I’m excited to be participating in today’s Roth IRA movement. There’s more information about this movement towards the bottom of this article.

I wish someone told me about Roth IRAs when I got my first real job. I was a teenager, working in a local Radio Shack store, even though I didn’t even know what a soldering gun was. So many years later, it’s hard to know what would have gone through my mind if someone were to start talking to me about investing part of the money I was earning. I had a bank account, but I’m sure most of the money I earned from working was spent on entertainment with friends. I wasn’t thinking about the future, and I’m not convinced that someone pointing me to an article about a Roth IRA would have changed my approach.

But it might have.

It would have been impossible for me, anyway, unless I had been visited by a time-traveler or I had received a book from the future.

Roth IRAs weren’t invented until years later, while I was in college. (This detail isn’t that germane to the point, as traditional IRAs were available and would have in most respects been appropriate for saving for the future.) Anything other than stock trading was missing from my understanding of investing. Considering Roth IRAs existed by the time I graduated college, why didn’t I know about Roth IRAs when I started my first job after that point? Well, they still weren’t widespread by then, and I was earning too little money to even conceive of dedicating some of it to my future.

I would have been wrong, of course, but I only know that now with hindsight. The problem with trying to educate young people about investing for the future is that it’s easy for them to be stuck in the mindset that other pressing needs deserve attention above investing for the future. Until someone’s mind is open to the possibility of financial security in the future with today’s sacrifice, any information about investing for the future, with Roth IRAs or not, just won’t have a strong effect.

Today, though, there are ways to make this transition easier. The benefits of investing for the future no matter how little an amount have been discussed on Consumerism Commentary ad nauseum, but they bear repeating. I’m not really discussing retirement as a goal. Most discussion about investing for the future revolves around retirement, but it’s unclear that the traditional concept of retirement will be relevant thirty, forty, or fifty years from now.

• Investing in a Roth IRA with your first job creates a new habit that lasts your entire life.
• The Roth IRA, with its ease of access, is a perfect gateway to investing for the future.
• When you intentionally invest in a Roth IRA with every paycheck, you can easily see the effect your choices have on your wealth.
• When you create an automated transfer plan from your checking account to your Roth IRA, you take some of the stress out of investing.

Good investing habits start with the Roth IRA because it’s so easy. There’s no concern about tax-related issues, because you invest with “after-tax” money. Minimum balances at brokerages are typically low for Roth IRAs because these companies know that these types of accounts are best used by people new to investing. The one step, opening a Roth IRA, opens a world of financial possibilities, and it’s possible to open an account with as little as $100 per month.

It’s easy to blame ignorance when we see young people in their first jobs, earning money but not saving for the future. Here are some typical anti-youth misunderstandings:

• “If only they had a financial education and understood that the earlier they invest in the stock market, the wealthier they’d be four or five decades in the future, they’d want to invest immediately.”
• “Today’s kids are focused only on the ‘now’ and don’t think about their future needs.”
• “The public educational system is to blame for the lack of solid financial knowledge among today’s youth.”
• “Why can’t parents take some responsibility for instilling good financial habits in their children?”
• “Get off my lawn!”

There is some relevance to at least four of these misunderstandings, but what makes them misunderstandings is that the point is really about cognitive development. By the time most teenagers have their first jobs at fifteen, sixteen, or seventeen years old, their brains are not yet equipped to consider the concepts of investing for the future. Of course, different individuals experience different rates of cognitive development, but attempting to feed someone knowledge before his or her brain is ready to grasp some of the higher concepts necessary for full understanding is a waste of time.

You can hope that some of the ideas stick with a child long enough for the connections to be made later in develop. That’s why some parents teach and model good financial habits with their children starting in kindergarten or earlier, but when it comes to the practical side of investing, adolescents in their first jobs are often not mentally prepared. As teenagers seeing for the first time how they have control over their lives outside of their parents’ house, there’s a tendency to want to make decisions independently, and without the influence of an adult preaching about prudent financial habits.

In their minds, adolescents may have already weighed the benefits of keeping more of their income for use today against the benefits of saving for the future and decided, independently, that their immediate needs are more pressing. They may believe they’ve already made the right decision.

I don’t know if I can propose a solution. Investing in a Roth IRA is a critical step towards financial freedom because of its ease, accessibility, and habit-making features, but if a young individual doesn’t apply this approach during the critical time when he or she first begins earning income, the barrier grows with time and it can be more difficult to start later on. The numbers have always been obvious; a five- or ten-year head start in investing in the stock market almost always pays significant dividends when it comes time to draw upon that nest egg, but these words are meaningless to young people who have other concerns.

