The 10 Biggest 401k Plan Misperceptions


By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Your 401k plan participants really believe some of the things outlined below!

Having worked as a 401k plan consultant for more than 30 years with some of the most prestigious companies in the world (e.g.; Apple, AT&T, IBM, John Deere, Northern Trust, Northwestern Mutual), I am always surprised by the simple but significant 401k misperceptions many plan participants have. Following are the most common and noteworthy 401k misperceptions:

401k Misperceptions

1. I only need to contribute up to the maximum company match

Many participants believe that their company is sending them a message on how much they should contribute. As a result, they will only contribute up to the maximum matched contribution percentage. In most plans that works out to be only 6% in employee contributions. Many studies have indicated that participants need to average at least 15% in contributions each year. To dispel the most common of all 401k misperceptions, and motivate participants to contribute something closer to what they should, plan sponsors should consider stretching their matching contribution.

2. It is OK to take a participant loan

I have had many participants tell me, “If this were a bad thing why would the company let me do it?” Account leakage via defaulted loans is one of the reasons why some participants never save enough for retirement. In addition, taking a participant loan is a horrible investment strategy. Plan participants should first explore taking a home equity loan, where the interest is tax deductible. Plan sponsors should consider curtailing or eliminating their loan provisions to eliminate one of the most misunderstood of all 401k misperceptions.

3. Rolling a 401k account into an IRA is a good idea

There are many investment advisors working hard to convince participants this is a good thing to do. However, higher fees, lack of free investment advice, use of higher cost investment options, lack of availability of stable value and guaranteed fund investment options and many other factors make this a bad idea for most participants.

4. My 401k account is a good way to save for college, a first home, etc.

When 401k plans were first rolled out to employees decades ago, human resources staff helped persuade skeptical employees to contribute by saying the plans could be used for saving for many different things. They shouldn’t be. It is a bad idea to use a 401k plan to save for an initial down payment on a home or to finance a home. Similarly, a 401k plan is not the best place to save for a child’s education — 529 plans work much better. Try to eliminate the language in your communication materials that promotes your 401k plan as a place to do anything other than save for retirement.

5. I should stop making 401k contributions when the stock market crashes

This is a more prevalent feeling among plan participants than you might think. I have had many participants say to me, “Bob, why should I invest my money in the stock market when it is going down. I’m just going to lose money!” These are the same individuals who will be rushing into the stock market at market tops. This logic is important to unravel with participants and an area that plan sponsors should emphasize in their employee education sessions.

6. Actively trading my 401k account will help me maximize my account balance

Trying to time the market, following newsletters or a trader’s advice, is rarely a winning strategy. Consistently adhering to an asset allocation strategy that is appropriate to a participant’s age and ability to bear risk is what plan sponsors should ensure is communicated through their employee education sessions.

7. Indexing is always superior to active management

Although index investing ensures a low-cost portfolio, it doesn’t guarantee superior performance or proper diversification. Access to commodity, real estate, multi-sector bond funds and many other diversifiers is sacrificed by many pure indexing strategies. A combination of active and passive investments often proves to be the best investment strategy for plan participants.

8. Target date funds are not good investments

Most experts who say that target date funds are not good investments are not comparing them to a participant’s allocations prior to investing in target date funds. Target date funds offer proper age-based diversification. Many participants, before investing in target date funds, may have invested in only one fund or a few funds that were inappropriate risk-wise for their age.

9. Money market funds are good investments

These funds have been guaranteed money losers for a number of years because they have not kept pace with inflation. Unless a participant is five years or less away from retirement or has difficulty taking on even a small amount of risk, these funds are below-average investments. As a result of the new money market fund rules, plan sponsors should offer guaranteed or stable value investment options instead.

10. I can contribute less because I will make my investments will work harder

Many participants have said to me, “Bob, I don’t have to contribute as much as others because I am going to make my investments do more of the work.” Most participants feel that the majority of their final account balance will come from the earnings in their 401k account. However, studies have shown that the major determinant of how much participants end up with at retirement is the amount of contributions they make, not the amount of earnings. This is another misperception that plan sponsors should work hard to unwind in their employee education sessions.

Make sure you address all of these 401k misperceptions in your next employee education sessions.


About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at: Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Bad Idea: Rolling A 401k Into An IRA, Part III


PSI Newsletter and Website Header 10.2.15By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

I believe that most of the time it does not make sense for your 401k plan participants to elect a 401k rollover into an IRA when they leave your employment. The reasons are many, as I have outlined previously here and here. Suzanne Woolley, in a recent Bloomberg Business piece, shared some new research and a number of additional reasons why a 401k rollover is a bad idea. Her thoughts and my comments follow. [Read more…]

Impact Of Higher Interest Rates On Your 401k Plan


PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

On Wednesday the Fed finally took the first step on the journey to normalizing interest rates by raising the discount rate by 1/4 percent (25 basis points). Thought long overdue by most economists, this interest rate increase, and the higher interest rates that will follow, are likely to have the following effects on your 401k plan and participants: [Read more…]

Help Your 401k Participants Manage Risk


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Ameriprise recently conducted a survey of investors aged 25 to 70 with regard to their views on risk. The survey sample can be considered a good representation of almost any group of investors, including those in your 401k plan. Using the survey results, Ameriprise classified investors into four categories. Outlined below are the categories along with my thoughts on what you can do as a plan sponsor to help these 401k plan participants become better investors in your 401k plan. First, it might help to better understand risk. [Read more…]

What To Tell 401k Participants To Keep Them From Panicking


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Aon Hewitt, a recordkeeping firm that works with mainly large employers, recently reported that 401k plan participant trading on Friday, August 21 was twice the normal level. Aon Hewitt also said that on Monday, August 24 participant trading was 7 times normal. The firm noted that virtually all trading movement on those days was out of equities and into fixed income. In the event you don’t recall, the Dow Jones Industrial Average (DJIA) closed down 531 points on Friday, August 21 and down 588 points on Monday, August 24. At one point on Monday, August 24 the DJIA was down 1,000 points.

