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Personal Finance | The Power of Auto: Robert DeVries

The Power of Automating Your Retirement (Auto5) is the title of Part Two of my recent book The Brighter Future 401(k), where I describe in detail the five features your 401(k) should have to help improve the retirement lives of your employees.
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Automating Your Retirement

IMPROVING EMPLOYEES 401(K) FUTURE

Robert-DeVries
Robert DeVries is a WealthCoach™ and Retirement Plan Specialist at FirstWave Financial. He recently earned is CRPS(R) designation and is now a Chartered Retirement Plan Specialist.

The Power of Automating Your Retirement (Auto5) is the title of Part Two of my recent book The Brighter Future 401(k), where I describe in detail the five features your 401(k) should have to help improve the retirement lives of your employees.

THESE FIVE FEATURES ARE:

1 Automatic Enrollment
2 Automatic Qualified Default Investment Alternative
3 Automatic Escalation
4 Automatic Re-Enrollment
5 The Stretch Match

HERE’S THE PROBLEM

The 401(k) has become America’s largest casino. There are over 86 million 401(k) participants as I write this. Many plans have 30 or more investment options. While many employers may feel choice is a good thing, in the end, they’re just confusing to 85{bfd614f294d07c51b84c8dad33a56885001f0ed7300088ac66752d3246377d5a} of your employees. Left to their own devices, they either choose not to invest because they’re confused, or worse, they make the wrong investment decisions based on flaws in how they think about investing.

The first flaw is that employees typically are chasing performance

When they get their 401(k) statements, assuming they even look at them, they fixate on fund performance, which is based on past performance. They use that information as the sole basis for their investment decisions. Invariably, they pick the funds that have had the highest returns. Too often, the trend that was creating the performance changes and the participant ends up buying high. Many people say that when they buy into the stock market it goes down. It is likely that they only participate when they hear their neighbors or colleagues talking about their great returns and then they jump in, only for the trend to turn shortly thereafter.


“If employers do not take action to assist their employees in saving more money or investing appropriately, their employees will likely be more upset when they discover one day that they haven’t saved enough for retirement.


A second flaw is emotionally charged investing

Emotions can be good or bad depending on the person and the situation, with one exception: where money is concerned. It’s a widely held principle that emotions provide no benefit when it comes to investing.

FLEEING THE FLAWS

The five automatic features listed are ways of automating investment decisions to avoid making costly errors and to override your employees’ emotions. While these features were introduced in 2006, many employers, especially those with fewer than 100 employees, still have not felt comfortable using one or more of them.

Some employers do not want to upset their employees, and some of them feel they are being too paternalistic when enacting these features. They think that automatically deducting money from an employee’s paycheck will upset that employee.

What will likely be more upsetting to your employees is not using these automated features. If employers do not take action to assist their employees in saving more money or investing appropriately, their employees will likely be more upset when they discover one day that they haven’t saved enough for retirement. The worst time for employees to figure that out is when it’s too late, when they’re already close to retirement. It is imperative that employers make it easy for employees to save and make wiser investment decisions.

Employers should evaluate all five automatic features and then decide which ones they are comfortable implementing to help their employees create retirement success. We added a Resource section to the end of our book “The Brighter Future 401(k)” where you can look up a variety of studies and white papers from various sources that describe the positive benefits of Auto5 features.

 

The_Brighter_Future_BookFREE DOWNLOAD

You can download a free digital copy of our book at Firstwavefinancial.com/the-brighter-future-401k. It contains important information about each of the Auto5 features and more. Please feel welcome to contact me personally and schedule your complimentary consultation to explore steps you can take to improve participation in and results of your 401(k).

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