Taking a slice of the paychecks from the first job can be done with little encroachment on expenses; directing 5 percent of each paycheck to a Roth IRA would hardly hurt at all. With a minimum investment of $100 each month, any working kid could find a way to make it happen, if not immediately, then after saving up for a few months and starting with a lump-sum rather than a periodic investment.

It’s not going to happen on its own, though, and it’s still unlikely to happen even after reading an article extolling the virtues of investing and saving for the future. It’s going to happen when the synapses in the brain fire in such a way that saving for the future makes sense and when sacrifice, no matter how small, is an acceptable option. In some ways, the latest guidelines that encourage automatic enrollment in 401(k) plans see this problem and have arrived at a solution: you’re busy thinking about other things, so we’ll get you started automatically. There’s always the argument that this policy benefits the financial industry more than the investors, but it does benefit the investors.

How do you propose encouraging young individuals in their first jobs to begin saving for the future with a Roth IRA?

Thanks to Jeff Rose, a Certified Financial Planner, who initiated today’s Roth IRA movement, involving more than 130 partners, all of whom are taking time today to discuss Roth IRAs on their websites, newsletters, or other publications.

Photo: stevendepolo

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From time to time, Consumerism Commentary readers contact me with questions. I am not an investment professional or a financial planner, and I don’t offer advice related to investing other than my general thoughts on the topic. The questions I receive range from basic investing details like government-regulated limits for investment account types to how to deal with a malfunctioning ATM. I can answer some questions publicly, as the answer may benefit others in similar situations.

I recently received a question from a Consumerism Commentary reader. He is having a problem with his pension managed by TIAA-CREF. This is a timely topic, as I’ve just recently written about this company’s new retail banking branch and the TIAA Direct High Yield Savings Account. In this case, the reader believes that his account has somehow been tampered with. He has made repeated attempts to work with the company, but the broker’s customer service department refuses to rectify the balance in the account.

Without having any further details, I can’t be confident about the merits of the issue. Investments lose value often, and have particularly done so in the last few years. While a pension should be invested in a manner that is generally safe from value decreases, it isn’t always. There is risk that the investments in a pension will lose value, at least in the short term. Balances may fluctuate, but if you have a guaranteed pension payout, that should not be affected unless the pension is underfunded.

Savings and checking accounts are protected from losing value by the FDIC, a government agency. Another government agency, the Pension Benefit Guaranty Corporation (PBGC) protects pensions. This agency will take over pensions that go bankrupt in order to maintain promised payouts to pensioners.

Disputes about investment balances are handled elsewhere, however. If you believe a broker has not managed your account correctly and that you’ve lost money as a result of anything other than investment performance, then you can raise the issue with the Financial Industry Regulatory Authority (FINRA) and ask for arbitration. The process will take some time to resolve. On average, the process has been taking 14 months in the most recent data offered by FINRA.

Here’s how you can get started once you’ve exhausted all avenues for resolving the dispute directly with the broker. I should point out that you may want to avoid this process until you’ve done everything in your power to resolve the issue directly with the broker, including contacting the company’s executives.

• Get a lawyer. An attorney familiar with investment banking will help you navigate this process. You can choose to handle the process yourself, but your opponent, the broker, will certainly have a lawyer. You don’t want to be at a bigger disadvantage than you already are for being one person battling a large corporation.
• File a claim with FINRA. To prevent frivolous claims, FINRA requires anyone filing a claim to pay fees. The filing fee is based on the amount of damages you’re claiming. FINRA offers a fee calculator to illustrate what you might pay; I ran the calculator for a hypothetical claim requesting $200,000 in damages, and the resulting fee was $1,425.
• Select an arbitrator and schedule a conference. FINRA will provide a list of arbitrators, and you and the broker must agree on the company that will be helping resolve the issue.
• Present your evidence. You and the broker will go through a discovery process to exchange evidence that you were or weren’t damaged through the broker’s action or inaction. This will involve exchanging documents in support of your claim and presenting your argument in person with the arbitrator.
• Wait for the arbitrator’s decision. Once the arbitration company considers the evidence, it will issue a decision and award any damages if necessary.

In 2012 through February, 79 percent of all complaints were settled any time after the initiation of the claim, so there’s a good chance that with the help of the arbitrator, you and the broker could come to a mutual agreement without going through the full arbitration process. In the same time frame, for claims that were not settled or otherwise closed before the arbitrator’s decision, the claimant was awarded damages in only 50 percent of the cases.

By investing with a broker associated with FINRA, you’ve agreed to abide by this arbitration procedure to resolve disputes when you’re unable to achieve your desired results by dealing with the broker directly. You can get started by filing a FINRA claim at the organization’s website or viewing the information FINRA has made available to the public.

Have you ever filed a FINRA claim for damages against a broker? I expect most Consumerism Commentary readers have not, but if anyone has experience with this type of process and can share some of the details, I’m sure readers would be interested in hearing about the process.

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