Why Do Employees Turn Down Free Money?!

Why do employees turn down free money? Maybe its time you should start showing plan participants the value of saving for retirement - don't just tell them. - Rea & Associates

Retirement Plan Sponsor Tip: Show, Don’t Tell

Here’s a question. … do you know of any employee who would turn down a three-percent raise with no strings attached? Well, believe it or not, it happens more often than you might think. When your employees choose not to participate in your company’s 401(k) match program, they’re 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? This article will review the various reasons behind your employee’s decision behind turning down “free” money while providing tips to help you maximize your own retirement plan participation.

Listen to episode 212, “The Retirement Crisis: How Your Business & Employees Can Come Out On Top,” on unsuitable on Rea Radio, Rea & Associates’ award-winning accounting and business consulting podcast.

A Better Investment – Dollar for Dollar

An employee who chooses not to participate in your company’s retirement plan might be spending more time dwelling on their present affairs and not enough time considering their future financial wellness. This is natural since the car payment, utility bills, and upcoming shopping trip is top-of-mind. Even so, many of us in the retirement plan community continue to struggle to understand why anyone 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:

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. 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.

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.

One of the best ways to encourage your employees to start investing in their future financial wellness is to show them the benefits of plan participation. Don’t just throw around numbers, demonstrate the impact. This approach will help make the thought of retirement planning reasonable and more tangible. Below are three more ways to educate your employees about the benefits of saving for retirement.

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.

Read Also: 5 Key Pension Industry Trends To Consider

Without a solid communications strategy and a plan to increase your employee’s level of participation, your company may be lagging behind in its efforts to put your employees on the right track to achieve their ideal retirement. Your retirement plan design and administration advisor 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 Angie Isakson, QKA (New Philadelphia CPA firm)

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