Will pigs ever fly?

In 401(k) circles there is a saying;

Educating employees on investing is like teaching pigs to fly;
They never will fly, and get sick of being thrown off the roof.

Now before you think this is rude and elitist let me explain.

A one on one session explaining principles of asset allocation, market dynamics, and efficient frontiers and time horizons leaves most casual investors confused and bored.  Try doing that in front of a group of distracted employees, with no experience in mutual funds.  Add language barriers and distrust of banking services and you have an understanding of how flawed this process can be – by no fault of the employer or employee.

Without interest, an employer will have low participation which can result in certain employees not being able to fully fund their accounts in any given year.  If lower paid employees don’t fully participate, the highly compensated employee’s and owner’s contribution limits are lowered.  A plan with low participation, or no participation, hurts everyone involved.

Another common problem can be inappropriate investment choices by employees.  A twenty-something who steps up and contributes $5000 a year, but is so confused about investment options that they leave the funds in a money market is not well served.  A fifty-something investment hot shot betting on the next new bull market can be a disaster waiting to happen.  How many of you know retirees who had to go back to work after the last market crash?  Investing is not a quick study.

The Dept of Labor (DOL) has struggled with this.  Even the 401(k) provider powerhouses have not been able to properly convey these principles, no matter how many color-coded brochures they print and deliver.

As a result the DOL made changes to ERISA[LT1] rules guiding how a plan should be run.

Auto enrollment has become an option.  Even with the best employee education and enrollment meetings, many well-intentioned employees never get through the paperwork to sign up.  “I’ll tackle that next week,” becomes a constant (and expensive) refrain.   Then once they sign up many stop with choosing a money market for ‘safety’ or lack of time to decipher the prospectus outlining each fund available in the plan.

Sure, a money market is safe, but an investment that doesn’t keep pace with inflation over a thirty of forty year time frame is not an appropriate investment.  Investors want safety but there is a floor on how low return rates can be. An aggressive allocation for a fifty year old is even more dangerous.  With such high volatility in the markets someone can loose half their portfolio in days or weeks.

Auto enrollment with Qualified Default Fund, think of a ‘balanced fund’, has recently become an option.

You put in a plan for your employees, hold the enrollment meetings, hope they all enroll and choose appropriate investments. Then many people don’t enroll.

But now:

You put in a plan, hold the meeting, and announce everyone is enrolled for 3% of their salary, and will be matched dollar for dollar on that 3%. The money is going into a balanced fund, part stocks and part bonds.  Anyone who wants to change investment options, change amount deposited into the plan, or opt out is welcome to do so. Now with the same amount of work as before, employees can customize their portfolio, but no one is left out in the cold if they cannot marshall the time and effort to do so.

With a little attention to their retirement plan offering, an employer can make a huge difference in the quality of life of their employees. For many people an automatic deduction from payroll to a savings account is their only way to save.  The automatic deduction is a great way to make sure some money is left each month – put it away before you get it! A retirement plan is, like a savings account, a great way to begin investing. Auto enrollment opens a door to the investment landscape to people who wouldn’t open it themselves. Of course, they can close and lock that door if they feel uncomfortable with it. But so many people will take that opportunity when they wouldn’t have before, and that benefits everyone.

Your company benefits now have more value to your staff than ever before.  Your twenty-somethings will pick age and risk appropriate investments and can retire with a million dollars (40 years at $5000 a year with 6.5% interest.) your fifty-somethings will avoid financial suicide.  The retiree actually stays in retirement.

Pigs don’t need to fly when there is a nice soft landing for them.