The Frugal Fiduciary Small Business 401(k) Blog
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Most of us know it is smart to save money for those big-ticket items we really want to buy - a new television or car or home. Yet you may not realize that probably the most expensive thing you will ever buy in your lifetime is retirement.
401(k) plan sponsors have a fiduciary responsibility to distribute certain information to plan participants from time to time. The purpose of these disclosures is important - to equip plan participants with the information necessary to make timely and informed decisions about their 401(k) account. However, these important participant disclosures can also be many – and spread throughout the year - which can make their distribution seem like an overwhelming fiduciary responsibility to many 401(k) plan sponsors.
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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.
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.