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5 Awkward 401k Questions Every Good Fiduciary Must Know the Answer To

5 Awkward 401k Questions Every Good Fiduciary Must Know the Answer To
November 28
00:36 2017

Retirement advisers, so immersed in the truisms of their profession, can sometimes be taken aback by the nature of some of the questions plan sponsors and participants ask them. These questions can be downright cringe-worthy. That being said, they also show how there really is no such thing as a silly question. Astute fiduciaries, recognizing perhaps many silent members of the audience share these very same questions, respond in two noteworthy ways. First, they never belittle the question or the person asking the question. These are sincere queries that represent commonly held beliefs. These beliefs live a Schrodinger Cat-like existence, being generally not quite true and not quite false. It’s critical, for the benefit of all retirement savers, that these questions be asked and that fiduciaries encourage their asking. This is the only way that allows the fiduciary to respond in the second noteworthy way: By using these questions to refute misconceptions and promote good retirement saving decision-making.

Here are three commonly asked questions that may initially merit a “pooh-pooh,” but upon further review actually open the door for teachable lessons.

Awkward Question #1: “Should I invest into the 401k, and will I save on taxes?”
This is perhaps the most often asked question among plan participants, and financial professionals have to fight hard from rolling their eyes whenever they hear it. Still, it’s an honest question and deeper consideration of it reveals a subtle – and surprising – answer.

“The adviser often times stumbles over this question as well and inadvertently answers, ‘of course you should,’ without thinking or analyzing the situation,” says Dan Thompson, owner and founder of “Wise Money Tools” and “Becoming Your Own Bank” in Boise, Idaho Area. “Sadly, the majority of advisers don’t take into account the current tax situation of the employee. They fail to recognize that there is only one way to win in a retirement plan such as a 401k and IRA. (A ROTH is a different animal.) The only way to win is to contribute to the plan at a higher tax bracket than when you withdraw from the plan during retirement. That’s it. There is no other way to win.”

Over the years, Thompson has spoken with dozens of CPAs about this topic. “It’s becoming more evident that with any measure of financial success, employees and employers alike are not retiring in lower tax-brackets,” he says. “The question that everyone needs to ask and understand, is ‘will I be in a lower tax bracket in 15, 20, or 30 years from now?’ Chances are if this is your first job out of college, you are likely in the lowest tax-bracket you’ll ever be in, and it might be more advantageous to pay the tax now, and put the money in other tax-sheltered vehicles. For others, once kids leave the nest, their home is paid for, they have little deductions and now all their income is coming from pensions and retirement plans, which are taxable, they could easily be pushed into as high if not higher tax-brackets. This will also cause their social security to be taxed as well. Thinking through this question is a critical part of employee education.”

Awkward Question #2: “How much guaranteed interest do 401k plans earn?”
This question betrays a communal misunderstanding – and a very serious problem – about the way far too many investors portray their investments. They can’t seem to distinguish between investment gains and interest income. Although it has an almost charming naivete, if unchecked this misunderstanding can prove dangerous to everyone – the retirement saver, the plan sponsor, and the financial professional. “I know this seems harmless,” says Caleb Bagwell, Director of Financial Wellness/Employee Education Specialist at Grinkmeyer Leonard Financial in Birmingham, Alabama, “but hearing this question shows me employees have a drastic misconception of how the 401k works. This thought process is not super uncommon but is scary because of the backlash that could occur on the plan sponsor. If your employees believe the 401k is free or that it provided guaranteed returns you have issue.”

It’s critical the adviser use this question as a springboard to thwart the false belief that the 401k plan itself generates interest like a bank CD would. Employing everyday metaphors can help. “I explained that the 401k is like a cookie jar,” says Bagwell. “We put money in our 401k cookie jar but that is just a holding place for our money. The ‘cookies’ we choose are what determine our return. You can have simple sugar cookies if want like money market or stable value funds or you can have Brazilian macadamia nut cookies like international or specialty funds. They all carry different amounts of risk and very few are willing to say ‘Guaranteed’ returns.”

Did employees get Bagwell’s metaphor? “Yes,” he says, “I wanted to make sure they understood the risk involved in their investments and also how their ‘target date’ series worked as that particular plan had chosen to have the target date series serve as the plan’s QDIA. I made sure the group understood that the 401k does not provide returns at all, the underlying investments do.”

