Retirement plan blues

During my time as a human resource director, I always was frustrated at the refusal of many new employees to enroll in our company’s retirement plan.

Why do employees, many of whom should know better, fail to enroll or even fully invest if already enrolled? The power of compounding interest through many years should provide an overwhelming incentive to participate.

Our pension representatives presented regularly but, in spite of repeated encouragement, few employees attended. Retirement plans, Social Security benefits and private investments are all part of the three-legged stool that assures a well-funded nest egg for the golden years.

Retirement and pension plans are of many varieties. One popular plan is the 401(k) defined contribution plan where both the employer and employee make a defined percentage contribution. The employer often offers higher contributions rates if the employee also makes an increased match. The investment choices are left to the employee and the final retirement fund depends upon the investment returns.

The other pension package is the defined benefit plan, usually funded by the employer with an employee match, where the employee receives a defined benefit upon retirement, usually based on a combination of age, years of service and final pay. Government employees and union members often are enrolled in this type of program. Usually the employer or union is the plan sponsor and responsible for the solvency of the plan.

Here are some of the reasons why employees typically fail to enroll in or maximize their benefit in a company retirement plan.


Involves a basic lack of understanding of pension plans, how they work or of the need to plan for retirement. New employees entering the labor market or those who never had employment that qualified for a pension plan typically have little knowledge of the importance of timely enrollment.

Unfortunately, it’s often not one of the life skills taught in schools. Even when it is made available, students tend to find the topic irrelevant to their lives. I recall teaching this subject to undergraduate business students and watching their eyes glazing over half way through the presentation.

Short-term horizon

Many people live paycheck-to-paycheck. They know they should save for the future but their pay is consumed shortly after receiving it. Twenty-five-year-old employees believe they can start a plan in their 50s and be prepared for retirement. Well, yes, starting late is better than never. However, once again, the power of compounding interest works best with an early start.

Substantial debt

The employee’s earnings are needed to pay off big ticket bills such as a car loan, mortgage, student loan, credit card debt, etc. Money is tight and the pension plan contributions are optional so it will have to wait.

Stock market fears

Some people shy away from the market, having watched others lose more than one-third of their retirement investments in the great recession of 2008 — even though the current long-term stock market recovery has more than made up the earlier losses.

Enrollees should consider an automatically rebalanced investment portfolio that keeps the employee invested with risk appropriate for the employee’s retirement horizon.

Lottery syndrome

They’re going to hit it big someday, maybe a big lottery payout or perhaps a rich relative will leave them a fabulous inheritance. Something good will happen before retirement time arrives, they just know it.

It always saddened me when an employee who refused enrollment at time of hire later asks about enrolling in our pension plan. They’ve overheard co-workers praising the benefit and now wanted to join. When I tell them that enrollment is open but cannot be made retroactive, the disappointment on their faces is perceptible.

Are you participating in your company’s retirement plan? Have you maximized both employee and employer contributions? Do you have a Roth IRA? Hurry, tempus fugit.