According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some low level math, that means roughly 31% of those who have access to a 401(k) are not participating. What are people doing with their money?
At a 38% total workforce 401(k) participation rate, no wonder why everybody is worried about retirement. With 31% of workers with access to a 401(k) not participating, this looks a whole lot like self-inflicted pain, which is one reason why the wealth gap continues to increase. Even though I recently wrote about the average 401(k) balance finally breaching $100,000, we’ve still got a long way to go.
The reason why I’ve been such an avid 401(k) contributor my entire career is because I knew I didn’t want to get in at 5:30am in the morning and leave after 7:30pm for the rest of my life. The only way to extricate myself from a tiring life was to save and save some more. Besides, once your 401(k) is set up, saving becomes easy due to automatic deductions.
Now that I’m out of the work force, I think it’s a duty to expound upon the reasons why everybody with access to a tax-advantaged retirement plan should contribute. Once we get the participation rate up, then we can work on increasing the savings amounts. Let’s begin.
MENTAL WAYS INDIVIDUALS CAN MOTIVATE THEMSELVES TO SAVE MORE
Personal finance is emotional. So here are several emotional points which I think will help spur you to save more.
1) You will eventually become bitter and angry. Almost every recent college graduate comes out bright-eyed and bushy tailed about their future if they land a job. They all love their jobs (or at least love earning money) and can easily see themselves working for years they say. After the 10 year mark, I’ve noticed a MASSIVE drop off in enthusiasm. Why? Perhaps during this time a colleague stabs you in the back, you get passed over for a promotion, or you get a much smaller raise than expected. Maybe you’re just bored out of your mind after doing the same thing for 10 years in a row.
As a manager in my previous life, trust me when I say that one of an employer’s main goals is to give you the least without you leaving. Often times employers mess up this equation, and that’s when all hell breaks loose.
Just read the different styles of writing between a millennial blog, a Gen X blog and a 50+ blog and you’ll notice a very different outlook on all things. Perhaps you won’t actually become bitter and angry, but you will eventually shake your naivete to see the world for what it really is: a cruel, cold, dark, and thankless place (unless you live in San Francisco or Hawaii) where everybody looks after themselves first. The trick is to accumulate enough money so that by the time you face reality, you’ll have options.
2) Freedom brings intense joy. The biggest benefit to being financially independent is freedom. Now that I’ve tasted absolute freedom for the past two years, it’s very hard to be forced to go back to work for money anymore. Going back to work for a new experience, a new challenge in a different industry sounds tempting. But going back to work for the main purpose to make more money feels empty.
It’s hard to understand what such freedom feels like by simply telling you it’s magical. Think about those morning surprises in elementary school when you find out you don’t have to go to school due to a snow storm. You end up making waffles and pancakes with your parents who also don’t have to go to work. Freedom feels like those mornings you wake up thinking it’s a Monday, but it’s really still Sunday times 100. Freedom feels like when you’ve finally found the love of your life – you never want to let go.
3) The government is wasting your money. The more you can protect your money from the government, the more you can prevent greedy politicians from misappropriating funds. If you are against wars, know that the government spent close to $1 trillion of your tax dollars in Iraq, resulting in thousands of casualties. If you are against power hungry politicians, just look up Anthony Weiner, Elliot Spitzer, Rod Blagojevich, Jesse Jackson Jr., Edwin Edwards, Spiro Agnew, Carroll Hubbard, George Ryan, James Traficant, Randy Cunningham, Huey Long, Robert McDonnell, and many more. They will make you sick to your stomach when you learn how much they embezzled and abused their power.
If you’re still optimistic that the government is wisely spending your tax dollars, do some research on the number of homeless veterans in America, pension amounts for your city’s top officials, income tax burden distribution, the net worth of the 20 wealthiest members of Congress, and how our public school test scores compare to international peers. Ignorance is bliss, which is why such government malfeasance is tolerated. But you aren’t ignorant. You are a freedom achieving machine who understands that money is just a tool to achieve your objectives.
4) Prove your doubters wrong. How many people went through high school picked on by bullies? How many times have people doubted your abilities, told you you weren’t good enough, or said you’d never amount to anything? I’ve experienced a ton of hate and doubt growing up overseas as a foreigner, as a minority going to college in the South, as a blogger, and as an aging athlete. Every single negative incident motivates me to try harder. Without hate and doubt, I seriously believe life would be too easy for the average person in this country. We should embrace our skeptics with love.
The great thing about money is that it’s largely blind to who we are. Anybody can make money, which is why money is such a large focus for many immigrants who come to America. Many of the immigrant families I’ve spoken to focus on two things when they arrive: 1) getting as much education as possible, and 2) trying to accumulate as much wealth as possible. I’m sure these two things are important to many other Americans as well. By having enough money, nobody can ever oppress you again.
