In April, LIMRA, a think-tank for the financial industry, completed a survey intended to focus on the savings and investment preferences of those living and working in the United States. After receiving responses from 2,697 Americans, a representative sample of the country, LIMRA was able to determine that 49 percent of the country is not saving for retirement. Additionally, more than half of Americans between the ages of 18 and 34, at 56 percent, are not saving for retirement.

Saving for retirement — and receiving the associated tax benefits through typical investment types like 401(k) plans and IRAs — requires a public trust in the financial industry. On one side, financial planners, investment salespeople and brokers, columnists, and bloggers are encouraging the use of financial products that, through both apparent and hidden fees, enriches the industry, while on the other side, investment firms are the beneficiaries of massive taxpayer bailouts and frequently in the news for using taxpayer money for paying their executives bonuses that defy the laws of gravity.

It may be true that the reason many Americans do not save for retirement is ignorance. There are typical excuses for not saving for retirement, such as the lack of good, seemingly trustworthy information about the options that are available, the lack of knowledge about the benefits of investing in 401(k) plans and IRAs, or the belief that during tight personal economic times, not a cent is available to save for the future. After the recession, however, many people just see the financial industry as unworthy of trust. Organizations like LIMRA, working for the industry and promoting financial products, are unlikely to bring this attitude to the public attention.

The industry is more interested in shaming people unwilling to get on the boats rather than analyzing the leadership capabilities and trustworthiness of the boats’ captains.

I’m saving for retirement with 401(k) plans and IRAs. When possible, I choose plans that have low fees, but the choice is not always up to me. Employees may be able to choose from a selection of investments inside their 401(k) plan, employees can’t choose their company’s 401(k) administrator and broker without a coordinated effort among a large portion of employees. That would be nearly impossible in a large company. Unions are intended to solve some of these issues, but it can often reach the point where being a member of a large union is much like working for a large employer. The power of any individual is limited.

The 401(k) is ingenious for the financial industry, particularly now that it’s automatic. In a perfect world, every single employee is enrolled in a 401(k) plan on their first day on their first job. The investments may not perform well over time, but that’s not particularly relevant for the financial industry. As long as every American is investing a portion of their paycheck every week, two weeks, month, or other period, 401(k) administrators and brokers will continue to thrive. The employee probably benefits when retirement approaches, but that is by no means guaranteed. All you need to do is look at the portion of Americans who planned to retire in recent years but saw their nest eggs trampled on during the recession.

Investors bear the responsibility for changing their risk profile as they near their planned retirement, but there is a mixed message. The financial industry says you need to stay invested in stocks (highly volatile, highly risky) as you approach retirement because most people need their funds to last several decades throughout retirement while at the same time warning people to risk only what they can afford to lose. When people receive conflicting information, making decisions becomes more difficult. And when the conflicting information is coming from the same source — that is, the financial industry — the default reaction is the lack of trust.

Does the financial industry wants to do American citizens a favor by providing options for saving for retirement? No. The financial industry wants its companies to not only stay in business but to profit as much as possible. And to that end, it sells products — investment opportunities — designed to enrich the companies and their shareholders. There’s nothing wrong with this, because consumers will only buy products they need or desire enough. Companies will sell towards that need. And when only half of Americans have discovered retirement savings vehicles like 401(k) plans and IRAs, the industry will resign itself to doing a better job in explaining to the country why their products are needs, not wants.

Saving for retirement is important. For most people, stocks are the only investment type that can grow wealth quickly enough to provide the dream retirement so impressed upon Americans through media. It’s risky, as recent would-be retirees have seen. Thanks to the cognitive dissonance resulting in the understanding that the promotion of retirement is a result of the financial industry trying to increase profits on a large scale rather than corporate concern for the well-being of a nation and the knowledge that Americans must do something drastic to save money in order to fulfill the dream of quitting work, some Americans choose to invest while others would sooner give away their firstborn rather than drink the financial industry’s Kool-Aid.

LIMRA may be right — that most people who do not invest for retirement with 401(k) plans and IRAs have not done so because the industry’s message hasn’t successfully penetrated their consciousness. That may be due in part to a lack of education, but for others, it’s a lack of faith and trust in the industry.

Photo: zoonabar
LIMRA

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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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I used to work for a company in the financial services industry. Another branch of the corporation I worked for is involved with institutional money management. This department manages institutional investments like company retirement plans and pensions. This is a service they provided to other companies of various types, much like Fidelity and Schwab offer 401(k) management and administration to companies. This could be considered an in-house service, so as an employee of the company, my 401(k) plan was managed by this branch of the same company.

You would think that given the company’s standing within the financial industry, the 401(k) plan would include smart investment choices. Unfortunately, most of the funds available are high-priced, actively-managed mutual funds and annuity funds. There is one stock market index fund available, but its expense ratio is significantly higher than those of the low cost index funds found elsewhere. Nevertheless, I wanted to take advantage of the company’s matching contribution — after all, that’s free money — as well as the tax savings, so I relented and participated in the plan.

401(k) plans — and 403(b) plans available to non-profit and educational organizations — suffer from poor investment choices. They are often significantly more expensive than the index funds you can find for IRAs. A fund’s expenses play a significant role in an investor’s ability to grow wealth over time. A low-cost fund could save an investor over a hundred thousand dollars over the course of a career when compared to a similar fund with above-average expenses. Even taking inflation into account, this will be a significant amount of money.

Schwab has announced that they are now offering a selection of new 401(k) investment choices designed to cater to investors who are keen on keeping more of their money in a program called Schwab Index Advantage. It isn’t clear from the announcement whether the available funds will match what’s currently available to retail investors, but if they aren’t the same funds, they should be similar in cost. The Schwab S&P 500 Index Fund has an expense ratio of 0.09%, lower than even Vanguard’s competing retail S&P 500 Index Fund with 0.17%.

The brokerage also offers companies the ability to provide employees with investment advice and planning tools for an unspecified low cost. The GuidedChoice system will help employees make ongoing decisions regarding their retirement investing, and this should help employees save more for retirement. It’s individualized advice, which isn’t common with retirement plans. Most employees are lucky if their retirement plan comes with a web application that helps them determine an asset allocation strategy; individualized advice could, if the advice is good, help investors grow their nest eggs in a way that’s most appropriate for their goals.

Are you satisfied with your 401(k) retirement plan, its choices, and its included advice?

Charles Schwab

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