Part of my job requires that I attend regular benefits fairs and seminars held by an employer to help promote the benefits they offer and encourage participation. Generally at these events you will find the various health insurance providers, any sort of additional wellness programs and the retirement plan provider, which would be me. This event is a great opportunity for current employees who may already be enrolled in benefits to ask questions or learn more about the benefits and also as a great opportunity for employees who may not be participating in the benefits to finally enroll.
When you are sitting at a table for 8 hours and greeting hundreds of people who have the opportunity to take advantage of a particular benefit such as the retirement plan you begin to see trends and some downright astounding behavior. The event I attended last week was no different and by interacting with so many people over the course of a day I was able to categorize people into five basic categories.
The saver comes in many forms from young to old, new employee or old and male or female. The one trait these people all have in common is being thankful for having a retirement savings plan and they make a point to stop at my table to say so. Most of these people are extremely happy and are simply amazed at how fast their savings has grown, especially with a decent company match program. The savers are also the ones who will stop by and actually increase their deferral percentage and boast about the plan to their co-workers.
The Guilty Conscience
I find this group the most fascinating and I’m amazed at how they will go out of their way to avoid contact with me. These are the people who realize they should be saving in the retirement plan but for whatever reason have not started yet. These individuals are easy to spot because as they wander through the room from table to table they will almost always make it obvious they are avoiding my table. They may visit every other table in the room if only to pick up the free swag yet completely avoid coming within 20 feet of my free goodies.
Occasionally a guilty conscious will stop at the table and their guilt is clearly visible. You can almost see that they are embarrassed with the fact they haven’t enrolled, yet even though they are there and could enroll in about 30 seconds they will still refuse. Next come the excuses about why they haven’t or some will even take the paperwork and promise to fill it out and turn it in before the end of the day. I don’t understand how a person can be completely aware of the situation yet continue to carry that guilt by putting off enrollment.
The demographic of this group is primarily the younger people between age 18-30. I find this group to be extraordinarily cocky about the fact that they have plenty of time to get serious about saving in the future. I had a frank conversation with a young lady who was 24 years old and was finally getting started with her career after being with the company for about eight months. I asked why she wasn’t enrolled and I received the typical answer of “Oh I have plenty of time to worry about that when I’m older.” Of course I pulled out my info about compounding interest and how starting early makes a big difference, I even stressed the fact that she is missing out on a fantastic company match and could be receiving a few thousand dollars worth of free money every year, but again it drew no interest.
Since it was clear I wasn’t able to convince her to begin saving today I asked what she thought about Social Security and I was shocked to hear her answer. She admitted that Social Security was not likely to provide any benefit to her in retirement and she didn’t care. So I asked where she thought her retirement income was going to come from if she wasn’t saving on her own and Social Security wouldn’t be there to provide much if anything. She basically said she doesn’t care and doesn’t want to worry about it. Is it just apathy? Maybe. Whatever the case may be, this is one of those issues where putting your head in the sand won’t make the situation better.
The Outside Investor
This group of people can be almost painful to talk to. For the most part the outside investor chooses not to take part in the employer retirement plan because they are already working with someone else. Now that is fine, but I don’t understand how people can give up a 100% match on up to 5% of their pay. Clearly there are cases where a plan may have horrible investments and a poor or non-existent match where it makes sense to invest elsewhere, but with a good plan with low-cost index funds and a generous match I don’t understand the logic.
An example I had last week was an older employee who was probably around 50 and they have been with the company for about 15 years. When she stopped by to pick up some swag I asked if she was enrolled and the answer was no. Before I could even ask why she got real snippy and said she was working with someone else who was doing way better than the 401(k). First, I’m thinking OK, how do you know that if you aren’t invested in it? Are you actually tracking the plan’s funds to compare performance? Of course I didn’t say any of this but right away I knew she was probably lying.
So, since she was giving me some attitude I fired back with “oh, so you’re earning over 100% on the new money you invest every year then?” alluding to the company match. Clearly that was an outrageous claim and she said no, of course not! I go on to explain how the match works and how she is literally throwing money away, especially since she has been with the company so long she is fully vested so it is a guaranteed return. Again, she wanted nothing to do with it and insisted that her broker was making her rich.
Aside from the people who are investing outside of the plan and don’t want to participate in the plan at work I find there are a lot of people who are in the plan yet their broker or advisor give them a hot tip and they want to take out all of their employer plan money and move it over with them while they are still working. Unfortunately they are always upset when they find out they can’t take out the money while they are still employed and under the qualified age. What I find even more interesting are the investments they are being pitched by someone on the outside. I always ask what they were going to go into if they moved the money and I hear some crazy things.
