Keep 401(k) Flow Up In A Down Market

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.