Educating employees on investing is like teaching pigs to fly;

They will never fly, and get sick of being thrown off the roof.

Now before you think this is rude and elitist let me explain. A one on one session explaining principles of asset allocation, market dynamics, efficient frontiers and time horizons leave most casual investors confused and bored.  Try doing that in front of a group of distracted employees, with no experience in mutual funds.  Add language barriers and distrust of banking services and you have an understanding of how flawed this process can be – by no fault of the employer or employee.

The Dept of Labor (DOL) has struggled with this.  Even the 401(k) provider powerhouses have not been able to properly convey these principles, no matter how many color-coded brochures they print and deliver.

As a result the DOL made changes to ERISA rules guiding how a plan should be run.

Auto enrollment has become an option.  Even with the best employee education and enrollment meetings, many well-intentioned employees never get through the paperwork to sign up.  “I’ll tackle that next week,” becomes a constant (and expensive) refrain.   Then once they sign up many stop with choosing a money market for ‘safety’ or lack of time to decipher the prospectus outlining each fund available in the plan.

Sure, a money market is safe, but an investment that doesn’t keep pace with inflation over a thirty of forty-year time frame is not an appropriate investment.  Investors want safety but there is a floor on how low return rates can be.

Auto enrollment with Qualified Default Fund, think of a ‘balanced fund’, has become an option.

You put in a plan for your employees, hold the enrollment meetings, hope they all enroll and choose appropriate investments.

Or:

You put in a plan, hold the meeting, and announce everyone is enrolled for 3% of salary, will be matched dollar for dollar on that 3% and the money is going into a balanced fund; part stocks part bonds.  Anyone who wants to change investment options, change amount deposited into the plan, or opt out is welcome to do so.

Now with the same amount of work as before, employees can customize their portfolio, but no one is left out in the cold if they cannot marshal the time to do so. It does not matter if you run a yoga studio, a green health spa, or green small business, a sustainable retirement plan will help retain employees.  Good corporate sustainability is more than recycling!

Pigs don’t need to fly when there is a nice soft landing for them. To find out more information visit Social K

What are your thoughts on this? I would love tho hear what you think.

Not a bad deal, lets go through it again.

Earn $40,000.

Pay taxes on all $40,000.

Put $5000 into Roth IRA, after tax.

$5000 grows to $75,000 over your lifetime.

Take original $5000 out – taxes were paid when that money was earned. Take $70,000 tax-free. Nothing due on earnings.

In a regular IRA you put $5000, before taxes, from earnings into same investments in IRA, grows to same $75,000 over time. Then pay taxes on all $75,000 when taking it out of IRA.

Pay taxes now on $5,000 and nothing later,

$70,000 distribution – tax-free.

Or,

Pay no taxes now on $5000 and pay taxes on full $75,000 taxable distribution.

Seems fairly straight forward, especially if you think taxes will be the same or possibly higher when you retire.

Here is where it gets interesting.

A Roth IRA has earnings limitations. If you earn over $120,000 as a

single person, or over $177,000 as a married person, you can not make a Roth contribution. Tough luck.

But wait……..

Making an employee contribution into a Roth ‘bucket’ in your 401(k) has no earnings limitation. You can put full employee contribution into the Roth ‘bucket’ not just $5,000.

If you earn $200,000, are over age 50, you can put $22,000 into the Roth 401(k) at work.

In 25 years that $22,000, earning 6% grows to $94421.16. The $22,000 had taxes paid when earned, but the growth $72,421.16 is never subject to taxes.

I’d call that the best kept secret out there. Whether you run a sustainable green business, green health spa, yoga business or are just interested in corporate sustainability, a Roth option in your 401(k) will probably make sense.

This is an example and anyone interested in further information should contact a registered financial advisor, or ask about a Social(k) 401(k) /  403(b) at work.