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401(k) best practices: employee education | Employee Benefit Adviser

I didn’t write the following list, but my thirty-years managing 401k plans substantiates what is said below … sadly 😰.

Human nature being what it is, people tend to do exactly the opposite of the correct strategy based on their misunderstanding of retirement planning and their perception of risk.

Participants have a long list of misperceptions regarding their company’s 401(k) plan. The most frequent I hear include:

🤑 You should stop making contributions when the stock market falls.

🤑 It is a good idea to take a loan from the plan.

🤑 I only need to contribute enough to receive the maximum company match.

🤑 Money market funds are a good place to invest.

🤑You should sell when the market falls to avoid losing everything.

🤑 Allocating more of my balance to funds that are performing the best is a good investment strategy. I don’t want to miss something.

Source: 401(k) best practices: employee education | Employee Benefit Adviser

The fact is: stock market drops are usually buying opportunities 🤨 taking a loan is a very bad idea 🤨 you need to contribute as much as possible and certainly enough to meet your retirement goals 🤨 money market funds are to be avoided because their return is minimal and inconsistent with long-term investing 🤨 selling when the market falls is a fools move and exactly what caused people to “lose their retirement savings” in 2009 🤨 your fund allocation should reflect your retirement plan 🤨 your risk tolerance and your age and time before retirement.

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4 replies »

  1. Taking a loan is a bad idea? Perhaps for the adviser whose personal revenue is a function of assets under management. Talk about a conflict of interest.

    However, it was not too surprising that the individual who wrote the article failed to identify other forms of leakage – hardship withdrawals and post-separation, pre-retirement withdrawals as items to avoid/mistakes people make.

    From a participant’s perspective, the ONLY time a plan loan is a bad idea is where a loan is used to maintain an otherwise unsustainable standard of living … on the way to personal bankruptcy.

    Otherwise, a loan is ALWAYS a good idea, compared to other forms of liquidity (limited to situations where liquidity is needed). It is ALWAYS a good idea compared to a hardship withdrawal. It is ALWAYS a good idea compared to a post-separation, pre-retirement withdrawal (with the exception of situations where the 10% early distribution penalty tax is the only tax applicable). It certainly is ALWAYS a good idea compared to a payday loan, a cash advance on a credit card, and sometimes, it is the only liquidity available to those who are not otherwise credit worthy.

    The challenge here is that most advisers and service providers use 20th Century loan provisions which inadvertently penalize participants. My bet is most people who read your blog use electronic banking to pay at least one bill each month. What reason is there for service providers and benefit advisers to deny the same functionality, 21st Century functionality, to participants who have a loan outstanding at separation, or who wish to initiate a loan post separation?

    Damn, they just passes a provision in the Tax Cuts and Jobs Act of 2017 to accommodate the service providers and benefit advisers who fail to keep up with best practices processing – which, in turn, negatively impacts participants.

    Liked by 1 person

      • Why would anyone NEED to take a loan from a retirement plan? It is a must option where the individual participant lacks other liquidity options.

        Why SHOULD participants always consider borrowing from a retirement plan? In almost every situation, a plan loan will have a more favorable impact on overall, total household wealth when compared to other available debt/liquidity options. For example, even where a commercial loan is available today at, say as little as 8% interest, it is likely that a loan from your 401(k) plan will have a more favorable impact on your overall, total household wealth.

        Liked by 1 person

  2. I hope that education has improved since I entered the workforce. High schools really need to teach the basics about personal finance.

    When I was hired in May of 1985, a large group of new hires sat in the caferria with HR for several hours and had our benefits explained and which forms to fill out. When I retired, that was no longer done and in most cases there was not even a person available to have a face-to-face with to answer questions or to help with the forms. At the time, I do not remember anything about 401K plans. That fall during open enrollment was the first time I can recall seeing anything on 401Ks. My department was new and nobody really understood it. Why did we need to put money into a 401K when we had pensions? Nobody I worked with knew anything about it but we all have heard about bank IRAs in the 1980s and they did not invest in stocks. After asking questions for a year and by the open enrollment for 1987, several of us realized that we were leaving money on the table so we started 401K accounts. Others could not get the concept for years after that.

    By the mid-1990’s more people had the 401k plans and they could explain them to the new hires. Also by 1996 the new hires lost their defined pensions so they really had to invest into the contribute plan and 401K. I think that is when everybody started trying harder to understand these plans.

    Most young people I talk to today understand that they have to save for retirement and should be in 401Ks and should save as much as they can. I think that many also believe in the bad advice listed above. Many do not even contribute into plans offered to them because they think they need the money more right now to get by. I know that my crystal ball did not work too well predicting the future and my wife fought me on how much I was saving for 30 years. After 32 years, she admitted that I was right when I retired early. So I understand what these young kids are thinking, but it hard to prove to them that no matter what the world events are, their personal ups and downs are, what the market does, that if they don’t save something they will end you with nothing.

    I think that the best thing that has happen to help me educate young people was Warren Buffet’s bet with managed hedge funds. His 10 year bet proved that if you invest into index funds long term you can get at least 7% ROR by leaving it alone. Even kids today know how rich he is.

    Liked by 1 person

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