According to the Profit Sharing/401(k) Council of America, 20% to 25% of all employees eligible to participate in their firms equity-based 401(k) do not.
Given that many companies offer some sort of match, this is an especially disappointing trend. Its caused, I believe, mainly by lack of knowledge among potential participants.
This is a disservice to all concerned. For participants, it may result in smaller retirement nest eggs than they might otherwise have built up; and, for you, the advisor, it may result in lower income.
Fortunately, you can do something about it: Assume the role of knowledgeable and trusted advisor, and take the time and effort to educate and reassure plan participants. (If you fail in this, you may open up the opportunity for another advisor, who is willing to offer reassurance, to replace you.)
To be an effective educator, and to reach the maximum number of plan participants, you should hold at least three educational meetings a year. At each one, cover the important basics–dollar cost averaging, illustrations on how time reduces the risk of loss and can be an investors best friend, and the value of a proper asset allocation.
But, while it is always important to demonstrate the value of saving and investing for the future, it has been my experience that people almost never react to an offer of future benefit/detriment. (There are obvious parallels here to why our society still has so many people suffering from obesity and cigarette smoking: People just cant envision the value of making a change for the future. It is too hard for them to relate to how todays behavior will hurt a future thats 20, 30 or more years off.)
Therefore, if you wish to increase 401(k) participation rates, you will have better results by highlighting the current benefits of participation.
Point not only to the significant savings on income taxes, but also to the value made available by the employer match (offered by many plans today). Show that, by participating at least up to the full match offered, employees are giving themselves what amounts to a tax-deferred raise. (See Chart I for an example of the tax savings and net result for those in plans with 4% matches.)
Another challenge you face when encouraging broader participation may be fear associated with the stock declines of the past two years.
This is the first significant bear market to hit the American investor since self-directed 401(k)s became prolific in corporate America. The fact that it hit after the biggest boom in the stock market in history, makes it hurt all the more, since many workers were 1.) convinced they could self-manage their assets, and 2.) oblivious to the inherent risks in doing so. Adding insult to injury, many employees over-enthusiastically invested in their own companys stock, ignoring or ignorant of the risks of doing so.
As a result, many investors today are holding their money on the sidelines, or investing in “safer,” low-yielding products. This is an incredibly self-defeating “strategy,” given that todays lower prices actually represent a buying opportunity, but the trend is here nonetheless.
Therefore, it is your job, as trusted advisor, to step in, educate and reassure, to explain that now is the time to invest, not sit on the sidelines. Remind participants that they want the market to be low when they are investing and high only on the day they retire. Emphasize that the key is to buy low, sell high.
Participants who sit on the sidelines will likely miss an enormous opportunity if they wait for solid reassurance that the bear market is over. Bear markets often recover rapidly, as can be seen in Chart II.
In summary, if you can understand the emotions that plan participants are likely feeling, and if you can offer solutions that address their concerns, you should be able to assist them in making wise retirement plan decisions. This, in turn, should help you continue to grow assets in existing plans. Perhaps you will be able to acquire new plans, too.
, CPA, CSA, RIA, MBA, is president of NF Communications, a Walnut Creek, Calif. firm producing marketing systems for financial sales professionals. His e-mail is [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 12, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.