The financial press continues to harp on the fact that millennials are failing to prepare effectively for retirement. Sixty-six percent of those between 21 and 32 have no retirement savings whatsoever. If offered a 401(k) opportunity at work, however, about 94 percent of them are saving something — but not as much as they should be.
The fault lies with today’s lack of effective salesmanship on the part of the financial organizations that dominate the 401(k) space. Typical enrollment meetings put groups of employees to sleep. The current focus is on explaining the website, which assumes that everyone will be inclined to leave YouTube, a Netflix movie or any number of more enjoyable distractions to absorb some “dumbed down” investment advice.
Sell the sizzle; not the steak. Step One of any effective sales effort is creating a need. In the life insurance industry, it was called “backing up the hearse,” which described what life for the breadwinner’s family would be like if he or she died. Retirement plan promotional meetings fail to instill a sense of immediacy and satisfaction to be gained from having money piling up in a retirement plan. Presentations that drone on about the need to have money 40 years from now at retirement just fall on deaf ears — I’m all like, “Later, Dude.”
So where to start? First, get people mad by using tax tables to teach them how much they are paying in taxes on the last few dollars of income — their so-called “marginal tax bracket.” That’s what they save with a contribution — not the percentage of total taxes they have had withheld. Most millennials have no concept of how they’re taxed. The comment, “I don’t pay any taxes, I get $500 back in April…” is a common sentiment. People need to experience a loss of what could have been “free government money” if they had only contributed more. Most Californians, especially singles, see their last dollar taxed at about 30 percent. That’s the dollar that goes into the plan at a take-home pay cost of just 70 cents. The government tax-savings “subsidy” of 30 percent amounts to about a 50 percent return.
The next missing ingredient includes lessons about how people make money in the stock market. Novice investors need to hear an expert say something like, “As goofy as it may sound, we all want to pray that the stock market crashes periodically.” Why? It’s so that our inbound, dollar-cost-averaged contributions will automatically buy shares at cheap prices during downdrafts. Another example of counterintuitive but confidence-building thinking is the history of market resilience. For example, the market in the 12 months following any major crash has averaged a 39 percent gain from the point at which the market hit bottom — and this has been the average for the eight major crashes since 1970.
And finally, market history suggests 10 percent average annual returns over long periods, and money earning 10 percent compounded doubles every 7.2 years. Today’s $1,000, with no additional contributions, will compound to $64,000 by the time an early millennial reaches retirement at 65. Check it out. Double the $1,000 every 7.2 years.
Most institutions selling retirement plans discourage loans, but a liberal loan provision removes a psychological impediment to contributing to the plan in the first place. Plus, paying the interest back to yourself amounts to a guaranteed return of 5 percent on this particular plan “investment choice.”
Typical employee meetings fail to paint a picture of how exhilarating a possible $50,000 balance will feel in just five or six years with, say, $500 per month earning an average of 10 percent — especially when that $500 costs as little as $350 in take-home pay. This resulting reserve can be a life-saving cushion for someone between jobs. Or, it can mean a “tipping point” illustrating how money begins to have a life of its own.
In short, today’s employee education lacks emotional “sizzle” in the typical retirement savings pitch. To combat this, the industry needs to offer financial education that taps into self-interest on some emotional level — be it greed, fear, financial security, the thrill of having a growing account balance, fear of having nothing between jobs … whatever. Threatening an insufficient retirement 40 years from now doesn’t cut it.
With millennials who may be buying $4 coffee and $6 deli sandwiches every day, we’re up against immediate gratification — and even immediate gratification, in the minds of some, “just takes TOO LONG.” The industry needs to shift gears, tap into an emotional core and stop talking about something 40 years away.