Helping Employees Work Their 401(k)s

Employers have many resources for helping employees manage retirement assets.

The lackluster performance of 401(k) plans during the past few years has made many employee participants jittery, and increasingly they’re looking for employer-sponsored help on handling retirement investments.

“Participants are waving the white flag, saying, ‘I don’t know what to do,’ ” says Michael Skinner, vice president of development at Morningstar Inc., a Chicago-based investment research firm.

In a recent survey by Minneapolis-based American Express Retirement Services, about half of workers with access to 401(k)s said they want help deciding how to allocate their plan assets. Most of the 756 respondents also expressed interest in financial advice and saving for retirement.

Typically, it’s HR’s role to connect employees with sources of financial education, such as company-paid seminars, online investment tools and other information to help them become better investors. Offering such resources can help companies meet their fiduciary responsibilities to provide financial education for 401(k) participants. In addition, such efforts often lead to increased worker participation in 401(k) plans.

The challenge for HR is to make such efforts effective, and experts say it starts with determining the breadth of employees’ knowledge about investing. Often, financial educators say, company-sponsored 401(k) education programs are doomed from the start because employers overestimate employees’ grasp of investing concepts and then throw too much information at them. It doesn’t make sense, for example, to ask employees to allocate their 401(k) contributions when they don’t understand diversification.

Put the horse before the cart, says Sally C. Hass, benefits education manager at Weyerhaeuser Co., a Fortune 500 logging company based in Federal Way, Wash. “It’s saying, ‘What do you need your life to be about? Then you decide how to handle the money,’ ” she explains. Otherwise, she continues, “it’s like a prescription without a diagnosis.”

To tailor education programs to employees’ needs, HR managers must find out what their workers already know about investing, what else they want to know and how they want to learn it. Such information can be drawn from employee surveys and reviews of participant behavior such as contribution levels and asset allocation.

Some of This, Some of That

Having learned employees’ financial knowledge and needs, HR’s next task, experts say, is to choose the right mix of methods—whether in-person instruction, personalized communications, online tools or other resources. The type of investor determines the type and level of interaction. The financially illiterate employee who does not contribute to a 401(k) would need lots of classroom education and one-on-one guidance, while the savvy investor who actively manages his or her portfolio would need little more than an online advice tool. Most employees are somewhere in between.

Financial educators believe, and surveys show, that peo.ple generally prefer a strong personal approach, sup.plemented by written materials, software and other tools. “We believe face-to-face instruction is vital,” says Darryl Thompson, an independent investment adviser in New Orleans and an instructor for the EDSA Group Inc., an independent financial-education firm based in Baton Rouge, La. EDSA offers five courses for employees, including one on the basics of money management and another for employees five to 15 years from retirement.

EDSA’s retirement course, a three-hour class usually taught on site and after hours, brings together 50 to 60 pre-retirees and their spouses for instruction on topics such as choosing a retirement lifestyle, calculating how much money will be needed and tracking retirement savings. Investment basics and estate planning also are covered. Class participants work through scenarios using a fictitious couple, then go through the same exercises with their own financial data in a workbook.

Thompson says he works with employers to customize classes, which cost $700 per instructional hour. Because “no one course is going to be the perfect course for everybody,” and because employees and their needs change, EDSA encourages ongoing education, he says. For an extra fee, employers can get one-on-one counseling for their employees a few weeks after the class. Employers usually pay at least some of the tab for additional education—say, for the first hour of counseling—with employees paying for more time if desired.

Other Channels

Classroom teaching is only one approach to retirement education, however. Employers should also use as many other channels of communication as possible because people respond in various ways to various kinds of messages, and because repetition helps.

Among the many communication resources that HR can use are written materials, enrollment meetings, seminars, toll-free help lines and web sites. Such resources are available from 401(k) plan vendors and education providers.

Deliver the education in interactive, personalized ways, experts say, because people learn best when they are engaged in the process and understand how investing affects them as individuals.

“Give them just what they need at the time they need to make a decision,” then follow up with more information, says Kathryn Hopkins, executive vice president of Fidelity Institutional Retirement Services Co. in Marlborough, Mass. “You need to personalize materials to recognize what stage of life people are in,” she adds. “Technology has really enabled a broader reach and allowed people to get information when they want it and how they want it.”

