In the 401(k), 403(b), and 457 Defined Contribution (DC) marketplaces, it is generally the participant who is charged with the financial decisions related to how they accumulate assets for retirement through how they spend those assets and countless important decisions along the way. The assistance that most employers put forth is to make their financial advisor or the vendor’s representatives available to any and all participants who want to sit down for a one-on-one consultation. Additionally, absent guidance from the employer, many vendors will simply send out any number of stock mailers so they can show the client that they are “educating” and “communicating” with the employees. Considering the numerous ways in which employees learn, want and need to be communicated with, as well as the enormous volume of decisions participants have to make throughout their investing career, one would have to ask themselves if offering an annual visit at a benefits fair with a financially oriented person is the best way of addressing the varied types of issues that need attention.
While offering advisory services is important, there is much more to consider. Effective employee communication and education is crucial to the success of any retirement plan. A well-designed education plan helps to ensure effective and consistent communications with participants, improves participant understanding and decision-making, and leads to greater levels of employee satisfaction and retirement readiness.
“The two words information and communication are often used interchangeable, but they signify quite different things. Information is giving out; communication is getting through.”
- Journalist Sydney J. Harris
According to a 2011 U.S. Census Bureau report, "Language Use in the United States: 2011,” 60.6 million people, or nearly one-in-five people in the U.S. aged 5 or older, spoke a language other than English at home. If one in five employees speak a language other than English at home, it is clear that the primary language of employees needs to be addressed when providing education and communications. While vendors cannot offer onsite education in all languages, they may have telephone-based interpreters and document translation services that should be considered.Financial Literacy
If we expand the definition of “language” to include retirement plan and financial terms, such as match, non-elective, hardship, normal retirement age, compounding, after-tax, pre-tax, asset allocation, equities, bonds, cash, diversification, and rebalancing, it is not hard to see how an average employee can quickly become overwhelmed and refrain from taking any action. Couple this confusion with a recent study by the financial services firm, Edward Jones, which shows that more than one quarter (28%) of Americans say they spend more time thinking about vacation planning than planning for retirement. It is incumbent upon the employer to not only educate and communicate in the primary language of the participant but to communicate in simple, clear terms that the average participant can understand.Gender
Countless studies have shown that the economic well-being and financial behaviors of men and women differ significantly. Generally, women hold lower levels of wealth and have significantly lower earnings than men. In addition, several recent studies have found that women invest their retirement assets more conservatively than men (Bajtelsmit and VanDerhei, 1996; Hinz, McCarthy, and Turner, 1996) and that women are more risk adverse (Jianakoplos and Bernasek, 1996). In a paper by Annamaria Lusardi, “Financial Literacy: An Essential Tool for Informed Consumer Choice?,” the author notes that women consistently scored lower on financial literacy questions than their male counterparts. These findings have serious implications for the how the retirement world provides education. Differences in participants needs to be addressed in the education and communication efforts of the employer.Location
Not all participants are local to the headquarters of the organization, nor are they all current employees. Employers need to keep in mind they have the same obligation to provide education and communications to off-site employees and terminated participants as they do for actively employed participants. These groups of employees will need to be considered separately as they will not have access to all the resources deployed onsite.Age
Similar to language, education and communications should be targeted to speak to the needs of your specific participant audiences: Young Savers, Accumulators, and Pre-Retirees.Young Savers
Education and communications targeted at Young Savers and new employees should be focused on getting participants enrolled in the plan. Many younger employees lack financial literacy, therefore the programs should be focused on getting participants started and developing a level of financial literacy that will allow them to understand the necessity of retirement savings. Participants who seek education on the investment options specifically should have the ability to receive it, but generally the education program for Young Savers should focus less on investment selection, and focus more on the simple act of retirement savings. Frequently, employers use orientation as an opportunity to educate new hires on the retirement plan structure. For more information on this participant population, see our white paper, Capturing the Young Saver.Accumulators
Providing employees general financial literacy that is appropriate to their age demographic will help improve decision making for many participants. For Accumulators, the range of education and communication topics is likely to expand to healthcare, insurance, social security, etc. The goal is not to create expertise, but to raise awareness and direct attention to the appropriate resources.
