Print these off and debunk them one-by-one in your next education and enrollment meeting, because your 401(k) plan participants really believe some of these things.
Having worked as a 401(k) advisor for more than 30 years, I’m always surprised by the simple but significant 401(k) plan misperceptions of many plan participants. Here are the most common and noteworthy:
- I only need to contribute up to the maximum company match
Many participants believe their company is “sending a message” about how much they should contribute. As a result, they only contribute to the maximum matched contribution percentage. In most plans that works out to only 6 percent in employee contributions. Studies indicate that participants need to average at least 15 percent in contributions each year. To dispel this misperception, and motivate participants to contribute something closer to what they should, plan sponsors should consider stretching their matching contribution.
- It’s OK to take a participant loan
I’ve had many participants justify loans with, “If this were a bad thing why would the company let me do it?” Account leakage via defaulted loans is one of the reasons why some participants never save enough for retirement. In addition, taking a participant loan is a horrible investment strategy. Plan participants should first explore taking a home equity loan, where the interest is tax deductible. Plan sponsors should consider curtailing or eliminating their loan provisions.
- Rolling a 401(k) account into an IRA is a good idea
Many 401(k) advisors are working hard to convince participants this is a good thing. However, higher fees, lack of free investment advice, use of higher-cost investment options, lack of stable value and guaranteed fund investment options and many other factors make this a bad idea for most participants.
- My 401(k) account is a good way to save for college, a first home, etc.
When 401(k) plans were first introduced, human resources staff helped persuade skeptical employees to contribute by noting that the plans could be used for many different things. They shouldn’t be. It is a bad idea to use a 401(k) plan to save for an initial down payment on a home or to finance a home. Similarly, a 401(k) plan is not the best place to save for a child’s education — 529 plans work much better. Try to eliminate the language in your communication materials that promotes your 401(k) plan as a place to do anything other than save for retirement.
- I should stop making 401(k) contributions when the stock market crashes
This is a more prevalent feeling among plan participants than you might think. I have had many participants say, “Why should I invest my money in the stock market when it is going down? I’ll lose money.” These are the same individuals who will be rushing into the stock market at market highs. The logic is important to unravel with participants and something plan sponsors should emphasize in their employee education sessions.
- Actively trading my 401(k) account will help me maximize my account balance
Trying to time the market, or following newsletters or a trader’s advice, is rarely a winning strategy. Consistently adhering to an asset allocation strategy that is appropriate to a participant’s age and ability to bear risk is the best approach for most plan participants.
- Indexing is always superior to active management
Although index investing ensures a low-cost portfolio, it doesn’t guarantee superior performance or proper diversification. Access to commodity, real estate and international funds is often sacrificed by many pure indexing strategies. A blend of active and passive investments often proves to be the best investment strategy for plan participants.
- Target date funds are not good investments
Most experts who say that target date funds are bad are not comparing them to a participant’s allocations prior to investing in target date funds. Target date funds offer proper age-based diversification. Many participants, before investing in target date funds, may have invested in only one fund or a few funds that were inappropriate risk-wise for their age.
- Money market funds are good investments
They’re guaranteed money losers, and have been for a number of years, because they have not kept pace with inflation. Unless a participant is five years or less from retirement, or has difficulty taking on even a small amount of risk, these funds are below-average investments. As a result of the new money market fund rules, plan sponsors should offer guaranteed or stable value investment options instead.
- I can contribute less because I will make my investments will work harder
Most participants feel that the majority of their final account balance will come from earnings in their 401(k) account. However, studies have shown that the major determinant of how much participants end up with at retirement is the amount of contributions they make, not the amount of earnings. This is another misperception that plan sponsors should work hard to unwind in their employee education sessions.
Make sure you address all of these misperceptions in your next employee education sessions.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.
