College grads entering new careers are being inundated with advice about working hard and living life to the fullest. Financial advisors would likely add one other thing — start taking advantage of 401(k) and employer matches right away.
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Advisors are rarely taking on recent college graduates as clients, but they do often work with their parents. This graduation season then can be an opportunity for those advisors to talk to those clients about their children’s savings habits, reinforcing their value to those current clients and making inroads with the next generation.
Mitchell Kraus, who co-founded Capital Intelligence Associates with his father, said his firm considers clients’ children to be clients, too, since children can have an impact on their parents’ plans.
“I’ve seen too often that … parents make a lot of money, or grandparents, and see their kids blow it and not understand,” Kraus said in an interview. The children might not be “driven as hard as their parents” or might just be “in a different financial situation.”
For example, he said he often goes over benefits with clients’ children from their first or second jobs. They probably cannot afford Kraus’ services full-time, but he can give them a head start, which “creates more security for the parents and more security for the kids.”
If clients’ children work for employers that will match a percentage of their 401(k) contributions, they should at least be contributing enough to take advantage of that match.
“Often, I tell my clients’ kids that the best place to start is the free money, and the free money is the 401(k) match,” Kraus added. “Even if you pick the wrong investment, if they’re matching your money … you’re still probably better off” than if you had not invested or not even saved those funds.
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When to get started
When a client’s child graduates and gets a job, “I say, ‘You know, they’ll have medical benefits. They’ll have the 401(k), and I’m more than happy to talk about contributing to the 401(k), the percentages, the investment options, whether it’s Roth or pretax,” Frani Feit, senior wealth advisor at Ridgewood, New Jersey-based Advisors Capital Management, said in an interview.
It is usually young adults’ “first foray into investing, and I think it bodes well to have a conversation, an overall, educational conversation,” she added.
Adult children might see their parents’ financial professionals as trusted advisors, or depending on their age, they may or may not be interested, so Feit takes an educational approach, and it can be helpful to hear from an independent perspective, rather than from parents directly.
“I have no skin in the game,” she added. “I just want them to be educated and get started on … their financial trajectory early to be successful. So that seems to be very neutral territory, which resonates with a lot of kids.”
Parent-child relationships can vary, and so can parents’ confidence in their own abilities to have conversations about money.
What some “parents don’t realize is that their kids want to hear this from them, but many parents may feel like they’re not the perfect example so they feel embarrassed to offer advice,” Laurie Allen of Hermosa Beach, California-based LA Wealth Management, told Financial Planning in an email.
Showing that you care
Telling clients to encourage their children to contribute to their 401(k)s could be part of an advisor demonstrating that they care about their clients and maintaining a positive relationship.
“When advisors take an interest in the lives of their clients’ children, it’s an opportunity to demonstrate that your relationship extends beyond investments,” Eric Berlin, founder of Bend, Oregon-based Edgewood Wealth Management, told Financial Planning in an email. “We believe in having those important conversations earlier rather than later, when clients’ children begin earning income, enrolling in benefits and making their first big financial decisions.”
Another advisor, Britton Williams of Raleigh, North Carolina-based Calamita Wealth Management, said connecting with the next generation and a potential future client is valuable, and recommending that clients’ children take advantage of employers’ 401(k) matching can lead to more important discussions.
“Helping the next generation is one of my favorite things to do as my client’s advisor,” he told Financial Planning in an email. “This opens up other financial planning conversations like weddings, house purchases, car purchases, student debt, children’s 529’s, retail stock trading … There are more planning needs for the 20- and 30-year-old than the 45-year-old.”
Budgeting expenses is a key part of 401(k) decisions, such as deciding on exact contribution levels.
“Over the past year I’ve had conversations with several adult children of clients about how to think about saving either directly to Roth IRAs or contributing to their company-sponsored plans,” Dale L. Shafer, founder, financial advisor, and chief compliance officer of Scottsdale, Arizona-based Life Moves Wealth Management, told Financial Planning in an email. “The conversation is largely around getting a handle on cash flow and tax considerations, then working back into how much they can and should be contributing based on other financial factors. I’m encouraged by how these younger folks are very receptive to advice and also very interested in the markets, being financially responsible and long-term planning.”
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Luke Delorme, director of financial planning at Tableaux Wealth in Great Barrington, Massachusetts, outlined the kind of advice advisors can give in a recent article published by the Center for Retirement Research at Boston College. He reminded graduates to start saving now by contributing “aggressively” to their retirement savings plans and taking advantage of the maximum match an employer might offer.
“You may not be earning much, you likely have student loans, you want to save for a home, and you still want to go out and have fun. These are all competing claims on a small paycheck,” he wrote. “If your employer matches your contribution, like most companies do, try to contribute the highest amount that’s matched. The employer match is free money you can’t afford to leave on the table.”
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Delorme urged young professionals to be patient.
“Growth will feel painfully slow at first (we named our game Get Rich Slow for this reason),” Delorme wrote. “But compounding accelerates dramatically as balances build, and it’s hard to catch up if you skip the early years.”
