LAST REVIEWED Sep 18 2019 8 MIN READ
By The Human Interest Team
Popular songs include lyrics such as, “If I had a million dollars.” People show up at convenience stores in droves to purchase lottery tickets when the jackpot is high. And hopeful contestants from around the United States line up to audition to appear on the TV show “Who Wants to Be a Millionaire?”. Even with all the focus and talk about how to become a millionaire, not many people realize that with the right retirement investment approach, they have an opportunity to make becoming a millionaire a reality —- especially if they start saving when they’re young. Rather than giving out lottery tickets at your company holiday party, you can help put your employees on the millionaire track by providing retirement investment options and educating them about the steps they can take to maximize their 401(k) savings. Below are three relatively easy do’s and don’ts to help you help your employees get started. The do’s all have a common theme: financial literacy education and awareness for your employees! Whether it takes pamphlets, reminder e-mails, or Q&A sessions, I encourage you to get your employees informed about their options so that that you can truly help them make the most of their savings and investments. We’ve included blog posts for each piece of advice that provide more detail and guidance.
Do maximize the company match
If you provide a company match for your workers, let them know about it! Be sure to explain why they should take full advantage of that money: it increases their overall investment, it’s part of their salary, and it’s tax-deferred income. It may seem surprising that people would walk away from “free money,” but that’s what many employees do when they don’t contribute the full amount their employer will match because they’re not aware of the financial benefits.
Do regularly increase the amount you contribute to your 401(k)
First things first, employees should start investing in the 401(k) plan as soon as possible. Even if they can’t afford much initially, those early investments will make a difference in the long run. With each salary raise an employee receives, they should aim to increase their investment percentage until they reach the maximum contributions allowed.
Do wait for vesting
Work is work, and sometimes it just doesn’t work out. But before employees make the decision to leave, they need to be aware of—and carefully consider—any restrictions related to employer 401(k) match contributions. Depending on your plan, the employee may be required to stay in the job for a specific amount of time to keep all of the employer contributions. Leaving a job before the contributions have vested in the plan means losing that money. Ideally, employees should look for a good fit before they accept a job offer, but if they decide to leave it’s better to stay in a job a few more months (if possible) and leave the company after the vesting period is over.
Don’t rely on DIY investing
DIY investing requires skill and constant attention to make decisions that will help reach long-term goals. Unless employees have a solid understanding when it comes to investments, and actively watch the financial market, they’ll need guidance about how to invest and balance their money for long-term growth. Employees should be informed and knowledgeable about their investments, but even the most experienced investor benefits from the advice and insight of other experts.
Don’t cash out your 401(k) when changing jobs
If an employee hopes to become a millionaire, they should not cash out their 401(k) when leaving a job. Having access to $5,000 or $10,000 in cash is tempting, but it’s not worth it. When someone cashes out their 401(k) balance before retirement age, they lose the advantages of compound interest on those dollars, and they incur costs in the form income tax and a tax penalty for early withdrawal. Instead of cashing out the balance, make a decision that supports long-term financial goals. Make sure your plan education includes information about the choices available when employees leave a job: roll the account over to a new employer’s plan, leave it in the old plan, or move it to an individual retirement account (IRA), etc. Proactively managing their investment when they terminate employment helps employees avoid losing the benefits they’ve worked hard to earn.
Don’t stop at a $1 million
Of course, thanks to inflation, a million dollars won’t be worth the same amount forty years from now when millennials retire. But it’s still a good mental number to have in mind. However, employees should be aware that if they want to live a millionaire lifestyle in retirement, they’ll need to save more than $1 million by the time they’re ready to leave the workforce 40 years from now.
Admittedly, saving money for 40 years is not be the most exciting way to become a millionaire, but it’s a far more likely way to reach that goal than by playing the lottery. When you get your employees on the millionaire track by helping them understand the value that investing in a 401(k) it not only delivers long-term results for them, it inspires them to deliver results for your business now. That’s an investment strategy you can’t afford to ignore.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.