financial decisions.
  3. Require individuals to put in place a financial advance directive so that at a certain age, a fiduciary could step in to approve "significant financial transactions" on behalf of the individual.
  4. Regulate financial products themselves. This could be done in the same way the nutrition supplement industry works: "New financial products would be allowed in the market without specific formal approval in advance but would be monitored for adverse effects." Or another approach would be for regulatory agencies to approve all new financial products before they hit the market.

Now mind you, the study is a collaborative work by economists and academics. It doesn't reflect imminent change by policymakers themselves. But let's quash some bad ideas before they catch on!

The least intrusive recommendation would be strengthened disclosure requirements. Just this week, the Securities and Exchange Commission proposed improving the regulation of fund distribution fees (otherwise known as 12b-1 fees) and providing better disclosure for investors.

This is good news for those who consider 12b-1 fees an atrocity. But most investors are not even going to notice that this fee has been reduced or eliminated. Nevertheless, the SEC's move will not hurt anyone except, perhaps, the fund industry and fund sales people. In 2009, investors paid out $9.5 billion in 12b-1 fees.

A license to run finances

Requiring a license makes sense for activities like driving, because society is best served when only competent drivers are allowed to use the roads. But requiring tests to determine mental competence is blatantly paternalistic. Likewise, the financial advance directive.

We already have the ability to designate someone to serve as power of attorney in case we later become mentally incompetent, but it's hard to determine in advance at what age such an infirmity may set in.

As for the fourth policy initiative, that may not be a bad idea, though some in the financial industry will say that innovation will be hampered and we'll lose our competitive edge if the government has to approve every new little product that's introduced to the public.

What if derivatives or collateralized debt obligations or credit default swaps were examined and determined to be too speculative for the public good? This would have slowed down progress. It also may have prevented the financial crisis from ever happening.

What do you think about the solutions proposed in this study? Should we get a license to prove we're sharp enough to manage our own money?

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