One of the more common investments I’m coming across are people pitching them equity-indexed annuities. They almost always say that their insurance provider or someone they didn’t know solicited the product and they are thrilled that they can invest in the market with no downside risk! If it isn’t the equity-indexed annuities it is often just a straight variable annuity with outrageous fees. A discussion on annuities is a separate issue for another day, but these are the most common reason people come to me believing they can’t do better in the 401(k) or use that as a reason to try to take the money out. Whatever the case may be, these people are almost always being misled by someone else and therefore missing out on a huge opportunity.
Finally, the most common type of person I see during these events by far are those who claim they are too poor to save. The excuse is always the same and they simply claim they can’t afford a single dollar to come out of their paycheck. Now I realize that there are certainly some employees who may not be in the best financial situation but it is also worth noting that this employer doesn’t hire people in at minimum wage either.
Most people approach the table and are quick to grab the freebies and when asked about the plan they simply say they can’t afford to. Fair enough, but when I ask them how much they think it would take out of each paycheck to save $1,000 over the course of a year they have a blank look on their face and have no idea, but say they could never save that much. I continue to go on and inform them that if they save a little less than $20 per paycheck (bi-weekly) they will have saved $1,000 with the help of the employer match. Occasionally I see a light bulb go off and they realize how they wouldn’t even notice less than $20 coming out of their paycheck but more often than not I still see people insist they couldn’t live if $5 came out of their check let alone $20.
I have seen some very interesting behavior from these types of people in the past and last week was no different. At the last benefits fair one of the vendors was someone selling Mary Kay cosmetics. I’m not sure how they got in or why they were at the event, but that isn’t relevant. But what was interesting was when one of these employees who stopped by and said they simply couldn’t afford even $5 per paycheck. They gave a list of excuses about why they just couldn’t spare anything, so no big deal. What was shocking was as I watched them wander through the rest of the vendors they stopped at the Mary Kay table and guess what they did? They purchased a bunch of overpriced cosmetics! Five minutes ago they couldn’t spare five bucks and get a 100% return on their money yet they happily go on to blow $30 or more on a bunch of frivolous things.
What Type of Person Are You?
Hopefully if you are reading this you are a saver. If not, what category do you fall under and why? If you’re feeling guilty about not saving enough or at all, that is an easy fix. Just start even if it is a very small amount. If you think time is on your side, think again. Time is either your greatest asset or your worst enemy and it can get away from you quickly. Are you investing already? If so, great, but don’t become shortsighted and miss some potential opportunities available to you. Even more important, make sure you are working with someone you can trust and has your best interests at heart. Finally, if you think you can’t afford to save, think again. Yes, there are cases if you are making minimum wage or on the verge of bankruptcy this can seem impossible. Maybe you can’t save a great deal right now but even a few dollars here and there is better than nothing. What is even more important than the money you save is the habit you develop of creating an automatic savings plan which will carry over to when you are capable of putting away more substantial funds.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I personally use my companies 401k, but I only put in enough to capture the full match my company offers. The funds offered under the plan have some of the most dismal returns I've ever seen with too many unjustifiable ups and downs, so I keep I keep all of that money parked in a bond fund that only yields about 2% to 3% a year. But hey, it's free money so as long as it's earning something I can live with it.
The rest of the money that I have earmarked for retirement goes into a self directed Roth IRA.
You're definitely right, Steve. There is a bit of a conflict when you are talking about a fiduciary duty and corporate responsibility.
I've been browsing through section 401 of the tax code and trying to find explicit information and haven't formed any conclusions yet, but I do think I found what could be the key to why money is locked in while still employed.
I think it is important to realize that in the tax code and on all of the forms the money you put into a plan is almost always defined as "salary deferral".
My wife is an attorney, not me but from my basic understanding I see this is important because if you are deferring part of your salary and it never touches you and the IRS doesn't account for it then that is technically your employer's money.
That money was never paid out to you, and instead you authorized the employer to defer that money into the plan. From there I think that is where the tax code, which states what qualified distributions are can maintain the position where you can't pull the money out while an active employee because you have authorized them to defer that portion of your pay until a qualified distribution requirement has been met (attainment of age 59.5, hardship, death, termination, etc.)
So again, I'm not a lawyer and I haven't received any definitive answer from someone with the authority to make a claim one way or the other, but that is the conclusion I have drawn from the information I have gone over thus far.
