Broker Check

401(k) Education Helps Profits

| April 28, 2021
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Your employees probably don’t make best use of your company’s retirement plan. Addressing this problem can boost their job performance and optimism – as well as your profits.

What if you offer your current and future employees the possibility of a 250% larger retirement account? Such a move makes your firm a lot more attractive and your cost of losing talented people to your competitors drops dramatically.

Educated and engaged 401(k) participants take small steps that bring large benefits over time. 

Your employees probably need bolstering: Only 51% of workers express any confidence about their financial futures, according to the 2013 Retirement Confidence Survey by the Employee Benefit Research Institute. Research co-sponsored by Charles Schwab & Co. also reveals that employees generally know little about and barely work on their on-the-job retirement plans:

  • More than half (52%) lack the time, knowledge or experience to manage their 401(k) portfolios.
  • Almost three-quarters (73%) spend less than eight hours each year managing their 401(k) almost half (45%) spend less than four hours.
  • More than half (56%) either aren’t aware of or don’t review plan-related education materials.
  • Almost a third (30%) didn’t know they paid any fees for their 401(k).
  • Most important, 83% of plan participants want professional investment management from their employer as part of their plan.

Your employees need and want help discovering options and choosing investments.

Why doesn’t every business help employees understand and contribute more to a 401(k)? Most companies simply lack the time or qualified staff to provide necessary resources, tools and education.

Schwab’s survey also found that more than 61% of employees feel more confident about investment decisions if advised by a professional. The cornerstone of sound 401(k) education: one-on-one, face-to-face counseling with every participant. There’s no substitute for sitting across from your employee and asking and answering the right questions. This helps your employees feel they have an advocate – not just an employer or advisor – to clarify such subjects as asset allocation and appropriate contribution rates.

Employees may not appreciate the power of incremental saving over the long term. For example, your employee currently contributing $50 a pay period and who increases contributions to $125 a period realizes as much as a 250% larger account balance at retirement.

To put that change in perspective, the median annual U.S. income is about $50,000. Depending on the number of pay periods in a year for your worker, a $75 increase per period only results in a 3% to 4% change in contribution rate and reduces net take-home pay by about $3 or $4 per day. Almost anyone can change their personal spending habits by $4 per day.

In addition to greater contribution rates, education and counseling produce more-informed investment decisions, which can lead to greater returns. Compounded over an entire career, a 3% to 5% difference in rate of return creates nearly $1 million more for a typical employee who defers $100 per pay period between ages 25 and 65.

The differential is even greater for your younger employees with more time to defer and save – and who usually invest too conservatively for their age. Participants younger than 25 who receive plan-sponsored advice report earning nearly 5% better returns than those in the same age group who don’t receive such advice.

Your employees look to you for their current living. Help them with their future lives, too, and you will both benefit.

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