Why Do They Turn Down Free Money?!

Don't Refuse Free Money - Rea & Associates - Ohio CPA Firm
Even employees with the best of intentions end up leaving large amounts of free money on the table – simply by choosing to delay the start of their savings strategy.

Would your employees turn down a 3 percent raise with no strings attached? What if I told you that it happens more often than you think? When your employees choose not to participate in your company’s 401(k) match program, they are essentially leaving free money on the table. It doesn’t make sense, does it? What could possibly compel your employees to walk away from free money? Could it be that they truly don’t understand how much cash they are leaving behind?

Read: Retirement Roulette

A Better Investment – Dollar for Dollar

Employees who choose not to participate in their employer’s retirement plans likely spend more time dwelling on their present affairs rather than their future. Even so, I struggle to understand why they would willingly leave hundreds of thousands of dollars on the table in favor of boosting their take-home pay by just a few extra bucks each pay period.

Consider this example:

Company XYZ offers to match 50 percent on the first 6 percent of compensation that the employee contributes to the company-sponsored 401(k) plan. But Sally, a 30-year-old employee who earns a salary of $40,000, believes that if she were to defer 6 percent of her income to the plan she would no longer be able to afford her current lifestyle.

For many, Sally included, the thought of deferring 6 percent of one’s income can be intimidating. But in reality, 6 percent may not be as much as it seems. In this scenario, 6 percent of Sally’s current salary only comes to about $38 per week. Sure, that extra $38 might come in handy to pay for a few trips to that gourmet coffee shop down the street, but if she were to defer it to her 401(k) instead, by the time she retires at age 65 her retirement account, when coupled with her company’s matching contribution, would have a balance totaling about $734,000.

Keep in mind that this scenario assumes a basic 3 percent salary increase and an average rate of return of 7 percent annually. Individual results may vary depending on your company’s unique plan design.

Even employees with the best of intentions end up leaving large amounts of free money on the table – simply by choosing to delay the start of their savings strategy. If Sally were to finally start deferring 6 percent of her income to the company’s plan 10 years later, when she is 40-years-old, her account balance when she turns 65 could be nearly $400,000 less than if she had started making contributions at age 30.

3 Ways To Help Your Employees Save

  1. Keep Them In The Know – Provide your employees with better, more frequent communication regarding the benefits of participating in your company’s retirement plan program. This includes making sure your employees are aware of how much they are required to contribute to secure the full company match.
  2. Every Little Bit Helps – It’s OK to encourage your employees to start small. Even a 1 percent contribution of their pay is a step in the right direction. At least they are making the wise choice to put money aside for their retirement. Over time, with your encouragement, they may be more willing to increase this amount.
  3. Annual Reviews – Remind your employees about the importance of reviewing their 401(k) accounts (at least) annually to make sure they are aware of any news, updates and changes that may impact their current savings strategy. This annual review will also help them stay on track to securing a comfortable retirement.

Retirement readiness is a hot topic in the 401(k) industry right now, but without a solid communications strategy and a plan to increase your employee’s level of participation, your company may be lagging behind. Your service provider can help identify what’s holding you back and can provide you with solutions aimed at helping you overcome these obstacles. By utilizing proven communications methods, educational messages and measures of accountability, you can take your company’s retirement plan participation rate to the next level.

Email Rea & Associates and request to speak with a retirement plan expert to get started today.

By Steve Renner, QKA (New Philadelphia office)


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