The Frugal Fiduciary Small Business 401(k) Blog
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When a small business offers a 401k plan, its employees often need some sort of 401k education in order to make the two primary investing decisions applicable to 401k participation – “how much should I save?” and “where should I invest?”
You’ve made the decision to establish a 401(k) plan for your small business, but you’re concerned inertia or procrastination will prevent employees from using it. You know many workers think “I can’t afford to save much so there’s no point of saving at all” or “it’s OK for me to postpone savings because I’m not close to retirement.” So how do you overcome these mental barriers or otherwise incentivize employees to participate in your new 401k plan? Two ways - education and plan design. Employees are more likely to participate today when they understand the cost of delay and when certain plan features are offered.
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The primary reason employees do not participate in 401k plans is their personal budget. They simply do not believe they can put money away without a significant change in lifestyle. No matter what other incentives an employer may offer – e.g., matching contributions, financial advisors – budget concerns trump all other considerations. No matter what, they won’t participate if they don’t think they can afford it.
Plan re-enrollment may not be as life-changing as Fleming’s discovery of penicillin, but it can be every bit as effective in putting your small business retirement plan back on track to success. It’s cheap and simple to implement, and it can improve the quality of participant investing. It can also provide a fiduciary safe harbor from liability for imprudent participant investing. This is as close to a 401k wonder drug as we can get.
I've always disliked the popular interpretation of the Tortoise and the Hare fable. Slow and steady wins the race, my eye! The tortoise did all that he could. The hare took a nap and barely lost. My interpretation – use your talents (and resources) frugally and you will get the best result possible. If the hare had appropriate incentives… Let's take the unlikely leap to 401k participation and investing. There are many reasons an employee might need incentive to enroll in a company 401k plan. For some, there's a lack of financial literacy. For others, it has less to do with understanding finances and more to do with the reality of living paycheck to paycheck. That's why many Employee Fiduciary clients choose automatic enrollment in their 401k plans – we have it in our plan and I encourage it as a best practice for small businesses. You might be wondering why an employer would want to push an employee into forcibly saving for retirement – and why the Frugal Fiduciary supports it. Ayn Rand, Milton Friedman, John Locke and Henry David Thoreau would all likely rise in protest! But over the years, I've observed a few things most small business owners have in common: 1. They want to grow their businesses 2. They want to attract and retain the best talent 3. They want to treat their employees well, because it is the right thing to do