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The secret is revealed at the end.
TIME VALUE OF MONEY, asset class, diversification, dollar-cost averaging: This is the language of investment professionals. But it isn’t the language of everyday Americans, including those saving for retirement in their employer’s 401(k) plan.
Trust me, I know. During my nearly 30 years overseeing 401(k) plans, including providing financial education to participants, it became clear to me that using such plans as intended wasn’t easy for most people.
For diversification, employees would often invest in several different mutual funds all focused on a similar collection of U.S. stocks—with no thought of adding bonds or foreign shares. In many cases, workers couldn’t be dissuaded from putting all their money in their employer’s stock. When target-date funds were added to a plan’s menu of investment options, many participants bought them as one of several investments, thereby negating the intended purpose.
During the 2008-09 financial crisis, employees often panicked, even if retirement was decades away. Needless to say, this locked in losses and meant they missed out on the subsequent recovery. Even worse, some workers were turned off investing in stocks and instead retreated to bond funds and other-fixed income options, in the process likely making their retirement-income goal impossible to achieve.
Participants consistently displayed a tendency to be ultra-conservative or dangerously risky with their investments. In either case, they put their retirement in jeopardy. It was rare that employees adjusted their investment mix as retirement approached. Many focused on their retirement date as if, on that date, they would use all the money in their account, thereby missing the vital point of allocating their investments to maximize an income stream over what could be 20 years or more. All these missteps were common, despite extensive and ongoing efforts to educate plan participants.
The reality: Workers can be overwhelmed by the choices they’re required to make—and by the consequences of making wrong choices. This is often compounded by employers adding too many investment options, which leads to indecision or throwing a dart at several funds with nice sounding names. One plan I reviewed for a friend offered 42 different mutual funds. That friend, not understanding the differences among the funds, chose none and instead defaulted to a fixed-income fund. Result? He retired with $45,000 in his account.
For most Americans, 401(k) plans are the most important retirement savings vehicle available to them, especially so when there’s an employer match. And yet these plans won’t provide a secure retirement if used incorrectly. Getting workers to save is the first step. Teaching them to invest is the second.
We have a long way to go.
This was my first article for HumbleDollar in 2018.
Ahhhh Sir Richard… So cool the last line.
My last job had a fantastic pension for decades. It got overwhelmed and in 2011 was modified, but still was a pension.
3 years ago after I retired, grandfathering the pensions, they went to the 401K option and I am wondering now just what options the participants have, and what they are doing with them.
I worked in the investment biz and one year was a part of the employee benefits communications team for our company’s 401K plan. While I generally knew that too many employees were too conservative in their investment choices, I was appalled when I spoke to individual employees about their plan choices. The number who were entirely invested in the cash option and their reasons why (safety) was revealing. Not only did many employees not understand the basic concept of the time value of money, our company had utterly failed to help its employees understand this concept in order to make better long term investment choices.
Save early and save often are just the starting steps to successful investing. People also need to understand that a reasonable exposure is their only sure way of growing their savings on an inflation adjusted basis.
Right you are.
Great article Richard. I remember when I was able to start my first IRA in the 1975, sure did not know much, but somehow knew to pick an appropriate mutual fund, as ETF’s did not exist. Always eager to learn more I followed Peter Lynch, and then found Warren Buffett, read books and early on in my early 30’s around 1979 or so, took a course in Stocks. When it came to the 2000’s I was well prepared to NEVER sell stocks in a panic, and followed Buffett’s advice “Be fearful when others are greedy, and be greedy when others are fearful.” Also Buffett is the best LONG term holder of stocks. When the market crashes, or goes down considerably you just WATCH, and hopefully have some cash to buy when stocks are at their lows. We need to find a way to educate all these investors so they can have a reasonable retirement. Thanks for trying to help MANY.
I have experience with the investing (mis)methods described here with an empirical experiment. In 2008 I panicked and mostly cashed out of stocks. I had two IRA accounts of equal value and I started a new job in 2010 with a matched 403(b) plan.
