Three Meetings: A Microcosm Of The Middle Market

Last month I spent an entire day sitting in an agricultural construction company and meeting with fifteen of their employees. These were fifteen individual “Pre- and Post-401k-enrollment meetings” for the employees that are either enrolled in their 401(k) plan or coming up on eligibility. I am taking over the 401k as the advisor for the plan. During these meetings, I answered various questions on their 401(k)s as well as any other financial questions they may have, even if not related to the 401(k). This agricultural plant is the definition of hard working middle America. As such, days like this provide perfect insight into the thoughts, biases, concerns, etc. of main street America, at least when it comes to financial matters.

In this article I am going to discuss three different meetings I had this day that I believe serve as a great microcosm of what those in the “middle market” think. This insight is important because the middle market is what many advisors should be interested in. This market is generally making “decent” money but yet they are not so rich that they are inaccessible for many agents/advisors.

This article will not share a ton of middle market statistics but just know that the middle market is powerful as it represents an exceptionally substantial portion of U.S. households. I have found studies that vary from 45 percent to 55 percent as far as the percentage of US households that are in this category. What makes a household “Middle Market”? I would define the middle market as households with income of roughly $40,000 to $125,000. Again, these are households that are generally not “poor,” that are more accessible than the ultra-wealthy, and need your help!

John The Welder:
John came into the office I was using somewhat hunched over with big giant calloused hands. He reminded me of my dad who poured concrete and dug ditches his entire life. John the welder had certainly worked hard his entire life, which I respect greatly. Interestingly, as we started the small talk prior to diving into his 401(k) options, one of the first things that he did was show me a picture of his vintage Camaro. Over the course of our 30-minute meeting he had mentioned his desire to buy hot rods and eventually retire with enough money to buy whatever car he wants. John makes around $50,000 per year.

Once we got into the 401(k) conversation, he asked about what his options were. That is where I introduced to him the notion of 401(k)s and Roth 401(k)s. He said, “How is this different from mutual funds?” It was at that moment where I needed to re-calibrate how I talked with John and simplify it greatly because he did not know the difference between the 401(k) classification and mutual funds. I then went on to discuss that the mutual fund is the engine that drives the car. However, like with many car brands, you can have whatever engine you choose housed within whatever type of vehicle body you choose. Did he want a hot rod? Did he want a sedan? Did he want a sports utility vehicle? The engine is the mutual fund and the body of the car is either a traditional 401(k) or a Roth 401(k). It started to make sense to him.

As we discussed the benefits of a traditional 401(k) versus the Roth 401(k), I laid out an example of how on the Roth 401(k) you’re paying taxes on the seed and not the harvest whereas with the traditional 401(k) you’re paying taxes on the harvest but not the seed. In an agricultural plant, what better analogy is there to use than this?

I then went on to tell him that his employer will match him three percent of his pay assuming that he contributes three percent. That is when he stated what is obvious to all of us—that tax rates will continue to go up. He said, “The (insert curse word here) government will not stop spending and taxes have nowhere else to go but up.” Clearly the Roth was his choice as it was the choice of a large portion of the employees in this plan.

We then got into the nitty-gritty about how much it is that he would like to contribute to his Roth 401(k). He chose to put in the absolute minimum to get the match of $28 out of his weekly paycheck.

Summary on John:

  • For all these employees, they trusted me immediately because of my association as the advisor working with the company. Statistics show that the middle market relies heavily on referrals, affiliations, and word of mouth. Leverage it.
  • Consumers react very well to analogies that are near and dear to their heart, and for John, those analogies had to do with cars. The “seed versus harvest” analogy also connected with him.
  • What is muscle memory to me and you like traditional 401(k) and Roth 401(k)s, middle America does not understand. Do not “normalize” what you know.
  • Middle America is very emotional about taxes going up and if you can demonstrate how they will be in a better position in the rising tax rate environment it will resonate with them.
  • Middle America needs help getting out of debt and needs help saving. They prefer toys and trinkets over the delay of gratification that is saving for retirement. As much as I tried to tell stories to John about how he should put in more so that he can afford to do what he wished, he stuck to the “minimum” of $28 per week he would put in the 401(k).

I will continue to work on John for him to contribute more. Again, he is only 15 years from retirement and has virtually no savings and significant automobile debt. I will also continue to work with him to address his debt.

Dave the Purchasing Manager:
Dave is the number two or number three guy in the plant and is 42 years of age. Dave makes around $130,000 per year. In rural Iowa, that is very good income! Dave came into my office with a bit of a swagger wanting to talk more than listen. He had indicated that he was already maxing out his 401(k) and is actually investing some additional funds that he manages himself via an online brokerage.

Dave’s biggest questions had to do with 10-year term life insurance. He asked how much it would cost for $150,000 in death benefit. I asked him how much he thought it would cost. His answer? “Around $50 per month.” I ran the figures and showed him the ledger where it indicated that it actually costs less than $18 per month at that level. He was ecstatic with what he was hearing. Dave thought the actual cost of his life insurance would be over three times more than what it actually was.

