Who is responsible for 401(k) participation?


If someone were to ask the famous Nobel Prize winner Richard Thaler this question, I think his answer would clearly be “managers and executives”. And to be honest, he makes a pretty compelling point.

As a man who has spent his career studying human behavior, Thaler draws the conclusion that humans are predictably irrational and consistently make choices which are not in their best interest. While this seems very simple on the outside, the findings are quite complex. Here’s a great example: only 50% of US workers participate in a workplace retirement plan. While some don’t have access to this type of benefit, many do have access, and simply don’t take advantage of it. Yet, we know that saving for retirement (and taking every advantage) is the optimal route to take.

Most of us would say we make wise decisions for ourselves and our families, but the data does not back up this sentiment. Thaler has also found that people only save money if it’s automatic. Thus, he feels to most important aspects of a 401(k) offering are:

  • Automatic enrollment
  • Automatic escalation
  • Good default low-cost investment options
  • Helping individuals roll their 401(k) into an IRA when they change jobs

Again, this seems like a very easy concept for CEOs and managers to adopt, but that doesn’t seem to be the case. Thaler proclaims, “If the employees at your firm are not saving enough for retirement, realize that it is your fault. And that is because we know how to make saving for retirement much easier and more successful.” But since so many workers aren’t saving, he places the blame on the managers themselves.

But why should you care? Because the financial wellness of your employees will affect the bottom line of your business. A report released by Gallup on the Economics of Well-being tells us that having a low sense of financial stability can lead to “stress, anxiety, insomnia, headaches, and depression”. All of these emotions lead to reduced productivity and output. And worse? Employee retention also tends to spike.

Step one: HR managers and senior executives should make 401(k) participation an “opt-out” decision. This creates a wall to prevent individuals from harming themselves by passing on automatic retirement savings. Second, escalating the amount of these contributions -over time – will allow your employees to increase their savings rate. Most studies have shown that your monthly savings rate is the number one statistic that will decide whether you will be able to retire on time or not.

Third, it is imperative that these retirement plans have low-cost investment options for employees to choose from. Simple index funds really will get the job done. In much of his work, Thaler points to the fact that humans are consistently irrational, so nudging them towards smart investment choices is important.

The key to checking off these boxes is most likely automation. Managers and CEOs have the authority to make these decisions. In theory, the financial stability of your employees (and the ability for them to feel that stability) is largely dependent these types of executives. However, when said managers do indeed take these steps, it’s really a win-win situation for everyone involved. Your employees’ minds aren’t elsewhere, worrying about paying the mortgage or whether they have enough saved to cover a medical emergency. Employees come to work with a clear head. They feel happier and therefore you get more production out of your employees.

If you are a small business owner and feel that you may be spending too much on 401(k) plan costs or that your employees are bringing non-related stress into the workplace, please feel free to reach out to us. We work with multiple small business and their employees in the DC Metro to help bring a sense of peace and stability to personal financial planning issues.


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