Coworkers don't "get" 401(k)
Oct. 10th, 2021 12:18 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
canyonwalkerA few days ago I mentioned my company is starting a 401(k) match. My immediate colleagues and I chatted about this at a team meeting on Thursday. Our boss was letting us know about it in case we didn't see the announcement.
"Didn't see the announcement?" I thought silently. Who could miss it?
The answer, apparently, is most people. Most of my colleagues had noob questions about what it was and how it worked. Understand, BTW, this team is not fresh-out-of-school hires. Our average professional tenure is over 15 years.
One colleague, "Ray", seemed more clued in than the rest. I proposed side-channel that he and I meet 1:1 to discuss our plans for how to maximize the value of the company's match. We talked for 45 minutes on Friday. The results were... way less than I expected.
There's a bit of Dunning-Kruger going on here. I knew pretty much nothing about investing when I started my career. Over the past many years I've constantly improved my understanding. That leads me to presume that others in similar professional circumstances— people well educated and well paid— have developed their knowledge, too. Moreover, as part of my continuous learning in this area I am always curious to learn from others. Looking to others for opportunities to grow smarter also creates a predisposition to think that my peers know a fair bit about finances. Despite all my persistent humility, whenever I actually talk to peers about finances, investing, etc., I'm reminded that I'm actually way smarter than average.
Let me explain how this played out with my colleague, Ray. While he seemed like the most clueful person (other than me) in the team meeting, when we got together 1:1 where we were comfortable discussing things in greater detail, I quickly learned that despite working in high-level engineering jobs for longer than me he's still make noob mistakes when it comes to finances. He basically doesn't even participate in the 401(k) plan!
"I looked at the interest rate years ago. It was only 6%. I figured that's not worth it. I think I've only got $19,000 in there."
You know how sometimes a person says, like, 5 wrong things in the time between taking breaths, and the conversation goes completely off the rails from what you've expected because now you're got to spend the next 20 minutes unpacking all the wrong things they said in just 6 seconds? Yeah, this was one of those conversations.
"Only a 6% growth rate?" I asked, correcting the incorrect term interest. "You must've been looking only at one of the more conservative fund choices."
"There's choices?" Ray asked.
It good we weren't on camera because I was like 😳. "Yeah, there are, like, 20," I answered. "From the 6% rate you mentioned I'd guess you're in a target-date fund... with a target date that's not too far in the future."
Ray logged in to his account and, sure enough, the fund he's got a pittance of money in is a 2025 target date retirement fund.
"What are the other funds?" he asked. "Which one are you in?"
I repeated that there are, like, 20, and thus I can't name them all. But as long as he was logged in to the system he could click a link to see them himself— along with tables of their historical returns. "I've used those tables to pick 3 funds I expect to generate the best returns," I explained.
Then there's the issue of Ray having only $19,000 in his 401(k). He's been with the company more than 4 years, so he's obviously contributed way less than the maximum. For comparison, I've been at the company almost as long as him and I have over $100k.
I'm mindful of the fact that not everybody's finances are as good as mine so before passing final judgment on his low balance I asked him gently about his overall situation. He confirmed he's well off: he's 63, has other investments including a rental house that's cash-flow positive, his debts are mainly home mortgages that are almost paid off, and aside from vacations with his kids and grandkids he doesn't have expensive habits. As for his lack of investing in the 401(k) he repeated that the growth rate didn't look good to him on his (laughably brief) examination so he decided to stop contributing.
I feel a bit sorry for Ray. He's squandered opportunity with his hasty and near-clueless decision about the company 401(k) years ago. I don't think he gets overall how 401(k)s work... despite having decades to figure it out. I decided not to walk him through the tax-deferred benefits. I'm not sure it would stick. "You can lead a horse to water but you can't make him drink." At least he's aware enough to realize that the new company match is like free money, and he's not leaving it on the table. He's going to contribute $4k a year to capture the matching funds. Too bad people like him don't understand they could do so much better.
"Didn't see the announcement?" I thought silently. Who could miss it?