The power of inertia for Accumulators is strong, so personalized education that reports on the effectiveness of their current savings and investment behavior while identifying specific opportunities to improve retirement readiness, can be impactful. At this stage many participants benefit from individual financial counseling as they consider issues related to childcare expenses, mortgage expenses, and work through the most complicated period of their financial life. Access to phone, web, and in-person employee education resources can be a helpful bridge to allow participants to improve their retirement readiness.Pre-Retirees
For most participants, the education and communication programs that are in place today focus on the needs of Young Savers. These programs routinely talk about the time-value of money, the importance of beginning to save, and the premium that equity investing provides above fixed-income investing. The population with the least at stake is being educated, while the population with the greatest accumulated assets and anxiety about savings receives short shrift.
In order for a retirement education and communication program to be successful, it needs to allow employees to conclude their path in the plan. Education focused on this important and rapidly growing population should be targeted at the individual as a whole and less on the plan and its features. Pre-Retirees need help understanding how outside assets should be managed, the impact of spousal income on retirement projections, real income needs in retirement, and the sources for retirement income and healthcare benefits.
Financial literacy is no longer the primary concern for Pre-Retirees. This population is looking for specific guidance with regard to asset allocation strategies and the impact of timing on retirement readiness. This type of financial planning is typically best delivered individually, and provides pre-retirees an additional opinion as to their retirement preparedness. Plan participants desperately need an accurate assessment of their retirement preparedness in order to give them the comfort to transition to a successful retirement.
Throughout the education process, as with other factors impacting the health of the plan, the focus should be on how these changes improve the likelihood of your population securing a successful retirement.Leakage
Retirement plan loans have unfortunately become a frequently added feature to most DC plans. Retirement plan loans provide quick, and in most cases low cost, access to capital for employees who want it. While retirement plan loans are generally less damaging to your retirement savings than a cash-out or hardship withdrawal, plan loans are still likely to hurt a retirement nest egg. When participants take out a loan, they take their own money out of the investments thereby reducing their money available for investment. We then see participants reduce or even stop their plan contributions due to their increased monthly debt burden resulting from the new monthly loan payments.
Taxes are not due on 401(k) loans unless you default on the loan. However, if you fail to make all the payments, the entire outstanding balance of the loan will be considered a 401(k) withdrawal and income tax will become due on the distribution. Also, if you leave your job or are laid off before paying off the loan, the balance of the loan often becomes due. About 10% of borrowers default on their 401(k) loans, typically due to an unanticipated job change, according to the U.S. News and World Report article, “The Risk of Taking a 401(k) Loan.” In addition to income taxes, if you are under age 59 1/2, a 10% early withdrawal penalty may be applied to the withdrawal.
Participants need to be educated on the true cost and obligations created by taking a retirement plan loan.Assets vs. Income
The retirement industry has been focusing on savings rates and asset accumulation as the baby boomers age. However, this has had limited effect in inspiring participants to save enough for retirement. Financial services firms have focused the communication messages on income replacement rates between 75-90%. However, along the way, the ancillary benefits of giving employees flexibility, choice, and access have become the tail wagging the dog of the retirement plan with little thought given to the end goal of a successful retirement.
Returning to the primary purpose of providing retirement benefits will require sponsors and vendors to communicate with participants in a manner that allows a participant to assess how the factors within their control such as contribution rate, investment choices, time horizon, and spending needs, impact their retirement success. This transition in communication model is what we broadly refer to as “retirement readiness.” The concept of retirement readiness is predicated on the practice of taking current assets and assumptions about future behavior, to make estimates as to the level of income a participant could reasonably expect to receive in retirement. The big change that comes with the retirement readiness concept, is in changing the focus to income and retirement spending rather than asset accumulation.
Generally, successful retirement programs focus communications with participants on income rather than assets. While assets will change with the rise and fall of markets, retirement income expectations are substantially less market dependent. With this shift, participants are left to focus on the things within their control to improve their retirement savings program and their own “funding status.”
For more information on Retirement Readiness, see our white paper, Addressing Retirement Readiness.Retirement Catch-Up
People are living longer. In almost every plan we consult with, we are seeing average ages of employees increase, and a surge in savings rates among employees over the age of 50. In aggregate, participants seem to have recently become aware of their retirement needs and have adjusted their retirement ages and savings rates accordingly.