Awkward Question #3: “Once I make the contribution how quickly can I take the money out?”
We live in a society where instant gratification isn’t merely a treat, it’s an expectation. The inertia of this kind of short-term thinking runs counter to everything we’ve ever learned (or tried to teach) about saving for retirement. Cracking this nut quickly becomes “job one” for anyone speaking to employees about saving in their 401k plan. “The issue with employee education is that not enough employees understand the power of tax deferral or compound return,” says Adam Bergman, President of The IRA Financial Group in New York City.

It’s been said that as soon as financial educators start writing numbers on the board, they lose the room. This question, however, provides on case where the use of numbers can easily – and impressively – get the point across. In his cause, Bergman responded and explained how the secret to retiring with wealth is that one must make contributions consistently. “The actual investments that funds are invested in are not as important as the ability to make 401k contributions on an annual basis,” he says. He then backs this up with real numbers. “For example,” he says, “if an employee who makes $40,000 starts making a 3% contribution at age 28, continues this through age 70, and just earns a 7½% return, the individual would have $333,000 at age 70. This is even without any employer match. That usually gets their attention quite quickly!”

The trick to using numbers is to keep them familiar, and that means keep them small. People are much more familiar with dollar bills than with bills containing more than one zero. If they can understand the impact of a small amount of money, they’ll make the right decision that will eventually lead them to numbers with more than one zero. “I think showing real numbers via employee deferral calculators always helps to make the point that even saving just a few dollars a day can make a big difference when you retire due to the power of tax-deferred compounding,” says Bergman.

Awkward Question #4: “Do I have to notify my employees of the plan?”
Sometimes it’s the plan sponsor that can ask an awkward question. This can be quite disconcerting because plan sponsors have a fiduciary duty. The wrong questions might such a breach in that duty. Bergman was once asked this very question. This is what he offered: A very stern response of “Yes, every eligible employee based on your plan documents must be notified of the plan and offered plan benefits.” Bergman says, “I think the individual got the point.”

This question in particular has severe fiduciary implications. “Certainly, hiding the plan from employees is a violation of the individual plan trustee/administrator’s fiduciary duty and can cause various forms of legal problems and issues with the DOL and the IRS,” says Bergman. Still, it’s much safer for the plan sponsor to ask the adviser this question than wait until the DOL comes calling. That’s why it’s important financial professionals always practice “there’s no such thing as a stupid question” and make that mantra believable to everyone – plan sponsors and plan participants alike.

Awkward Question #5: “Can I force employees to meet one-on-one with financial advisers?”
Studies show employees who obtain financial advice tend to be more likely to achieve their retirement goals. With this in mind, caring plan sponsors will find a way to put their employees in a situation to benefit from personalized financial advice. But, is there a point where they can go too far? Bagwell tells of a time when “the plan sponsor once made each employee not participating in the plan have a mandatory one-on-one meeting with me while the remaining employees were given the option to meet or not to meet. It got awkward after the group presentation when I was asked why some people were being forced to meet with me.”

Faced with this situation, the adviser needs help from the plan sponsor. “Luckily,” says Bagwell, “the plan sponsor stepped in and explained they wanted to make sure that those not using the plan understood fully what they were giving up by not taking advantage of the safe harbor match.”

While there appeared to be no fiduciary breach, the awkwardness of forced one-on-one meetings made everyone uncomfortable and that discomfort needed to be addressed. “I believe the intentions were good, although it certainly seemed as if the employees felt there being forced to meet with me and that I had financial incentive to ‘convince’ them to participate,” recalls Bagwell. “Privacy may have been violated, although not intentionally. I requested going forward that we provide everyone with education and make one-on-one available upon request with singling out any group.”

Even voluntary one-on-one meetings can be awkward. “I went on a road show with one of our plans that is in the construction business,” says Bagwell. “They had requested the employees at each job site meet with me one-on-one as opposed to a group session. When we got to the fist job site all the employees were lined up outside the work trailer and looked very disturbed. When the first employee came in I had to explain to him that was not there to complete a drug test but to talk about the 401k. He ran outside and yelled, “It’s not a drug test!” which was met with much applause.”

Awkward Question (Bonus Number): “Where is my 401k?”
It’s not unusual, especially or millennials, for employees to hop from one employer to another. Sometimes they move so fast and so frequently, they lose track of their orphan 401k accounts. Bergman says, “I have heard from many employees who don’t remember where their 401k money is due to corporate mergers and acquisitions. They actually have no idea where to even start looking. The sad part is some people even forget who their old employer was and when they worked there.”

The good news is, as long as their former employers remain good fiduciaries, their money is safe. The better news is, unlike many job hoppers, they didn’t withdraw their retirement savings. 

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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