Thanks for elaborating on plan pricing. As a non-HR scrub (former) employee, it always burned me that the costs (plan administration and fund management) passed down to me via fund expense ratios were so opaque.
Anyway, doesn't there seem to be a conflict of interest when a company's C-level officers have a fiduciary duty to employees / plan members (to maximize their benefit and facilitate future financial security) yet at the same time have a corporate responsibility to shareholders (to get best value for benefits by tethering their costs)?
I realize that in terms of the corporation it's commonly a balance between short term level of profitability and long term business growth, but the ERISA seems to legally change the game for the plan sponsors, who are compelled by the ERISA to act only in the interests of providing benefits to plan participants. I short, I don't see how someone could have both corporate and pension/401(k) plan management responsibilities with impartiality.
I'm a saver/procrastinator/outside investor.
I started putting money in a 401(k) with my first job out of college. I also started an IRA then, too, since my income was low enough and I didn't qualify for the pension plan. My second job I didn't use the company 401(k) - I didn't like the vesting scheme. Stupid excuse, I know. But I did continue to contribute to my IRA. With my third job, I contribute to the 401(k) and I started a Roth IRA. And, starting this year, I began contributing to a Roth 401(k).
I'm a procrastinator because while I save, I procrastinate on upping the contribution amount ;) I was giving 10%, and now I'm up to 11%. Or maybe I'm at 12% now! I don't remember. It's not as much as I think I should be putting in more, like 15-17%, but I bought a condo last year and have been trying to adjust to the new expenses. Next year I will probably up my contribution again. But, it's always a hard choice: retirement or mortgage pay down or save up for big expense (painting my blank, white walls)?
Steve, there are definitely some hecklers out there! Most of the hecklers I come across are just outside investors trying to give us a hard time. But luckily our plan consists of some great managers and very low expenses so people don't have much to complain about.
1. What a fantastic idea. I am always looking for new ways to illustrate the benefits of contributing to a plan.
2. This is a good question and without digging through pages and pages of the tax code or ERISA I can only give my best reasoning.
I know that like you said, virtually all employers don't allow you to remove money from the plan while still employed unless it falls under a clearly defined hardship rules (or in the case of a 403b they can follow the safe harbor guidelines or create their own). I think the revenue code allows for flexibility so the employer could allow money to be rolled out while employed but I think many find it easier to keep things in-house.
There are a few reasons for this. First, you have payroll deduction and a company match. From an HR standpoint it would make sense to keep the money there for many reasons. Then you have the various types of vesting schedules where again, the plan administrator can run into a nightmare trying to keep track of money in, money out, what's vested and what isn't, etc.
But ultimately I'm willing to bet it comes down to pricing. When an employer is searching for a plan provider they have to strike a balance between providing a good option for the employees why keeping costs down. Part of the proposal will include what types of administration tasks are outsourced, the level of assets that will be in the plan, and then how those costs are passed down to the employees.
For example, if an employer has roughly 100 million in plan assets and at 100M the provider drops their overall administration rate from 4% to 3% there is no way they would include a provision for employees to roll money out of the plan while employed. That could significantly reduce the overall assets and put either the employer or the plan provider in a bind.
But anyway, I wish I had a more concrete answer for you. The answer may lie in some legalese somewhere but I haven't run across it. And since I don't work at the employer/provider negotiation phase or deal with the development of the SPD I can only guess that the pricing and contract details play a large part.
I'd be in a different category, called The Heckler. I'd ask to see your Summary Plan Description, and your list of funds, and I'd start ripping into them for having higher expense ratios than the best equivalents on the open market (outside of 401(k) plans).
Then I'd enroll to get the company match. ;-)
Thanks for the post, it was fun to read. I have two things to add:
1) for The Poor category, perhaps you could start showing up at these fairs with a stack of Form W-4s -- that way you could demonstrate that by contributing a certain amount to their 401(k) account, they could in turn increase their allowances on the W-4 and come out even (or better) on their monthly paycheck, while increasing their net worth to boot
2) since you are a plan provider, perhaps you can give a square answer to this question: why don't many (or any?) plans allow participants to rollover their present balance into an IRA *without* leaving the company or otherwise disenrolling from the plan? who most influences this aspect of the plan, the plan provider or the plan administrator? doesn't the fiduciary duty of the plan administrator (ultimately a company's CFO, or equivalent) require her or him to admit that allowing plan providers to "lock up" their employees invested monies (for the duration of their employment) encourages those plan providers to be less than competitive with the expense ratios of their funds (because they know their customer base is semi-captive)?
