Your 401 (k) Is Making a Statement

I started my first 401(k) in 1987, while I was working for the Orlando Sentinel. The appeal was instantly clear to me: free money. The newspaper matched contributions, as most employers do, 50 cents on the dollar, up to 6% of your salary. If I saved 6% of my salary, the Sentinel kicked in another 3%. That's a 3% raise, just for the asking. I've worked for many years in the tightfisted business of newspapers and magazines, and many's the year that I haven't gotten a 3% raise. If you don't do the 401(k), if you don't take the match, you're just leaving money on the table. Fold in the automatic deduction -- savings whisked away before I see it -- the tax break, and the fact that the money is locked away so that it can't be splurged on a vacation or a new car, and you've got something pain free that makes you feel good. I not only enrolled in the 401(k), I became a 401(k) missionary -- I prodded, goaded, and cajoled my colleagues into participating. I even did the math with them. The woman who would become my wife -- who is in a 401(k) because I delivered the 401(k) forms to her desk and stood over her while she filled them out -- marvels to this day that she has saved five figures without sacrificing a single important shoe purchase.

Nearly 70% of the people who are eligible for a 401(k) enroll -- but the 401(k) is more than popular. It reshapes people's behavior, perceptions, and expectations. No one regrets having a 401(k). More than that, the very act of saving for retirement causes you to think about how you're going to take care of yourself 30 or 40 years from now, something most of us would never do until way too late. My wife is amazed at what she's saved; I'm amazed that she isn't constantly thinking about how many pairs of shoes her 401(k) would buy. In fact, with more years of work ahead of her than behind her, and with a nice start on saving, my wife is increasingly aware that she's not saving enough.

The 401(k): Behind the Numbers (II)
Want some good news about the 401(k)? It really is your personal lottery ticket. Consider for a moment just one person, a 30-year-old woman. Let's say that she earns $50,000 a year. She probably doesn't earn that much at 30, but she will earn that, and more, over the next 35 years until she retires at 65. So let's say that on average, she's earning $50,000 every one of those years. Let's say she's got $10,000 in savings, and she does the typical 401(k): 6%, with a 3% match. She collects an 8% return, on average, for 35 years.

When she's ready to retire in 2037, she'll have $1,023,200 in her 401(k). That number is a miracle in several ways: On a conservative post-retirement return of 5%, the $1 million will produce $50,000 a year to live on in retirement. She will have saved enough to sustain her income virtually forever. What's more, she'll have saved $1 million while having earned just $1.75 million during the time that she saved it. She'll have made herself a millionaire by putting away less than $100 a week.

Ignorance Is Not Bliss
The hottest thing in the sprawling and mostly hidden 401(k) industry is education. If the past couple of years have made any group more jittery than us 401(k) participants, it's our employers. For one thing, they have fiduciary and legal responsibility for providing good 401(k) investment options, so they're worried about being sued if we're disappointed. What's more, if you go to the trouble and expense of providing a retirement plan, you want your employees to be able to use it to retire. Employers think that they can settle their own stomachs by teaching us about investing and retirement planning.

The Vanguard Group manages 401(k)s for 1,452 companies, including such sprawling plans as FedEx (100,000 participants). At Vanguard, they tackle our education without illusion. Says Barbara Fallon-Walsh, who is in charge of participant education, "We live and breathe this stuff every day. Unfortunately, our participants do not. There's not a huge level of engagement. It's hard to touch people. We can print pretty materials, but do people read them?" Here's how seriously Vanguard takes education: To invest the company's total assets of nearly $600 billion, it has 200 people. To educate its 401(k) customers about their 401(k)s, it has more than 250 people.

Outside the calm, orderly campuses of Fidelity and Vanguard, 401(k)s intersect with the reality of bills and babies, of getting downsized or divorced. In the real world, 401(k)s are much more complicated than they seem.

In a conference room in the Sofitel hotel in North Houston, Marbe Cherry is talking to 35 hotel workers -- kitchen staff, housekeepers, maintenance men -- about their 401(k)s. It's an enrollment meeting, and although some people have come to sign up, most are already in the plan. They've come to listen to Cherry give an impassioned explanation of the importance of saving, the basics of investing, the absolute necessity of diversification. She does the whole thing in Spanish. It's a tough crowd. Most everyone is an immigrant, and the education level and earnings are modest. The mythology can be hypnotic.