Interest rates were low and the IRAs didn’t appreciate. The 403(b) got steadily funded with each paycheck and invested mostly in a low cost S&P500 index fund. Then, with one of the IRAs, I slowly started moving cash into stock (influenced by HumbleDollar). Today, the IRA with a stock allocation is worth $60k more than the mostly cash IRA. The 403(b) is worth more than the IRAs combined. We know what’s happened to the stock market since 2010.
But I continue to disagree with the premise of the stock market being great. What if stocks languished or crashed? And they still could the next trading day after you read this. We just don’t know.
When reflecting on your career, Dick, either back then in 2018, or more recently, I often detect a sense of frustration that your efforts to educate and guide didn’t bear more fruit. I think it’s possible that you opened more doors than you know. Some of the employees might not have been ready to hear your message but may eventually have done more reading and independent research, leading to wiser investment decisions. Like you, I have completely lost touch with the vast majority of families to whom I provided health information, especially around early childhood development. But the few with whom I have maintained contact (5 or 6), continue to amaze me At the time of my interventions (non-mandated), I believed that few or none of them were destined for a good future with their children. It’s wonderful, years down the line (in two cases, 30+ years) to learn that I was wrong and the children are thriving with productive lives. Not due solely to my visits, of course, but due to their mothers’ determination to do better for their children than was done for them. You just never know where those seeds fell and how they may be thriving today.
I hope you are right, at least I like to believe that. Several years ago after I retired I was standing in line at a Disney ride in Florida. A man came up to me and said, “you’re Dick Quinn, aren’t you?”
When I said said yes, he turned to his wife and said. “This is the man who saved our retirement.” That felt good.
Good men and women should be recognized, even in line at Walt Disney World!
Great post, RDQ!
Early on, I was just a saver, and a mostly fixed income investor at that. I didn’t start thinking seriously about diversification and investment choices until later. The newsletters I received in the mail back then — in my case, from TIAA and Paine Webber — were helpful in changing my ways. TIAA was especially good in writing about actual clients and how they were navigating their investing and retirement journeys. The underlying message was always that “it could be you”.
If I were starting out now, I wonder how or if those messages would reach me. Just like too many investment choices can be overwhelming, so too can be the vast amount of online resources. Information on paper is, at least for me, harder to ignore.
You have a good point. Too much can be counterproductive plus people respond to different communications in different ways.
I found the best method was in-person small meetings inviting the employee’s partner as well. But of course, in many settings that is just not practical.
I was always amazed at how hard it was to get people to pay attended to and act on things that were only in their best interest to do so.
Dick, if you were “always amazed” at the difficulties in getting people to pay attention, then I would — with the highest respect — suggest that perhaps you also were not learning from the failed educational interactions between you and the workers. Interpersonal communication is a deeply complex process, as complex as financial planning. Did you ever take a seminar on communication to examine why your message wasn’t getting through?
I coach my clients that if we have a good story to tell but aren’t getting the desired attention, we need to try out a new way of telling it. My grandmother, an early childhood educator who co-invented the first Head Start program, was constantly tweaking her stories for the children to make them more understandable and appealing.
One of.my kids was in Head Start. The program and the teacher(s) were great.
I’m kind of in awe, Mike, that your grandmother was one of those who developed Head Start! As a retired Public Health Nurse whose career focused on home visits to very low income families, I appreciated what wonderful programs Head Start and now, Early Head Start, are. Parent involvement is typically required and for some parents, this was their first “work “ experience (even though it was volunteer). Coming from a middle class family, with very conservative values which generally eschewed any government “handouts,” I made sure to spread the word that the two government programs that should never be cut are Head Start and WIC, the nutritional food supplement program for pregnant women, lactating women and children up to age five. Kudos to your grandmother who started something that has benefited millions. (I got into a political argument with my brother in law when he said HS wasn’t “worth it “ because studies show that HS didn’t increase college admissions for its participants. Not the point, buddy! Fortunately, he learned not to jeopardize our generally good relationship by ever bringing it up again 😂).
