Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
Today I met with a client of mine for a committee review of the plan. It went as these meetings normally go – a review of plan level activity, a discussion of the fund line-up, how were the recent employee meetings, etc. All very pleasant with a good discussion.
At one point in the review, the owner/patriarch of the company asked “I see we have some employees invested in bonds. Why? They shouldn’t be. Can you let me know who, so I can speak to them. Fixed income is not where they should be putting their money.” To be clear, he was saying this with the best of intentions. He is universally loved by his employees and truly has only their best interests in mind. However….
It is not uncommon for employees to stop by an HR office or CFO’s office, or even the founder’s office to ask “what should I do with my 401k money?” It is also not unusual for caring individuals who occupy those seats to want to help employees with their money. But is this the right thing to do?
The problem with giving such advice, of course, is that you open yourself up to downside risk. It is almost never the case that people sue when things go well. They sue when things go wrong. So when an officer of the firm “helps”, “assists”, “advices”, etc. an employee on where to invest his or her money, downside risk is created when things do not go right
In fact, I believe there already exists a fair amount of risk as our Baby Boomers move into retirement and realize that their nest eggs are not what they need them to be. How easy would it be for an employee to look back on some “advice” their employer gave them years ago about investing and argue that but for that advice they would be in a better place with their retirement account?
Well, after we all had some fun in our meeting today challenging the owner’s actual knowledge of investing, we agreed on a better approach. As an advisor who serves in a fiduciary capacity, I am actually licensed to give “investment advice for a fee.” Since we were able to quickly conclude I was the only one so licensed, we agreed that in the future employees would be directed to me to discuss their investments and how to invest.
Are you an employer who struggles with helping employees invest? Is your advisor licensed to provide “investment advice for a fee?” Not sure? Give me a call and we can have a discussion about how to do the right thing without exposing the company to risk.
Pete Welsh a/k/a 401kGuy
In the financial advisor world, we get numerous opportunities throughout the year to take a break, attend a conference, learn a few things, and recharge the batteries a bit. This week I had a chance to do just that, and was able to listen to a very impressive speaker discuss “Trust” – what is it, how do we earn it, and what’s it mean.
The speaker was Dr. Jeff Hancock, Professor of Communications at Stanford University and Director of Stanford’s Center for Computational Social Science. Suffice to say, he is a pretty bright guy, and what he does is study human psychology and the meaning of trust. I didn’t even know that was a thing until this week, but after listening to him, I am glad the we have someone like him.
Dr. Hancock’s work is even more important in a world where many of us are inundated regularly through digital information. A thousand years ago, “trust” was more or less limited to those in our small communities. Maybe we had to trust someone a town over, but that was it for most folks. Now we have to trust, or not trust, information from all over the world that is hitting us relentlessly all day. How do we deal with this?
In the most succinct way possible, Dr. Hancock distilled trust into this simple statement – “Trust is the confidence in one’s expectations.” Beautiful, right? If I have a high confidence in what I am hearing, seeing, reading, etc., then I trust it. He was discussing trust in general, but, of course, I couldn’t help relate this back to what I do – assist employers and employees with their retirement plan.
All this made me think about the trust employers and employees have in their own 401k plan, and can they “trust it.” The first step in such an analysis would naturally be what do they expect from it. Without expectations there can be no confidence, which means there can be no trust.
So I ask you, what are your expectations for your 401k plan? How much confidence do you have that those expectations will be met? If you are struggling at all with these two questions, then how can you trust your retirement plan? And if you are struggling with these questions, how much do your employees trust the company’s retirement plan?
I have a thought. A good place to begin building up trust in your plan is to sit down with a competent advisor to clearly understand what expectations you should have for your retirement plan. Once you begin building trust in your plan, you can help your employees build trust in the plan, which is really another way of saying you would help your employees build trust in their future. And isn’t that a good thing?
Need help beginning this journey? Give me a call, I would love to work with you…trust me!
Pete Welsh a/k/a 401kGuy
Now few people are against making more money, so I am not going to suggest that making more is a bad thing. At almost any wage level, people generally lift their gaze to the next level up and begin to think what life would be like if only they were there. Fortunately, many people do move up the salary scale over the course of their careers and often hit peak earning years in their 50s.
However, one common misconception about earning more money is that money alone will result in less stress and financial worry. Some new research out from the Salary Finance suggests that this is just not the case. Salary Finance interviewed over 10,000 employees recently on a variety of Financial Fitness measures. The report is voluminous, and it isn’t possible to cover all the topics mentioned, but the idea that earning more relieves stress is so ingrained in our DNA, that I thought I would use some of the research here to debunk it.
We should start by saying that there is a level of earning below which extreme stress is omnipresent. If a person is earning below subsistence level, stress will be experienced. So let’s for argument sake not consider that low of a level of income. For Salary Finance, they interviewed people at all levels and found that 58% of individuals earning between $25-40k have financial worries. That probably doesn’t surprise any of us.
What was interesting is that 40% of the people earning between $160-200k also have financial worries. Wouldn’t you think the percentage should be much less for this higher income earning group? I bet if you asked someone making $30k if they would have financial stress if they were making $180k, for example, they would say Heck No! But yet, the stress is present to a surprising extent.
So if money alone does not reduce financial stress and worry, what does? It appears that the number one difference is that people with less stress are Planners, using the language of Salary Finance. What is a Planner? Well, it’s someone who lives within their means, has emergency savings on hand, and focuses on long-term financial goals. In short…a Planner!
If you are an employer who would like to help your employees move from Coping to Planning, and thereby maybe not think that you paying them more alone is going to solve their problems, give me a call. I would love to have a discussion about how we can improve the financial lives of your employees.
Pete Welsh a/k/a 401kGuy
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
I have long given up believing that investors are “rational” as I was taught in college. As a Finance major, I learned that investors are rational and make decisions in their own best interest. People don’t voluntarily make decisions that do not favor them, I was told, but rather “optimize” their decisions to benefit themselves. HA!
Some new research from Bankrate.com would leave some college professors scratching their heads. The survey asked 1,000 individuals about their investing preferences for 2019 for money that they would be investing for more than 10 years. Obvious categories were Stocks, Cash, Real Estate, Gold, etc. (Real Estate was #1 for 2019, by the way). What was really interesting, however, was a question about how falling interest rates would affect their investing decisions. Now for a “Rational Investor” falling interest rates should have a profound effect on where they put their money for 10 years or longer, just as rising interest rates should affect such a decision. Entire financial empires wobble on whether the Federal Reserve Board will raise or lower interest rates by even tiny percentages, for example. Certainly, a rational investor would factor declining interest rates into their investment decisions for the long term, right?
Nope. Not going to happen. According to BankRate.com’s research, the survey respondents would make almost no changes to their investments in a declining interest rate environment. It appears that people pick a preferred investment and then decide to stay with it regardless of what is happening around it that would impact their long-term returns. In fact, only 33% of the respondents said that if interest rates were declining would they put more money into the stock market. 67% of the respondents are “not rational.” Surprise!
So, what can we make of this information? If people should be making changes to their long-term investments as a result of macro changes in the economy, and the vast majority won’t, we obviously can’t rely on people making their own decisions in their best interest. Rather, the obvious takeaway for me is that investors need to have some distance from their investments and the decisions on those investments. What does this distance look like? To me, it looks like a competent investment advisor. Someone skilled in taking the emotions out of the decisions and applying financial analysis to the situation. It looks like someone who will act in your best interest. I guess, it looks sort of like me. Give me a call so we can discuss your situation.