Which would you rather do: indulge in your favourite dessert right now — or stay on your sensible diet so you can look and feel good and age more gracefully?

Faced with the unfortunate predicament of being able to make only one choice, it may feel as though there’s a small but annoying tussle going on in your head.

Researchers at Princeton University think that’s exactly true. The group has discovered that separate areas of your brain affect your decision-making: there’s the emotional side that deals with short-term, instant gratification-type rewards (the favourite dessert), while the analytical portion is content to hold off for the longer-term reward (feeling and looking better).

One of the researchers, Dr. David Laibson, told a Washington mutual fund conference in May that this kind of action also plays out when it comes to personal finance. Many people, he says, choose immediate pleasures instead of waiting for much larger rewards. It’s one of the reasons why so many consumers max out their credit cards and don’t pay them on time. Their emotional side craves the instant gratification, even though their analytical side says it’s better to pay bills now and invest in a pension plan for the future.

Laibson, a behavioural economist, says consumers with a bent toward instant gratification delay finishing unpleasant tasks — such as enrolling in a company pension plan — even one that matches employee contributions, such as 401(k) plans in the U.S. Laibson has conducted a study in which two-thirds of people interviewed at a company believed they don’t save enough for their retirement and more than one-third were in favour of joining their company’s pension plan. But after four months, only three people actually had signed up.

Americans aren’t the only ones who have trouble saving for retirement. According to Statistics Canada, Canadians contributed about $28.8 billion to their RRSPs in the 2004 tax year, which represented only about 8% of the total room available to eligible tax filers.

Laibson says getting investors to put money away for retirement is a tough nut to crack, but it appears that many sides are working on it.

Paul Schott Stevens, president of the Investment Company Institute, the U.S. trade association for mutual fund companies, told the Washington conference that the mutual fund industries in the U.S., Canada, Britain, Denmark and Australia are taking an active and responsible policy role in helping consumers achieve their long-term financial goals and secure a decent retirement by developing innovative products such as life-cycle funds.

As well, some companies have come out with funds aimed specifically at baby boomers and their desire for tax-efficient monthly cash distributions upon retirement.

Regulators can help the cause by providing point-of-sale information that is simple and easy to understand, he says. In the U.S., the National Association of Securities Dealers has recommended an Internet-based two-page disclosure document called Profile Plus that provides basic information about a mutual fund, including its investment objectives, risks, performance, fees and expenses, and information about potential conflicts of interest. Canadian regulators and the mutual fund industry here are also looking at ways to get key information to investors so they can make informed decisions about their purchases without being weighed down by an often unread prospectus.

The U.S. is also toying with the idea of getting more employees to take advantage of generous 401(k) plans by “forced” participation in the plans rather than letting employees have the choice of opting in or out. Still, this remains a difficult sell, not only for employees but for companies, too.

Retirement is a serious issue, especially if there’s not enough to live on when the time comes. It’s part of our individual responsibility to use the rational, analytical parts of our brains to ensure money is put aside now for when we need it in the future. IE



Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.