Your 401k plan’s trading activity for those days probably mirrored Aon Hewitt’s book of business. In other words, many of your participants were probably selling out of their equity funds and moving into fixed income funds at precisely the wrong time. All who practiced this strategy likely locked in large losses when they sold out of their equity positions at the worst possible time — when the equity markets were down sharply.

If your 401k plan investment advisor is like me, he/she works very hard to make sure that this does not happen. That your participants do not panic. That they understand that equity markets are volatile and will go up and down sharply without warning. I feel the best service we advisors provide for your plan participants is educating them about market volatility and being ready to take their phone calls when they are scared and about to make a bad decision. I spend a lot of time talking with my client’s participants about these very subjects.

To help those participants who recently exited equities, and to reassure those who maintained their equity allocations, please consider communicating the following: [Read more…]

Helping Your 401k Participants Cope With Volatile Markets


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Volatile markets have returned with a vengeance. The Dow Jones Industrial Average has fluctuated by a thousand or more points on recent trading days. During these times your 401k plan participants can become very nervous. Plan sponsors and their investment advisors should help participants remain calm during these volatile markets by sharing the following: [Read more…]

How 401k Participants Can Avoid Sabotaging Their Returns


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Recently Dalbar reported that the average equity mutual fund investor experienced returns of 5.5% in 2014 compared to the S&P 500 Index return of 13.69% — more than 8% less. Dalbar also reported that the average fixed income mutual fund investor received a return of 1.16% in 2014 while the Barclay’s U.S. Aggregate Bond Index returned 5.97%. In terms of magnitude, this is even worse as fixed income mutual fund investors received more than 5 times less in returns than the index.

Is this an example of active management underperforming passive, or is there something else at work? The folks at Dalbar conclude that the performance differences, because they are so large, are attributable to bad investor decision-making. Unfortunately, Dalbar’s studies show that 2014’s mutual fund investor performance is not a one-time event. The average mutual fund investor typically underperforms the indexes each year by a wide margin. What can 401k plan participants (who comprise the majority of mutual fund investors) do to keep from sabotaging their 401k returns? Plan participants should: [Read more…]

Four New And Surprising Facts About Retirement


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I hope you had a great weekend and for those of you who are dads, a wonderful Father’s Day!

LRPC’s Monday Morning Minute for this week, Four New And Surprising Facts About Retirement (presented below) comes to you courtesy of LifeHealthPro. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share the most relevant information with you each week. If you are short on time, make sure you take a look at each of the four facts in bold.

I think that all of us hope to retire someday. You may be surprised at the information shared below. Hopefully one of these facts can help you or your employees with the planning process.

Have a wonderful week!


Four New And Surprising Facts About Retirement

By Emily Holbrook, Editor in Chief, National Underwriter Life & Health

We’ve heard it all before, retirees and pre-retirees are financially ill-equipped to make their savings — if any — last throughout their golden years. With more and more businesses cutting pensions, and health care costs and longevity continuing to rise with no foreseeable end, truly having enough savings for retirement can seem out of reach for many.

As LIMRA’s Secure Retirement Institute recently noted in their “Informing the Debate: Facts About Retirement Security” report, the biggest risk to Americans’ retirement security is their lack of savings. Half of baby boomers have less than $100,000 saved for retirement and more than a third have less than $25,000. These numbers are a terrifying wake-up call.

The following are a few more surprising retirement security facts revealed in the aforementioned LIMRA report: [Read more…]

Using Neuroeconomics To Improve Employee 401k Decision-Making


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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

A recent white paper titled “The Silent Value: Advice for the 21st Century” describes the challenges most of us face when attempting to make good financial decisions. Using the science of neuroeconomics (a combination of economics, neuroscience and psychology) the authors state that many of us hamstring ourselves by maintaining various bias’ and emotional connections which end up resulting in bad investment decision-making.

The white-paper shared the tendencies outlined below, explained via neuroeconomics, that lead to poor individual financial decisions. I have added suggestions on how to overcome these bias’ with your 401k participants.

1. Emotional decision-making

All of us get scared when the market is plummeting and become overconfident when the market is soaring. Often, at these market troughs and peaks, we make the wrong buy/sell decisions in our 401k plan accounts.

How to address: Understanding market cycles can often allay feelings of fear and greed when participants think about making investment decisions. Ask your advisor, in your employee education sessions, to emphasize a long-term view toward investing and sticking with a plan, especially during periods of high market volatility.

2. Loss aversion [Read more…]

Wider Use Of Online 401k Employee Education Expected


PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Many experts believe that 401k employee education, in its current form, does not work. I believe that it is just a matter of time until all employee education migrates to the Internet and online 401k employee education becomes the norm, for the following reasons: [Read more…]