The answer, apparently, is most people. Most of my colleagues had noob questions about what it was and how it worked. Understand, BTW, this team is not fresh-out-of-school hires. Our average professional tenure is over 15 years.
One colleague, "Ray", seemed more clued in than the rest. I proposed side-channel that he and I meet 1:1 to discuss our plans for how to maximize the value of the company's match. We talked for 45 minutes on Friday. The results were... way less than I expected.
There's a bit of Dunning-Kruger going on here. I knew pretty much nothing about investing when I started my career. Over the past many years I've constantly improved my understanding. That leads me to presume that others in similar professional circumstances— people well educated and well paid— have developed their knowledge, too. Moreover, as part of my continuous learning in this area I am always curious to learn from others. Looking to others for opportunities to grow smarter also creates a predisposition to think that my peers know a fair bit about finances. Despite all my persistent humility, whenever I actually talk to peers about finances, investing, etc., I'm reminded that I'm actually way smarter than average.
Let me explain how this played out with my colleague, Ray. While he seemed like the most clueful person (other than me) in the team meeting, when we got together 1:1 where we were comfortable discussing things in greater detail, I quickly learned that despite working in high-level engineering jobs for longer than me he's still make noob mistakes when it comes to finances. He basically doesn't even participate in the 401(k) plan!
"I looked at the interest rate years ago. It was only 6%. I figured that's not worth it. I think I've only got $19,000 in there."
You know how sometimes a person says, like, 5 wrong things in the time between taking breaths, and the conversation goes completely off the rails from what you've expected because now you're got to spend the next 20 minutes unpacking all the wrong things they said in just 6 seconds? Yeah, this was one of those conversations.
"Only a 6% growth rate?" I asked, correcting the incorrect term interest. "You must've been looking only at one of the more conservative fund choices."
"There's choices?" Ray asked.
It good we weren't on camera because I was like 😳. "Yeah, there are, like, 20," I answered. "From the 6% rate you mentioned I'd guess you're in a target-date fund... with a target date that's not too far in the future."
Ray logged in to his account and, sure enough, the fund he's got a pittance of money in is a 2025 target date retirement fund.
"What are the other funds?" he asked. "Which one are you in?"
I repeated that there are, like, 20, and thus I can't name them all. But as long as he was logged in to the system he could click a link to see them himself— along with tables of their historical returns. "I've used those tables to pick 3 funds I expect to generate the best returns," I explained.
Then there's the issue of Ray having only $19,000 in his 401(k). He's been with the company more than 4 years, so he's obviously contributed way less than the maximum. For comparison, I've been at the company almost as long as him and I have over $100k.
I'm mindful of the fact that not everybody's finances are as good as mine so before passing final judgment on his low balance I asked him gently about his overall situation. He confirmed he's well off: he's 63, has other investments including a rental house that's cash-flow positive, his debts are mainly home mortgages that are almost paid off, and aside from vacations with his kids and grandkids he doesn't have expensive habits. As for his lack of investing in the 401(k) he repeated that the growth rate didn't look good to him on his (laughably brief) examination so he decided to stop contributing.
I feel a bit sorry for Ray. He's squandered opportunity with his hasty and near-clueless decision about the company 401(k) years ago. I don't think he gets overall how 401(k)s work... despite having decades to figure it out. I decided not to walk him through the tax-deferred benefits. I'm not sure it would stick. "You can lead a horse to water but you can't make him drink." At least he's aware enough to realize that the new company match is like free money, and he's not leaving it on the table. He's going to contribute $4k a year to capture the matching funds. Too bad people like him don't understand they could do so much better.
no subject
Date: 2021-10-10 11:05 pm (UTC)no subject
Date: 2021-10-11 09:13 pm (UTC)no subject
Date: 2021-10-11 10:44 pm (UTC)My first lesson in 401(k)s came from my first full-time professional employer. They were a major company so they could afford to create good resources for newer employees figuring this stuff out. In addition to written reference docs— which are not useful for new learners, BTW— they had a nicely produced short training video plus a simulator tool you could use to explore the impact of making different investment choices. Nowadays you can find plenty of both on YouTube and the web regardless of where you work.