Why should you participate in 401(k)s?

What motivates people to participate in their 401(k)s at work?

That’s a question that needs to be answered by companies that offer retirement plans to their employees. It’s also a question for people like me who are proponents of financial literacy education. My goal is to communicate with people of all financial means about how to assure financial security in retirement. That’s why I write columns, books and blogs, and give presentations on the subject, while doing my day job, which is managing retirement portfolios for the high net worth.

As a result, I’m always looking for data on what motivates saving and investing and what doesn’t.

Research firm Cerulli Associates surveyed 401(k) participants recently, leading to some answers.

Most people (51 percent) said they participated in their 401(k)s because of the employer matching contribution. According to Cerulli, most large plans ($250 million to $1 billion in plan assets) and mega plans (greater than $1 billion in plan assets) match. Fewer smaller plans (less than $25 million in plan assets) have matches, as might be expected. A match is a payment the company makes to the employee’s 401(k) account. The employee may need to continue working for a period of time until the match “vests,” or it may be available for the employee to take with him immediately if he terminates employment (immediate vesting).

Another 42.7 percent of those surveyed said: “I could afford to start saving for retirement.”

This result made me wonder whether nonparticipants felt they could not afford to participate. I asked Cerulli if that question could be addressed. Indeed, another Cerulli study found that 51.8 percent of those who delayed participating until after age 30 cited not having enough money as the reason.

My personal experience tells me that people don’t necessarily know that they can afford to participate in their 401(k)s. If they think they can’t, I’d like to review their W-4 withholding, whether they get tax refunds, and whether the 401(k) plan offers a match.

Throw those elements together, and you can teach people five key lessons:

1) How they can participate in their 401(k) without lowering their paychecks significantly;

2) How the match enables them to — in my words — “purchase retirement savings dollars at a discount”;

3) How they can lower their taxes when they contribute to the 401(k);

4) How time leverages the math behind compounding;

5) How they can do all of this for themselves.

Unless you go through this exercise, you can’t convince me that you cannot afford to participate in your company’s 401(k).

Returning to the research, 27.7 percent of the participants were motivated to participate by “tax benefits”; 26.6 percent said that “(a) family member told me I needed to start saving for retirement”; 24.4 percent were automatically enrolled; 18.6 percent said “My employer suggested that employees start saving for retirement”; 11.4 percent reported that “A financial professional suggested that I start saving for retirement (e.g., adviser or accountant).”

Focusing for a moment on younger employees, Cerulli makes a good point about advice: “Given that younger investors are further down the investable asset spectrum than their older, wealthier counterparts, they are unlikely to appear on the radar of traditional financial advisors (e.g., wirehouse or bank advisers) who often set asset minimums.”

That means that advice needs to come from the sponsor or educator. Young employees are the most likely to benefit from a career-long commitment to maximizing their 401(k)s.

Let me state the obvious: We want to know what motivates people to participate in 401(k)s because we want more people to participate in their 401(k)s. The vehicle is simply the best mechanism to save and invest for retirement.

A special request: If you are a sponsor of a 401(k) whose participants (especially younger employees) love their plans, I’d like to hear about it. Email me at readers@juliejason.com.

The data sourced to Cerulli was reported in The Cerulli Edge — U.S. Retirement Edition, 2Q 2018 Issue.

If you are in the Stamford area on Dec. 15, join me at Barnes & Noble in the Stamford Town Center (100 Greyrock Place, Stamford, CT 06901). I’ll be there at 1 p.m. to sign books for holiday giftgiving. I hope to see you there.