Making wise financial choices in a participant’s years prior to retirement can make a huge difference in the employee’s quality of life when they retire. While some in this group may have a qualified investment adviser, many still do not. For all of the participants in this demographic, the education and communications need to be supplemented to include:
Division of retirement plan assets is one of the most common, and frequently contentious, disputes to occur with participants who marry and/or divorce. Participants often forget to update their beneficiary designations to reflect their changed status and in these cases, disputes can arise between the participant’s spouse, ex-spouse, children, or other potential beneficiaries such as parents or other siblings. Initial beneficiary designation elections (or lack thereof) are likely to remain in effect for long periods of time without participants reviewing or updating them to ensure that the designation reflects their current intentions. Because of the passage of time, participants often forget who they designated as beneficiaries at an earlier date. In some cases, participants may not recall whether they have ever completed a beneficiary designation form or not, even when they have had a life changing event such as marriage, divorce, or becoming parent(s).
But the problem isn’t limited to the participants. Keep in mind, it is the Plan Administrator who will have to work with a deceased participant’s beneficiaries and estate to sort all this out. It is wise to develop an education program to notify participants of the importance of updating their beneficiary designations when there is a life-changing event.
For more information on beneficiaries, see our white paper, Best Practices for Beneficiary Designations in Retirement Plans.Advisory Services
While many participants value sitting down to discuss their situation with an advisor, not everyone is comfortable with discussing personal matters with strangers. Often, I hear that people do not want to be told how poorly they are doing or that they already know they are not savings enough. In my history of working with plans, I’ve concluded there are three types of people who will sit with a financial advisor. There is the person who needs help in getting started, the person who wants affirmation that they are doing well, and less often than most will admit, the person who is behind on their asset accumulation but is willing to show and admit to their mistakes. The question that employers need to address is the cost of providing such services. One of my closest friends is fond of saying, “Nothing in life is free. If you want nothing, have as much of it as you like.” Many employers think these services are free, but they are not. In fact, unless the employer is paying for the services, the participants are paying via increased plan fees. Historically, only a portion of the participants receive advisory services, but all the participants pay for them.
Another common refrain is that the person giving the advice is biased or trying to sell something to them. These concerns are not unfounded. In a 2013 report titled “Regulation of Investment Advisers by the U.S. Securities and Exchange Commission,” the SEC traced the history and growth of investment advisers and reflected the position that investment advisers could not properly perform their function unless all conflicts of interest between them and their clients were removed. The report stressed that a significant problem in the industry was the existence, either consciously or, more likely, unconsciously, of a prejudice by advisers in favor of their own financial interests.
For those who are interested and willing to meet face to face with an advisor, a significant benefit that many 401(k) plans provide is “free” access to investment professionals who can help tailor a plan to meet your specific goals and risk tolerance. During the open enrollment period, the professional will often come to your office and meet with participants. However, far too few people take advantage of this opportunity. In a recent Schwab Retirement Plan Services survey, only 39% of retirement plan participants said they were “extremely” or “very confident” in making their own investment choices. More than three-quarters of retirement plan participants report that they chose their own investments.
In “The Spectrum’s Millionaire Corner study: Advisor Usage Among DC Plan Participants,” of investors with balances over $100,000, only 27% have a financial plan in place. That means that 73% do not. While advisory services can be valuable, a well-rounded and effective plan will offer advisory services to supplement, not drive, the participant education and communication efforts.
In our experience, successful education and communications services are derived by working with the client to oversee the education services of third-party providers from the recordkeeping vendor or other third-party providers. Under this type of structure, we are able to remain objective, help the client develop education goals, set the strategy, and oversee the execution of the strategy against the objectives outlined by the client. We have found the best way to do this is to have the vendors create a written calendar of events that will be carried out to execute on the client’s directions and intentions. This way, we have a deliverable that can be monitored and measured.
Employers should work with their vendors to develop an education strategy that will be documented in the form of an education calendar. This calendar is specifically designed to direct the efforts of the vendors as they provide education services to employees on the importance of retirement savings and the value of the contributions made by the client. Understanding that individuals learn differently, the key elements of these efforts should be focused on the four key drivers of successful retirement plan education programs:
Goals designed around improving these drivers should be written into a calendar that provides a framework for executing on the long-term strategy. Once these goals have been established, the tools to implement the strategy need to be effectively communicated. Years of research has led many industry experts to agree that participation communication and education should incorporate the following characteristics:
Finally, the employer should meet with the vendor at least annually to review and compare the sponsor's goals for their plan with actual results achieved, and to benchmark the plan's participation, salary deferral, and asset allocation metrics. These statistics can be used to evaluate the effectiveness of the program and make appropriate revisions for future efforts.