Morningstar gives each of its 401(k) participants a personalized statement showing the account’s status and how a particular action—a higher contribution, say—would impact take-home pay and future savings. “We don’t want to kill people off with reams of data,” says development executive Skinner. “We want to do a simple gap analysis. At the very least, it gets people to question: Am I on track?”

American Express’ retirement unit found that 25 percent to 30 percent of noncontributors decided to enroll in a 401(k) after getting a personalized statement and face-to-face consultation, says Rusty Field, vice president of financial education and planning services.

Ways of Teaching

Some large companies have their own retirement education specialists and do it on their own. Most employers, however, outsource such efforts to financial services firms or independent education companies, which operate through networks of certified financial professionals. At minimum, such providers should know the nuts and bolts of finance, and “they have to know how to teach,” says William R. Pomeroy, president of the EDSA firm.

Some companies rely on their full-service 401(k) plan managers to provide education for plan participants; it’s usually part of the package from a major vendor. Other companies are willing to pay fee-based independent education providers.

Independent firms claim they offer the advantage of not being beholden to any investment firms or products. They contend that 401(k) fund managers and administrators that offer educational services may use such services to generate pros.pects for their firms or to pressure participants into choosing high-fee funds that are not in their best interest.

But full-service firms say their education programs pose no conflicts of interest. “There’s no selling and no products discussed in general financial education,” says American Express executive Field.

The Education-Advice Debate

Companies typically feel they must walk a fine line—providing the employee investment education as their fiduciary responsibilities require, but not letting the content turn into advice on choosing specific funds or other investment products. Currently, only independent advisers are allowed to provide investment advice to employees, under Department of Labor regulations.

Congress again this year is considering legislation that would allow 401(k) service providers to give such advice on their own fund offerings. The Pension Security Act, H.R. 1000, sponsored by Rep. John Boehner, R-Ohio, has cleared the House Education and the Workforce Committee.

According to a committee summary of the bill, it would, among other things, give employees “access to a qualified investment adviser who can inform them of the need to diversify and help them choose appropriate investments. Fiduciary and disclosure safeguards will ensure that advice provided to employees is solely in their best interest.”

Although it does not appear that any disgruntled investor has sued an employer for providing access to advice that turned out bad, the fear of lawsuits runs strong, and many employers are reluctant to offer advice until the law is clarified. Fred Oliphant, an attorney at Miller & Chevalier in Washington, D.C., says that if employers “endorse an investment adviser and hold him out as competent, they have responsibility for the continuing use of that person. Most people still are not willing to cross that line.”

Hewitt Associates, an HR consulting firm in Lincolnshire, Ill., says 85 percent of companies with 401(k) plans offer education. Advice is another matter. “We’re seeing interest” among plan sponsors, says Hewitt’s Lori Lucas, a defined contribution consultant “but not a trigger to get them to offer it.”

According to the Profit Sharing/401(k) Council of America (PSCA), a Chicago-based organization of pension plan sponsors, 41 percent of plan sponsors offer investment advice. That percentage is likely to rise, says David L. Wray, president of the PSCA, because of employee demand and because companies will become more confident about offering investment advice for their employees as they see other firms doing it.

Employers can limit their liability by prudently selecting an advice provider and monitoring its performance. Financial experts recommend using one provider for education and another for advice. Liz Davidson, CEO of Financial Finesse, a financial education firm in San Francisco, says giving access to advice requires “long paper trails and tight controls,” referring to the documentation that the employer must prepare on the criteria for choosing a provider and the reasons for choosing a particular provider. “It takes a lot of time and thought and legal counsel,” she says.

Even without offering advice, employers can give employees a benefit of lasting value by teaching them how to be smart retirement-plan investors. No matter what course the economy takes, says Fidelity’s Hopkins, “a good, solid education program on the basics will stand employees in good stead.”

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.

Web Extras

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Ups and Downs in 401(k)s

External links
Vanguard Center for Retirement Research
(Source: Vanguard)

401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2001
(Source: EBRI)

Pension Security Fact Sheet
(House Education & the Workforce Committee)