Thank you, Linda. My grandmother never sought attention for her breakthrough, but she always spoke with quiet pride — and a bit of wonder — of the call from Lady Bird Johnson’s chief of staff informing her that the First Lady intended to take her tiny local children’s program national. I’m glad I’m the only member of my family who has lived long enough to see what is happening to it.
In the next hour I will head out on my Meals on Wheels route — another program that will likely be rendered extinct before the end of the year. I have no idea what my elderly clients will do without it.
I studied communications both in school and subsequently.
I can assure you trying to get the message through took every form of communications available at the time. In the process our campaigns received several national awards.
This was a group effort, not just me.
You are bucking human nature when it comes to this kind of thing. That being to focus on the more pleasant here and now things, the immediate gratification things.
Just look at the behavior of people relative to their finances, retirement planning, even health. Why don’t people behave responsibly and prudently?
Dick, in light of current events, that is a question I have stopped asking myself. My doubts about human nature have increased exponentially this year.
Thank you for your response.
I agree.
A person’s financial destiny is within their own grasp. People have agency in all areas of life, and it’s the individual who needs to make the effort to educate themselves and seek solutions for retirement. The well of knowledge is deep, and many are willing to help. Your career is a prime example of this help. If people choose not to draw deeply from this well or ignore advice, the consequences are theirs to own.
Yup, sadly that is true. There is only so much others can do to change a persons behavior and acceptance of information.
Thanks for an interesting post Mr. Quinn.
This made me think of Barry Schwartz talking about the “Paradox of Choice” in the context of 401K plans.
From this article (https://thedecisionlab.com/reference-guide/economics/the-paradox-of-choice)
Analyzing data from nearly 800,000 employee records, Iyengar and colleagues found that the likelihood of employee participation decreased when 401(k) plans offered more funds. In fact, every additional 10 funds reduced participation by up to 2%. Plans that offered only two funds had a peak participation rate of 75%, but plans with 59 funds had participation rates as low as 60%. Out of all the plans examined in the study, those offering less than 10 funds had significantly higher participation rates than those offering between more than 10 options.
From an Australian perspective, we are pretty fortunate that our superannuation funds typically have a small number of diversified portfolios that participants can choose. As an example, one our largest superannuation providers has 6 “pre-mixed” options to choose from:
https://www.australiansuper.com/investments/your-investment-options/pre-mixed-investment-choice
Also, given that our superannuation system has a compulsory requirement for 12% of base wage (excluding overtime) to be invested into super, we don’t have to constantly be encouraging people to save. However I recognise that this works in Australia only because we are a very compliant culture.
Is the mandatory super system what we call social security, but left more to the individual for investments? Is there any backup if the investments don’t meet expectations?
I think the key difference is that superannuation accounts are held by superannuation funds. These are private funds, not run by government, but highly regulated. Each superannuation account is in the name of an individual.
If someone does not have sufficient in their superannauation account by age 67, there is an aged pension scheme, all run by government.
That sounds like a great superannuation system. Does the employer have to contribute also?
There isn’t really a discussion anymore in Australia as to whether it is the employer or employee that’s making the contribution. For example, if someone’s salary is $100,000, then their total package would be considered $112,000, and $12,000 goes to the employee’s superannuation account.
That’s just the situation that everyone is used to, so there is no need to debate “who” is contributing the $12,000, it’s part of normal remuneration structuring.
I like watching football and basketball, but I miss technical aspects of many of the plays until the color commentary explains it to me during the replay. My friends, by contrast, can recognize the many nuances of the game without giving it a second thought. Just don’t ask them the difference between growth, value, small cap or large cap…..
I guess it’s all about priorities.
Wow, and not much has changed. This could have been written, today!
Nowadays target date fund and contribution defaults are helping the average employee save more.
https://open.spotify.com/episode/5X8AvgjtPK6zmBSCZVd2S6?si=OYQGC3mrQCWrD7slqin_NQ
Sorry – duplicate comment!
I could relate to a lot of what you wrote, Dick. Thankful I was able to learn before it was too late for us. Chris