The Investment Language Teacher

Why Do 401(k) Plans Confuse Employees?

Posted on 9/14/2014 by Mike Walsh in about 401k 401k 401(k) plans 401(k) Investing 401k Education 401k Literacy 401(k) Confusion

There are lots of reasons why employees are confused by their 401(k) plans. Two primary reasons are most people have never taken any investment courses and financial service firms have a vested interest in the public not being educated about investments.

Every year surveys get conducted which show that employees are confused by their 401(k) plans and wish the process of choosing investments could be easier. Why do employees feel this way? 

There are probably many reasons why this is the case, in this post I want to propose 2 reasons which I think are the most responsible.

First, most people have not had an opportunity to take any courses on investing or mutual funds, the components of every 401(k) plan. Everyone is focused on getting trained and educated for their chosen profession. People simply don't have the time to spend on topics that aren't directly related to their careers.

This will be changing in the years to come thanks to advances in technology. In years past the information required to choose all investments, including mutual funds, was only available to investment professionals. This made it necessary to work with an investment professional to choose your investments. Today, things are different. All the information that you need to consider when buying mutual funds is available online for free. 

The second reason why most people are confused by their 401(k) plans is that the financial service industry has a very large vested interest in the general public not being educated about investments. You might be asking yourself, how are these 2 things related?

A large part of the financial services industry exists because people aren't fully educated regarding their investment choices. Through TV ads and other media, the general public has been conditioned into believing that investing is very confusing and should be done only in consultation with an investment professional. If you ask the average person if investing is too confusing for them to learn, you will probably get more people agreeing than disagreeing. Even though this is the general way of thinking today, is it true? Is investing too confusing to learn?

Remember that most financial services firms were created before technology made information so readily available for everyone. Since the availability of financial information has changed so dramatically we need to adjust our thought process regarding the ability of the average person to learn mutual funds and investments.

There is literally a limited amount of information available for mutual funds. This information is the exact same for investment professionals and the general public alike. Once you understand the available information you can compare mutual funds. This may sound overly simplified, but, that is really what it takes.

The financial service industry will never tell the general public that mutual funds can be learned and understood by most people. It simply isn't in their interest to do so. If the financial services industry wanted the general public to be educated about investments, many more people would understand mutual funds and not be confused by their 401(k) plans. If financial firms ever did this, they would, in effect, be eliminating the need for some of their services.