I am in the 'saver' category and wish I could get into a 403b or 401k situation, but I am currently not.
With that said, my main motivation for saving is strictly for my 'future' self. Having this knowledge base about financial 'stuff', if I didn't save in a Roth and in my brokerage account, I honestly don't think I could live with myself at 55-years of age, knowing that I EASILY could have saved some money when I was young, but didn't.
I think folks that fall in the Procrastinator group are really going to have a hard time coping with their decisions later in life. Maybe it's just me, but I would hope with all of the information out there, that NOT enrolling and doing the right thing for your future, would be enough to drive you literally crazy.
I fear waking up at 55-years of age with $7500 in my savings account and NOTHING else and meeting a guy on a plane or something as he discuss how much he has in his Roth 401k, IRA's and other investments. THAT scenerio keeps me real motivated.
Far to many people think they know it all. I actively seek answers, advice and information on things that I don't know. I am smart enough to understand that I don't have all the answers and I think many in Generation X and Y are filled with excuses.
In 2050, there are going to be a ton of sad faces walking around.
I'm a saver. I can thank my father entirely for that. We didn't have a lot of conversations about money as a child, but just one short statement "Sign up for the 401(k) and get at least the company match!" stuck with me. I did that when I started working at age 22, although it hasn't been until the last couple of years that I've bumped that percentage up a bit (also, when my company discontinued the pension plan, I rolled my money into my 401(k); co-workers took the cash payout, saying, "It's free money!"). I'm a lazy saver, though. I only use my 401(k) for retirement savings. I lack the ambition to research other ways to save.
I have a friend, B, who fits under the poor. I have to allow a girl some fun, and she doesn't buy a lot of frivilous things, but I still wish I could explain to her that even $20 (pre-tax) would help a lot. She's still fairly young, but now is the time to start.
My husband and I are savers but lost some money potential in using the company 401(k) when we were younger and naive and didn't know very much about finances. We now are trying to make up for things in general since we are still "young". I wish I knew the stuff I know now back then, would have put both of us in a better position financially.
sophie, those are some great questions, but far beyond the scope of a simple response. But here are some general thoughts
1. You don't need to, but if your employer has a reasonable plan with decent fees, investment choices and a company match then yes, you should at least take part enough to get the match. If you aren't eligible to participate in a traditional IRA then you may want to maximize the 401k contributions or put the excess in a Roth IRA depending on your situation.
2. This varies but most suggest a 3 to 6 month savings. This means if something were to happen to your source of income suddenly you should be able to continue to pay the bills for that amount of time via your savings. This is different for everyone and it depends on whether or not there are dual incomes, if you have another source of emergency funds such as credit and so on. So there is no hard and fast rule, but you should at the minimum try to keep at least a few month's worth of expenses saved up especially if you have a mortgage.
3. This one is a huge topic that really can't be answered with the limited amount of information provided. There are many ways to structure your excess investments but it depends on a ton of additional factors in regards to your personal situation.
Regarding investment, what is the best investment portfolio?
1)Do I need to maximize my 401K savings?
2) How much money do I need to save as an emergency fund?
3) If left over money from expense each month, probably around 300 dollars, how to take tax advantage and which area do I need to invest? Mutual fund or Stock or Bonds, or T-bill.
so many choices, I need advice.
Steve and Beth, I'm right there with you guys. I had a late start myself. I spent my teenage and college years working my ass off and making decent money only to dig myself into debt and blow every penny I made.
I didn't really get started saving until I was 26 and even then, I was still digging my way out of the problems I got myself into early on. I wish I had known then what I know now!
Thanks for the great article. I am a saver, but I started as a Procrastinator thinking that 21 was too young to tie all of my money up in a company.
Boy was I dumb. I ended up staying at the company for 7 years and missed out on 4 years of 7% match.
I maxed my 401k at 15% to catch up for those stupid years. I can't believe I passed up all of that free money!!
Hope you don't mind, I shared this with my Myspace friends. I hope they take the time to check it out.
I'm a "Saver" and an "outside investor", I save my maximum in the company 401K and also invest another 5% outside the system. I've been saving since I was 26... before that I was actually too poor to afford to save and none of my employers had a retirement plan. I wish I would have started when I was a teenager. I'd be financially free today.
If you aren't saving, start now! Everyday you wait you leave money on the table.