The recession has many people leery about investing in a down market, but doing so via your 401(k) plan will pay off once the economy starts to turn.
“There’s a concern that people tend to shy away from contributing during down periods,” says Robert K. Thompson, first vice president and institutional trust services manager at MB Financial Bank. “When the markets are doing well, that’s when people tend to contribute because it’s positive and there’s more optimism. But the best time to buy is when the investment price is at its lowest. The beauty of a 401(k) is that you don’t have to make the decision of when to buy — it just happens on a regular basis through payroll deductions.”
Smart Business spoke with Thompson about how to maximize your 401(k) in this economy and how to become more active in your plan.
How can employers keep their employees involved in their 401(k) plans in this economy?
It’s not possible to overcommunicate the value of 401(k) plans or overeducate your participants.
You’re trying to retain the best employees, and having a 401(k) is a huge benefit because it continues to be the strongest retirement savings tool.
It’s important to continue to tell your employees why the 401(k) is valuable and why they need to contribute to it. Here’s why: When individuals purchase into these mutual funds through their 401(k), they keep contributing the same dollar amount, even as the market prices go down.
Take someone who contributes $100 per paycheck: If the prices are lower, that’s buying significantly more units or shares in each of those mutual funds. But as the prices go up over time, they end up with a higher price on more underlying shares and units. The growth is going to be significant.
What information should employers provide to employees about their plan?
Most plans provide educational materials to participants, from the very basic to the complex.
There’s never the assumption that everyone’s an investment expert, so the materials help educate participants from square one about their investments.
If you have a group of participants who have only put money into checking or savings accounts or certificates of deposit, this may be the only other place where they’re managing their money. As the plan sponsor, you have to assume that they’re not experts about investments, so you have to provide information that is understandable for them. A 401(k) provider can provide that education.
What can an employer do to convince employees of the value of participating?
Employees have to work through their own financial budget and know what they can afford to put away from paycheck to paycheck. The time value of money is the driver. You can put away relatively smaller dollar amounts the younger you are that will then accumulate to a substantial amount later on in life.
For example, if you started putting away a small amount of money when you were 25 years old, by the time you turn 65, you’ll be further ahead than someone who started saving when he or she was 35 years old. You’re going to have to put away more money as you get older to make up that difference. So start early.
That’s one of the reasons some of the rules have been changing as far as the amount of money that can be contributed to retirement plans.
For years, IRAs were limited to $2,000 per year. But if you do the math, it would have been extremely difficult, even at the highest rates that you could earn, for someone to be ready for retirement only saving at that amount.
Now, retirement plan contributions are indexed, so every year, you see a slight increase in allowable contributions. There are also catch-up provisions once you hit 50 years of age to help you reach your goal. When you run out of time, you can’t put in enough money to make up for the years that you didn’t invest.
Employees need to take responsibility and accountability for their own future. It’s like when you’re job hunting; you don’t expect somebody else to do that for you. Employees need to educate themselves and understand the value of these programs provided by their employer.
Benefits such as match provisions and profit sharing offer exceptional value to employees that you’re not going to find in any other type of retirement plan. There’s also the tax savings from 401(k) plans; for every dollar you put in, you enjoy a substantial tax benefit through reducing your overall taxable income.
robert k. Thompson is first vice president and institutional trust services manager at MB Financial Bank. Reach him at (847) 653-2390 or firstname.lastname@example.org