Last week I asked for help in coming up with some trivia questions that dealt with retirement, and I wanted to thank everyone for all of the suggestions. The questions were a success and it turned out to be very educational for everyone who took part. In doing this exercise I was also able to come away with some shocking conclusions.
Over the course of three days I met with approximately 500 people, and they ranged in age anywhere between early 20s into the 70s. The scary thing is that the majority of people did not know the answers to even the easiest of questions. For example, the following questions gave people the most trouble:
- What is the penalty for taking a distribution from your retirement account before age 59 1/2?
- At what age can you take a distribution from your retirement account without a penalty?
- When do you become eligible for Medicare?
- When is the earliest you can begin to receive normal Social Security benefits?
- Does your 401k plan have a maintenance fee?
- How often do you receive statements?
Most of these questions were multiple choice or true and false. I would have to say that regardless of age, 80% of people did not know the answer to the above questions. I had many other more detailed questions that the readers provided in my other post, but I was focusing on the few very easy ones to determine what people knew.
There were even some people who were in their late 50s or early 60s, and when asked about Social Security and Medicare, had no idea at what age you could begin receiving benefits. Maybe I’m a bit too optimistic, but I would think that someone who is just a few years from retirement would at least have an idea when they qualify for important retirement benefits.
The other interesting responses came in regards to the questions about the plan that they are participating in. Their plan does not have any fees, yet many of the people who got that question insisted that there are fees. One person even told me that they are being charged $12 per quarter! (which we determined was false after they brought their statement down for me to look at) Others had no idea that they were receiving a company match while others thought they were not allowed to contribute more than 3% (they can actually contribute up to 75%).
More Education is Needed
This exercise highlighted the need for more education. I realize that not everyone cares to know every detail about their finances, but it is important to know some basics. Knowing when you qualify for Social Security or Medicare, or how long it takes to become vested in your pension, or even whether or not your being charged a fee in your retirement plan can be important pieces of information when trying to plan for your future.
Over the past few years there has been a strong push to get people enrolled in their retirement plan, and that is certainly a good thing. People do need to be aware of their plan which offers a nice match, and to take advantage of it. But just becoming enrolled in a plan isn’t enough. It is important to ensure that participants truly understand the benefits of their plan, how it works, and how other outside retirement benefits work together.
This certainly gives me some things to think about and work on over the coming years. Hopefully with some further education I can see a significant improvement in the trivia question answers.
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.
That is a good idea for a post. But as you said, the information is a bit tricky to come by. I do think I remember reading something somewhere about retirement plan providers, but I can't recall where. Of course I have a stack of industry magazines about 10 feet tall from the past year, so I'm sure I could dig it up.
Thanks for the idea, and I'll see what I can find. That would make an interesting post.
Thanks for elaborating on the details. Something I would find very useful as a future genxfinance post: an enumeration of the best plans and plan providers down to the worst. I think it could be good ammunition for job hunters who are considering multiple similar positions and trying to decide amongst them based upon the quality of benefits offered. I realize that each employer can negotiate different terms and arrangements for each plan, but there must be some way to compare plans apples-to-apples.
I've had trouble finding this information myself. The sector seems opaque and tight-lipped (and frankly, rather smug) about their operations and pricing. "We're not going to tell you because we are not legally obligated to do so."
Right, there will always be fees, but people are under the impression that they are being charged quarterly or annual fees in addition to any expenses built into the fund expenses themselves.
And actually, the plan participants are very fortunate to be a part of a large plan with very attractively priced institutional funds with low fees. Expense ratios start at 0.12% and max out around 0.80%, with the majority falling in the 0.40% range.
Also, since you mentioned advertising/marketing, it is interesting to note that the plan provider doesn't have a retail business at all. They strictly provide for retirement plans, which is what can keep costs down.
Of course, other companies that do have other markets to service, they do have to provide room for covering marketing expenses.
Perhaps their plan does not have any explicit fees, but there most certainly are implicit fees passed along to the participants in the form of plan funds (offered by the provider) that are above market for the particular fund category.
To imagine that there are no such implicit fees is to imagine that the plan provider is not getting paid for 401(k) plan servicing and accounting. And if they are not getting paid, why wouldn't they just spend all the advertising / marketing budget on boosting retail business?
It's this kind of opaque compensation for 401(k) plan services that burns me. ;-\