I can say from first hand experience that insults from financially insecure people more easily roll off my back now that I’m financial independent. I just feel bad for them. In the past when I didn’t have a large enough financial nut to quit my job, I was much more boisterous in fighting back given I’d get annoyed. (See How To Get The Haters To Stop Hating You)
WAYS EMPLOYERS CAN INCREASE PARTICIPATION RATES
Now that we know the government can’t be relied on to encourage people to save given they can’t manage their own finances, the employer is the only logical solution to increase our retirement savings participation rates. Here are some suggestions:
1) Host a mandatory retirement seminar for new employees. Educating employees in the very beginning is the most effective way to get them to start saving given they are so excited to do whatever you tell them to do. In addition to educating all new employees about the firm’s retirement benefits, host mandatory retirement benefits seminars every year for existing employees. It’s incredible how few employees read their employee handbooks. If more employees did, I bet a higher number of workers would feel greater job appreciation thanks to understanding all of their benefits in detail.
Thanks to reading my employee handbook, I realized that my employer would pay for my part-time MBA if I agreed to stay for at least two years after graduating. I happily applied and my employer footed the $80,000 bill. I also learned about my employer’s sabbatical policy, which stated that one can take a one-to-three month sabbatical after five consecutive years of employment. Unfortunately, I did not take advantage of such a benefit because very few people took sabbaticals.
2) Provide as many low cost investment options as possible. One of the biggest push backs for not participating in a 401(k) is high management fees. The other big complaint is a lack of mutual fund options. There needs to be a diverse offering of low cost mutual funds from the likes of Vanguard and other low cost fund providers. I rolled over my 401(k) into an IRA mainly for these two reasons.
My old 401(k) provider was Fidelity Investments. As a result, we naturally had many Fidelity Investment funds to choose from in our 401(k). Fidelity is an excellent financial services company, but some of their portfolio fees were egregious. For example, I was paying a 1.6% annual fee to invest in a Fidelity Tech Fund. I had no idea until I ran my portfolios through Personal Capital’s 401k Fee Analyzer. (See: How To Reduce Your 401(k) Fees Through Portfolio Analysis).
3) Incentivize mandatory participation. The easiest way to incentivize employees to save is to make it crystal clear in an e-mail or in a seminar the employer 401(k) match policy. We had one fella come around to speak to us once a year about how he accumulated millions in his 401(k) thanks to our company’s employee match and profit sharing program. It was a little obnoxious, but I’m sure it motivated younger employees to start maxing out their 401(k)s.
At places like McKinsey Consulting, a portion of one’s paycheck automatically gets funneled to a tax-free retirement plan because they know its wise to train their younger employees to start saving early. The federal government opened the door to allow employers to automatically enroll employees in 401(k)s eight years ago, with the Pension Protection Act. Unfortunately, there’s only about a 3% participation rate.
In Australia and Singapore, a portion of each paycheck also gets saved in a retirement savings plan called the Superannuation Fund and the Central Provident Fund. These two countries have the largest inheritance amounts per individual in the world as a result. If employers can be upfront in highlighting their employee match policy and provide charts as to how much one will have after saving for XYZ number of years, more people will save.
THE IRONY OF THE 401(k) PLAN
The biggest irony about the 401(k) is that employers are not incentivized to get their employees to participate because employers want their employees to work for as long as possible. Once an employee has enough money, there’s an increased flight risk as she realizes she’s no longer beholden to a job. The Affordable Care Act is one of those government policies that emancipates many low-to-average income workers from bad job situations to do something more meaningful with their lives as well.
As a small business owner myself, all I see are many new taxes I’ve got to pay that I never had to pay before as an employee. It costs money for an employer to administer a 401(k) plan. Such costs are usually passed along to participating employees. And given the abysmal loyalty of employees nowadays, employers are more reluctant to offer generous retirement packages.
Part of the reason why I appreciated my last employer so much was because they not only provided a 401(k) match up to $3,000, they also gave employees profit sharing contributions. When I was thinking of leaving my job, I had to think a little harder because I’d give up $25,000 a year in total employer retirement contributions. In the end, I decided to take the leap because if I didn’t, I never would.
A great retirement benefits plan is an excellent way to attract the most talented, and most loyal people. Employers need to do more to make clear their benefits when hiring. Meanwhile, employees must get educated about what the employer has to offer and make 401(k) contributions a priority if they don’t want to end up bitter, angry, and poor (point #1). Please make an effort to contact your benefits administrator immediately.
UPDATED 401(k) SAVINGS GUIDE FOR 2016 AND BEYOND
To give you some motivation through a visualization of what you could have once you start participating in a 401(k), please take a good look at the chart below.
The low end assumes a consistent maximum contribution of $18,000 after the first year contribution of $8,000 with zero company match and zero growth. The high end column assumes a consistent maximum contribution of $18,000 plus a 5%-10% annual rate of return with zero company match. Now imagine how much more people can save once a match and profit sharing contribution kicks in. Save early and save often people!
WEALTH BUILDING RECOMMENDATION
Manage your money in one place for free: Run your 401k through Personal Capitals’ free 401k Fee Analyzer. The online program will quickly show you how much you’re paying in portfolio fees a year. The tool highlighted $1,700 a year in fees I had no idea I was paying. I ended up switching out of a fund with a 1.6% expense ratio into a 0.2% expense ratio Vanguard fund with similar attributes as a result.
They’ve also come out with their incredible Retirement Planning Calculator that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes.
Updated for 2017 and beyond.