My commentary to Dave was that he will likely outlive the 10-year term and that he should consider longer terms and/or convertibility options and/or permanent life. He wasn’t having the conversation around permanent life insurance, and he ended up wanting the 20-year term life insurance policy because once he is in his 60s, he claims he will “self-insure.” We also went with a term policy that is convertible to any of the company’s permanent products—not just a separate “conversion product”—before the end of the term. What ultimately got Dave over the hump was living benefits! Dave liked the idea of “life insurance” not death insurance. He liked the thought that if he had a chronic illness or critical illness then he could use the death benefit. Again, he can use the death benefit without having to go out and die!

Summary on Dave:

  • Outside of the 401(k), Dave is a “do it yourself” investor. At the time I met with him, the market was doing fairly well and he felt like Warren Buffett. As of this writing, the market has not been doing so well and Dave has asked me for options for him to move his online brokerage money to. He’s had enough!
  • Statistics provided by Life Happens and LIMRA show that Dave is not alone when he greatly overestimated the price of life insurance. If you can demonstrate to consumers that life insurance is usually less than half of what they think it costs, you will gain clients.
  • Dave had no idea what “convertibility” on term insurance meant. I educated him and strongly suggested that if he insisted on term insurance, he should look at that feature. Plus, there are various levels of convertibility that carriers can offer. This earned his trust through this education.
  • Consumers love living benefits! That is what got Dave really excited about his new policy.
  • Consumers have no idea how much coverage they need. I advised him that his “coverage gap” was much more than just $150k. He seemed surprised. After discussing with him his debt, family, etc., he decided to go with a $500,000 death benefit. The $500,000 death benefit will ultimately cost him what he thought he would pay for just a $150,000 death benefit.
  • For Exam One to schedule the phone interview, it required my intervention on a few occasions. Agents must be good at explaining to Main Street America what the next steps are after the policy is sold–the underwriting process. Even though I did do that with Dave, I still had to follow up with him three times for him to return Exam One’s phone call!
  • My previous bullet point also speaks to the need for more “accelerated underwriting” that the industry continues to refine.

Mary the Mom:
This one was remarkably interesting. Mary is the mother of a 62-year-old gentleman that works there. I will call him Mike. Mike is dependent on his mother as I would consider him a special-needs client. His mother has power of attorney over all of his finances. Mike is a great worker but cannot process analytical information. So, Mary came in with Mike. There were no pleasantries with Mary as she came into the office with a quarterly 401(k) statement in her hand. She immediately said, “I have a problem.” After asking her what the problem was, she went off about how “The 401(k) is losing money.” She was upset because Mike had $70,000 in his 401(k) that was largely in a 2025 target date fund and it had gone down to almost $60,000. She did not understand that because she thought that target date funds were supposed to be conservative, especially when only three years out from retirement. She exclaimed that she wanted to move it from the 401(k) money over to her “broker” that also has the same mutual fund company.

That is where I went over the details that her previous 401(k) advisor and her “broker” did not go into. This is where I discussed that as interest rates have increased, the bond portfolio has lost value. And she was perplexed with how this could happen because she was under the impression by all of those before me that it was a safe portfolio and that bonds did not lose value. She said, “What is the purpose of a target date fund if it is still risky only three years out from retirement?” She then asked if she could move her money out of the 401(k) plan over to her “broker” who has the same mutual funds. I told her it was not a problem with the 401(k) plan, it was a problem with where the money was allocated within the 401(k) plan. I also asked where the money would go. She reiterated that it would go into the same fund company, just under her “broker.” I then reasoned with her on this thought process.

Observations on Mary the Mom:

  • Consumers generally do not know that the old perception of bonds being “safe” is not always true! In fact, FINRA’s 2018 Financial Capability Study found that only 26 percent of consumers surveyed understood that when interest rates increase, bonds can lose value. Consumers need to be educated in this area.
  • Consumers do not understand how the financial business works. Mary thought by moving her money to her “broker”–even though the money would be in the same fund company–it would make a difference in the performance. This speaks to trust. She did not know me, but she knows her broker. By the end of the meeting, I had earned some trust by educating her on what was happening.
  • I mentioned to her that she can move a large part of the 401(k) balance into an annuity outside of the 401(k). She told me she was not interested in annuities. After I explained to her the guarantees that they provide, she became interested, and we are in conversations about annuities. Punchline, explaining what annuities do is more important than explaining what they are.

Charlie Gipple, CLU, ChFC, CFP, is the owner of CG Financial Group, an innovative and full-service independent marketing organization (IMO) that serves independent agents that sell life insurance, annuities and asset-based long term care. He also owns “The Retirement Academy” (www.retirement-academy.com), which is a subscription based online training platform for agents, reps, and company wholesalers.

Gipple is recognized throughout the industry as one of the foremost thought leaders and subject matter experts on annuities, life insurance, long term care, leadership, storyselling and behavioral finance. He is also an industry keynote speaker conducting 100-150 speeches per year. He has spoken at the MDRT Top of the Table as well as other large forums and has also appeared on TheStreet.com and AM Best TV.

Gipple has vast leadership experience in the insurance industry as he has been an executive of various insurance companies and large independent marketing organizations. He is unique in his broad knowledge across the life insurance, annuities and securities businesses. Additionally, within these businesses, he has a deep understanding of the distribution aspects of these products along with the actuarial and hedging aspects. He holds a bachelor’s degree in Finance from the University of Northern Iowa, is FINRA Series 7 and Series 66 licensed and also holds the CLU, ChFC, and CFP designations.

Gipple can be reached by phone at 515-986-3065. Email: cgipple@cgfinancialgroupllc.com.