Thursday, March 22, 2007

Retirement Survey: The Results

Regular readers of Money and Such may know that I am a member of my company's 401(k) stirring committee. Right now we are in the process of reviewing our 401(k) plan and examining offers from several different plan providers, including ING, Fidelity, Vanguard and ADP.

As a big believer in index funds, my natural inclination is to go with Vanguard. However, I recognize that I am not a typical investor, so yesterday I decided to take an informal poll among my fellow employees. My goal was to find out what their thoughts were regarding the 401(k) options that we are looking at. I discovered several very interesting facts:

1. People Don't Track Their Retirement Plan Progress - many of the people I interviewed confessed that they have only checked their 401(k) plan once. That "once" was the time that they enrolled in the plan. Whether because of laziness, because of ignorance or simply because they don't care, most of the people I interviewed expressed little interest in their plans.

2. People Either Care or They Don't Care - very few people exhibit a "moderate" level of interest in their 401(k). People tend to either max out their investments and be very involved with the plan, or they tend to invest very little and not bother with it at all. No one I interviewed spoke about a moderate level of involvement. For some reason, this appears to be a kind of all or nothing game.

3. Most People Don't Like Options - we are considering the introduction of a self directed 401(k) option, in addition to the regular menu of funds. Employees that choose this option for their 401(k) would be getting a brokerage account in which they can invest all or some of their assets as they please. To my amazement, most people said that if such an option existed they would not take advantage of it. I am guessing that the reason for this is fear. People don't know how to invest their retirement assets and are afraid to ask. Is it possible that people equate a fixed number of named options with safety?

4. Most Young People Don't Think About Retirement - almost invariably, the under 30 crowd I interviewed said that they do not invest or invest very little in their 401(k). Few, if any, even invest enough to take advantage of the company match, which is equal to 50% of the first 6% of salary.

5. No Strategy - it seemed like very few of the people I interviewed had any coherent investment strategy for their retirement assets. Some told me that they preferred investing only in aggressive, actively managed funds because they wanted to beat the market. One person told me that she basically invests in whatever her grandfather recommends, and so it didn't really matter to her what investment options we would make available.

6. Seniority is No Guarantee - one of the things that surprised me is that senior employees (Director level or above) were no more likely to have a coherent plan than were their junior counterparts. However, because they tend to be older and closer to retirement, a larger percentage of senior employees are taking an active interest in their retirement assets.

The results of this informal survey really cause a dilemma for me. On the one hand, as a relatively knowledgeable investor, I have a strong preference for index funds knowing that they would probably better serve my colleagues. Personally, I don't require a lot of hand-holding, service or training but many of my colleagues do. I also recognize the importance of minimizing investment costs.

I think that the best service I can perform for my colleagues is to ensure that they receive the training and information that would increase their odds of a secure retirement. Unfortunately, the option I deem to be most favorable from an investment perspective (Vanguard), does not offer a great deal of training and support for the employees. The option that offers the most education and hand-holding (Fidelity), is also more expensive and has limited indexing options.

I would appreciate comments, ideas, insights and suggestions from my readers. How do you think I should approach the problem?


Tiredbuthappy said...

Good post.

I especially found interesting your observation that people tend to fall into the extremes--really into retirement planning, or totally not into it. I've never thought of it quite like that, but it does mirror my experience with friends and coworkers.

PF101 said...

This is a great post and doesn’t surprise me at all. I conduct benefits training with businesses of all types an sizes and it’s rare that even 25% of the participants know even the basics about their retirement plan options. Based on this experience I have a few suggestions for you:

1 – Implement an automatic enrollment policy. This would require employees to opt-OUT of participation instead of opting-in. Their contributions would, unless they choose otherwise, go into the Target Retirement Fund that is appropriate for their age. This option is great for the people who just don’t know what to do or are just too lazy to sign up. Much of non-participation is fear or just laziness. I presented to a non-profit the other day and of the 15 people in that session, 10 hadn’t enrolled just because they kept forgetting. I made them go get their forms, explained the different funds and how to do asset allocation and we got them all enrolled right then. Make it as easy as possible and you’ll find that people won’t complain.

2 – Make sure you offer Target Retirement Funds. They’re great for people who don’t know and don’t want to know how to invest. This will by far be the biggest group of people so make it as easy as you can.

3 - I think it’s good for some people that your company is including a self-directed brokerage option, but do your employees a favor and see about requiring some sort of “prove yourself” system before people can choose that option. This will protect the people who think they’re Warren Buffet but are closer to Jimmy Buffet in their stock picking capabilities.

4 – Conduct employee training. I would double check Vanguard’s education services. I used to work in their Institutional Services department (401ks) and when I was there they definitely offered on-site education services. That was several years ago so it may have changed but I would double check. If they don’t I would check into 3rd party training. You could hire someone like me who would come in and teach the people who really need to know. Like I said above, I present to all kinds of companies and 99% of the time the entire presentation is about WHY you should save for retirement, how the different types of accounts work, what compounding is, what different types of investments are, why you want free money, etc. It’s personal finance 101 (hence the name of my company!). I can guarantee you I’d be cheaper than Fidelity and I’d guess there’s someone in your area who could provide a similar service.

Those are the main things I can think of now. If I think of anything else I’ll post again. Also, if you have any questions about my suggestions, feel free to contact me.

Good luck!

Adventures In Money Making said...

i check my retirement accounts twice a month, but most of my friends don't.

one of them had all his money in a a pink sheets fund(that probably shouldn't have been offered in the first place) a few years ago and was wondering why he didn't have very good performance.

SML said...

Frightening insight but not too surprising.

We have had Vanguard thru a Meagcorp for decades. I love it.
I do think they are quite helpful in providing information - one just needs to care to read it! Thru Vanguard we also have free access to Financial Engines - an excellent tool.

I wish we had the self directed brokerage option - to better place the tax sheltered and regular allocations in our overall portfolio.