Have you heard about the 401k 1 percenters? People whose employers match dollar for dollar up to 18000?! It is hard for me to even imagine!
Then there are the top 50 percenters who have a 401k with a with a 3-6% match. This is where I am.
Hubs is neither of these.
He works for a small employer with a 401k plan and a sometimes match.
His company is small enough that it started its 401k plan within the last 5 years. Before that, they helped employees sign up for an IRA. The details of the old plan are unclear. I was only a girlfriend at the time and I didn’t have access to good stuff.
Every year since the plan started, my darling Hubs has a 401k meeting at work. His company requires attendance for all enrolled employees. Representatives from the 401k administrator come in and give a little pep talk about retirement. Sometimes the group pep talk comes with a 1-on-1 chat with the rep.
Last year, Hubs decided to meet with the rep. During the meeting, the rep expressed concern over whether Hubs was living today and not simply saving for tomorrow. At the time, Hubs was contributing 16% of his paycheck to his 401k. 16% should not shock a retirement guy. He’s since increased his contribution.
When I got word that he had his annual 401k meeting this week, the PF nerd in me got way too excited. I wanted numbers! I wanted to ask questions! I wanted to share it all with you fine folks.
Here are some observations based on my tiny retirement case study.
- The company employs roughly 40 people between 2 locations.
- Only 27 people or 67% of the employees are signed up for the 401k.
- The 401k plan operates as an Opt-In program.
- The 401k plan has a discretionary match. Sometimes it’s 0%, this year it’s 1%.
- 1 out of the 27 people enrolled in the 401k plan logged into their account during the last year. That person logged on 46 times. That person was Hubs.
- The average annual contribution for the 27 people was $2500.
- The presentation included a mock portfolio to show how to navigate the website. The mock portfolio had an annual return of 20.21%.
- Most of the people working for the company are over 40 years ago.
Three things stuck out to me.
First, 20% return is an irresponsible return projection. That may happen once or twice after a big down turn, but it is no where near reality in the long term. It is especially misleading after a year like 2015 when returns were essentially flat. Publishing a return of 20% implies that everyone else is investing it wrong. 20% encourages risky behavior. 20% needs to be stopped. *makes note to have Hubs challenge the projection next year*
Second, a 67% participation rate is a bad sign. 1/3 of the employees are turning their back on the plan, intentionally or unintentionally. Opt In programs require action and don’t attract plan participants. To fix the retirement crisis, it would go along way if 401k plans operated as Opt Out programs. My employer auto-enrolls new employees into the 401k plan with a 2% contribution. With an Opt Out program, at least then employees would have to make the conscious choice and take action to avoid the plan.
Finally, a $2500 average contribution isn’t going to get you anywhere, especially with a low or no match. Never mind the fact that Hubs is skewing the average high with his contributions. In addition, many of these employees are older. Most of them are in their 40s, many are in their 50s. These aren’t savers with time on their side. Saving $2500 every year for 10 years with a (realistic) 6% return only leaves $35,000 for retirement! Even saving $2500 for 20 years at 6% doesn’t get you over $100,000. It’s time to hope and pray for the mythical 20% returns. Over 20 years, $2500 at 20% gets you too $720,000 for retirement.
Based on this snapshot of a small employer in the midwest, the U.S. is going to be in a world of hurt in the upcoming years.
The retirement crisis is upon us.