In a previous article I talked about why employees don’t participate in their company 401(k) plans. I want to continue that discussion now. People should understand that retirement is basically funded in three ways: 1) Social Security, 2) retirement accounts, and 3) other investment accounts. You need all three legs on your retirement stool. You cannot rely on just one or two sources of money for your retirement; you cannot sit comfortably on a stool with fewer than three legs.
An employee contributes pretax salary money into a 401(k) accounts and, in many cases, the company matches some or all of your contribution. One company has 84% participation because new employees are automatically enrolled into the 401(k) plan at a 3% deduction unless they specifically opt out. What surprised me at this company was that non participants were of all age groups with the largest percentage in the 25-45 age group. I expected that most non participants would be the 18-25 bracket.
From my informal survey, I heard several reasons why an employee does not contribute.
“I can’t pay my bills” if I put money in the 401(k). This is a very good reason if, in fact, it is true. Many families don’t have a budget and most people don’t know where 25-50% of their take home pay goes. Step one is to track expenses and step two is to put together a budget. If you do your homework, and you still don’t have any money left over for retirement, don’t contribute to your 401(k). Most people, however, can reduce spending by 10% and live just as before. Put this 10% in a 401(k).
“I have debts to pay.” This is another popular reason not to participate. And it is a good reason if the individual has stopped using credit cards and has put together a detailed pay-off-my-debt plan. Most people who blame debt payoff as their reason for not contributing are not actually working to pay down their debt. They continue to charge on their cards and have no comprehensive approach to debt reduction.
One individual told me that the interest rate in a 401(k) investment is not high enough. Here is a case where the person possibly doesn’t understand investing because a 401(k) plan doesn’t have a single interest rate. There are a range of investments including stocks, bonds, and cash. Your investments should be diversified depending on your age and your goals.
The best reason I heard not to contribute to a 401(k) is “I don’t understand investing and I do not trust the system.” Frankly, I don’t fully trust our financial system either. That is why I have spent considerable effort to educate myself on how to invest. Looking back, I didn’t understand much about investing when I was in my 20’s and 30’s. This comment encourages me to put together some short courses on Investing 101 to help people understand what they should be doing with their money.