What do online education, tax preparation, and online retirement planning have in common? More than you might think.
Let’s start with the debate over online education. Over the past few years, you probably would have come away with a couple of impressions of online schools. “Overpriced” might be one. Another would be “substandard.”
That’s because the argument has centered around the growth of for-profit online schools, many of which encourage their students to borrow using government-backed or subsidized loans. The huge amount that students have borrowed to study, both online and at traditional brick-and-mortar schools, is indeed a problem. Current student debt is markedly worse than our national credit card balance, at well over $1 trillion owed.
About 15% is private loans, and the balance is federal. Thirty-seven million people owe money for their education, and they owe on average just over $24,000, according to data from the New York Federal Reserve.
As one critic of the “crisis” argument points out, it’s as if 37 million people had out car loans. With job growth, this isn’t really a crisis. Take away job growth and add upside-down mortgages and credit card debt and, well, now you have a crisis.
An important undercurrent in the education debate is lost in the noise: the leveling factor. Harvard University and MIT for instance, are launching a major effort to extend their teaching expertise to community colleges, starting with pilot programs in Massachusetts. The trend is known as “massively open online courses” (MOOC).
All the courses are free. Anyone can take them from anywhere in the world. It’s not about getting a certificate. It’s about learning.
It’s so important a trend, the leveling of access to quality higher education, that the Gates Foundation is putting money behind the pilot plan. If you know anything about how Gates operates, they love to put in a dollar and see it yield $10 in results.
It’s a big deal, and not just for learning. Unlocking the Ivory Tower and letting in everybody means big gains could be had at extremely low cost and could be spread society-wide. Geniuses stride out of slums every day. Imagine if they could tap into real knowledge from, say, a public Internet terminal or a cheap smartphone.
In most businesses, especially mature ones, you eventually begin to recognize the “80/20” effect, that is, 80% of your business is driven by 20% of your clients. Traditionally, the higher-end businesses take the approach of finding and eliminating that large number of clients who use resources but bring no corresponding payoff to the table.
Once you look at things that way, high bank fees begin to make sense. Price is a signal. In these cases, the signal is “get serious or get out of our way.” Walk through a Neiman Marcus department store and you’ll get it. If the prices don’t appall you, you’re probably their type of customer.
In tax prep and now online education, smart organizations instead look to capitalize massively on that “long tail” of small-time consumers, people who want a quality experience but who aren’t necessarily going to buy the entire product line today, or ever. These folks are natural customers of online retirement planning.
Where we see the greatest impact for this kind of thought, of course, is online retirement planning. You could call it “massively open online retirement planning” if you like. Part of the trend is toward indexing using index funds or exchange-traded funds (ETFs). Most of the big brokerages now offer a handful or more of their ETFs commission-free, and the fees on ETFs are headed south as well. What used to cost you 2% a year can be had passively at a tiny fraction of that cost.
We believe strongly that the most powerful retirement model, the asset allocation plan, should be given the tech treatment, too. The software that financial planners use in online retirement planning is not hard to use. Updating it is a matter of asking a few key questions and entering data. Any normal person who manipulates Facebook, banks online or uses web-based email could do their own online retirement planning easily.
And it should be cheap. Not because financial planners overcharge for online retirement planning (they do, by thousands of dollars!) but because many more people should be using asset allocation retirement plans and disciplined rebalancing to ensure that they build wealth for their retirement.
If you want to look at it from the Gates Foundation perspective, there’s really nothing more powerful than a small investment that nets a big yield over time. Passive investing and asset allocation using online retirement planning tools is the answer for millions of prospective retirees. The sooner they get off the high-fee, high-volume trading merry-go-round, the better off we will be as a society.
Online retirement planning is no less important a mission than education, in our humble view, since every dollar working through online retirement planning toward your long-term financial security reduces the risk that societies eventually must shoulder in time, that is, guaranteeing that no one falls through the financial cracks in their old age.