Simple Start to 401k For Those That Don’t Care

Well, it’s that time again.  I’m finally eligible for the 401k at my new job.  This one isn’t nearly as terrible as the previous one.  This time we have access to the full assortment of Vanguard funds.  Vanguard is also the provider so we are sitting pretty with the ER’s across the board.

We don’t get a match, so those of you that do, be sure to make hay while the sun shines.  Throughout my career, I’ve rarely had a match in any 401k from an employer.  The only one that has had a match, I’ve set up on my own.  It’s a shame, but the benefits are still there so I continue to max them out.

I’ve come to the conclusion that the abysmal participation rates in work place sponsored 401k plans are due to a couple of factors.  I guess abysmal is a bit of a stretch, because there’s an average of ~60% of people eligible for the plans actually contribute.  As for those that actually do, they tend to contribute on the order of ~6% of their salary into the plan.

Let’s discuss some ways that we can help, so maybe you come across someone unsure you can push them in the right direction.

The Plan Presentation

Everyone in the company that was newly eligible for the plan got a meeting invite to the 401k plan presentation.  These are not typically the most interesting meetings on the planet, if you can call any meeting interesting.  Nonetheless, I attended and was quite shocked at how many young people were in attendance.  I’m sure the free lunch has something to do with that.

Side note: Why is it that grown adults will walk through the pits of hell for free sandwich at an office???  But I digress.

There were probably 20-30 folks mostly in their mid-20’s, obviously interested in the benefits of the plan.  Unlike, most of you, dear readers, these folks are not super well-versed in the ways of the market.

I was super curious to see how the presentation was going to go.

Now, the lady was nice enough.  And she was certainly knowledgeable, but there’s something to be said about knowing your audience.

She started off on the right foot, discussing how investing now will set you up for later and how time is your friend.

Then she went sideways and started showing people how to use retirement calculators on the Vanguard site.  Once you pull up a site to start putting numbers in, people start losing interest.  They want to know how it affects THEM, not some arbitrary person.

Then she made some comment about how if you only save $1,500 a month, you will have X dollars by the time you are 65.  This, of course, was greeted with snickers from the crowd.

Who can save that kind of money?

She followed up that with a display of how you can use the risk profile calculator to determine your appropriate portfolio allocation.  At this point I looked around the room, every one of those eager 20-somethings had glassy eyes and was staring at the booklet of 30 funds she proceeded to hand out, dumbfounded.

Understandably, this fell on deaf ears.  Here, you have a bunch of young folks that are interested in making their life better and you simply terrified them with unnecessary knowledge and made something more complicated and scary than it needs to be.

Somehow folks find me.  I must exude an aura, but one of my friends that was in the meeting turns to me and says,

“Mr.Wow, can you help walk me through this?”

Maybe It’s This Shirt That I Wear?

My Presentation

I said sure, I’ll help, and we promptly made plans for a lunch meeting.

I started off by asking what she thought of the presentation.  Just as I suspected:

“It was good, but I didn’t really understand it at all.”

So, here’s how I reworked the presentation:

1. I stared by explaining the benefits of investing in the 401k.  And how investing works and how over time, these things start snowballing.  If you have $100k invested, and the market goes up 10%, you just gave yourself a $10K raise, by doing nothing.
2. I explained to her that she needs to set up the plan now.  She doesn’t have to understand it fully, but she needs to start now.  That was her homework, go set up the account.  Today.
3. As far as the funds, she asked about her risk tolerance and the proper portfolio allocation (in less MBA terms).  I simply told her.  When you log in they’re gonna ask you what you want.  Find the one that says “Target Date Fund” with the largest number next to it.  Then put 100% of you contributions in that.
4. She asked should she do Roth or Traditional?  And while this is a super complicated discussion.  This is the way I look at it.  If you make over $75k, go traditional, if you make under, go Roth.  It’s arbitrary and this is a one size fits all answer, but for simplicity it makes it easy to understand.
5. Next, how much do you put in?  I just tell everyone to start at 10% of their salary.  Usually, they balk, and say “That’s impossible.”  But then we get into a discussion about how if they don’t see it they won’t spend it.  I tell her that she won’t notice, to give it a month, and if she can’t make that work she can adjust it later.
6. Then I always end with:  “Five or ten years from now, when you care, you can go back and adjust these things.  But you’ll be thankful you did this now.”

Then I handed her a copy of A Simple Path To Wealth and left it open to discussion later.

Here’s the secret that most people lose sight of:

The key is actually putting money away.

People get so wrapped up around expense ratios and which funds have the greatest returns.  This is all semantics if you aren’t saving at all, worry about that later, when you actually care.

One of the biggest issues with 401k participation is the intimidation factor, so make it simple.  Even with crappy ER’s and stuff, just start saving, and it doesn’t really matter into what.  Get the folks building the savings habit, then let them make adjustments.

So let’s recap:

The WoW’s Simple 401k Presentation For People Not Interested:

1. Start Now, Start Yesterday, if you can.
2. Invest in the furthest away target date fund that you have access to. If you don’t have access to one, pick something close to the SP 500, preferably with a low ER.
3. If you make more than $75K, go Traditional, otherwise go Roth, access permitting.
4. Start with 10% of your paycheck, move it up if you can.
5. Forget you have the account and money coming out of your check.

That’s my 401k presentation.  I’ve been pretty successful with it.  I’ve convinced multiple young people to start their plans this way.  It’s simple, It’s actionable, It gives direction.  Hopefully, keeping it super simple will help some folks get on some solid financial footing.

What say you?  Did I miss anything?  I know I missed a lot, but remember, this is for someone who doesn’t care.