A Retirement Plan? What's That Again?

I saw some recent research from ValuePenguin that suggested 63% of Americans do not understand how a 401k plan works.  This is as recent as May of 2019.  Does this surprise you?
 
Last week I did a number of enrollment meetings for a client of mine.  They are a Charter School here in Indianapolis and recently hired about 50 new teachers for the upcoming school year.  They are technically a public school which allows them to sponsor a 403(b) plan.  I started each meeting by asking for a show of hands of how many in the room understood what a 403(b) plan is.  What do you think was the percentage of hands that went up?  If only 37% of Americans understand a 401k plan, I can assure you that even less understand a 403(b) plan.  In fact, most people in the room were surprised to learn that both types of plans get their name from the corresponding section of the Internal Revenue Code.

For my part, I do not find it surprising that the majority of employees do not fully understand how a corporate retirement plan works.  After all, why should they?  It’s not their job to understand how these work, it’s mine.  And it’s my job to help them understand how to fully take advantage of these plans.  A key challenge to doing this is a practical one – time.  Most enrollment meetings are designed by the employer to last 20-30 minutes.  It is enough time to cover the basics, but do you think that everyone walks out of the room with a full understanding?
 
What’s the best outcome that can come from an in-person enrollment meeting?  For my part, the goal is not to provide a complete understanding of everything about the plan.  My goal is to get the employees to take at least one step forward on their investing journey.  Especially with younger folks, I encourage a modest percent of their income – 2 or 3 pennies on the dollar in the retirement plan.  Once they get started, they can always increase. Certainly deferring to the match is optimal, but many employees starting out struggle with deferring 6% or so of pay.  2% or 3% is at least a start.

So after the meeting, what are the next steps?  I encourage employees to contact me directly, and many do.  I always find it interesting to visit with employees regarding their own situations.  Exploring their own challenges allows for another learning opportunity to explain how the plan works and why they need to take advantage of it. 

If you want an adviser for your employees that understands the financial future of your employees requires a long term journey and not just a 20-30 minute drive-by, give me a call!

Pete Welsh a/k/a 401kGuy