Using the analogy of playing poker, Chris Carosa of Fiduciary News, says that many people delay saving for retirement because they are afraid of losing the game and making a big mistake ultimately feeling foolish. Many people find investing a confusing game. Carosa warns that the biggest mistake people can make is not playing the game at all and lists the five most confusing concepts to investors looking to save for retirement:
- How to Save: Most people do not have access to a retirement plan at work which has been proven to be the most effective way for people to save for retirement. With so many options and very little financial literacy education even for the most educated people, the choices can be overwhelming causing inertia.
- How much to save: The average means little to most people. Better to look at each person’s needs and situation. Longevity risk further complicates the issue.
- Inflation Risk: Many people face 30 years without a paycheck and do not account for inflation which, while working, is made up for with pay raises.
- Investments: Most investors are unconsciously incompetent and need to realize that they don’t know which is hard for an adult to admit for something so important.
- Who to Trust: After the recent financial crisis, it’s hard for many people to trust Wall Street. The DOL’s conflict of interest rule will make almost every advisor act a “fiduciary” which means investors have to dig deeper to understand who is actually acting in their best interests.
All of which points to the elegance and simplicity to DC plans, especially those that use the ideal plan with automatic enrollment, escalation, stretch match and professionally managed investments like target date funds. But also critical is the role of the plan advisor who might be the only advisor that employees ever meet making their selection and monitoring that much more critical not just for the benefit of the company and the DC plan.
