401(k) best practices: employee education
Many experts don’t believe that 401(k) employee education works. The challenges of educating adults, who may not be excited to learn more about their 401(k) plan, are sometimes difficult to overcome. What can plan sponsors do to make their 401(k) employee education sessions more effective? After more than 30 years of conducting education meetings, I suggest the following best practices.
Correct the misperceptions. Participants have a long list of misperceptions regarding their company’s 401(k) plan. The most frequent I hear include:
· You should stop making contributions when the stock market falls.
· It is a good idea to take a loan from the plan.
· I only need to contribute enough to receive the maximum company match.
· Money market funds are a good place to invest.
· You should sell when the market falls to avoid losing everything.
· Allocating more of my balance to funds that are performing the best is a good investment strategy. I don’t want to miss something.
Your education sessions should focus on communicating the right practices to follow when investing in your plan. If you’re able to dispel your most common myths and misperceptions, you will have achieved a lot.
Integrate financial wellness concepts. Experts agree that the most important employee wellness component is financial wellness. Lack of financial well-being causes employees the most stress. Research from Aon Hewitt shows that employees want to learn about budgeting, debt reduction, healthcare (especially HSAs) and purchasing a home.
Many employers have found that an investment in financial wellness education not only results in greater employee appreciation of their benefits package, it also leads to more productive employees. If you don’t offer financial wellness education now, consider starting a program soon.
Stick with education, not counseling. Some employers have found that financial wellness counseling resulted in added liability for their companies when counselors pushed their own products, especially to their executive group. Hire educators, not counselors. Let your employees find investment advice and products on their own. Remember, if your company has hired an advisor who is recommending a product, it could be inferred that your company is endorsing that product.
Include behavioral finance/economics elements. We are our own worst enemies when it comes to being successful investors. We practice destructive behaviors like loss aversion, mental accounting, overconfidence, anchoring, myopia and inertia. Helping your participants understand how to manage the emotions behind their fears will give them a better shot at reaching retirement readiness and financial wellness.
Incorporate retirement readiness concepts. Your participants need to understand what they should be trying to achieve. Talk about what retirement readiness means and what they have to do to get there. Most participants would be surprised to learn that they need to add at least 15% to their 401(k) plan accounts each year to build a retirement-ready account balance.
Develop an Employee Education Policy Statement. If you are really serious about employee education, develop an Employee Education Policy Statement and let it guide your planning and execution. Most plan sponsors don’t take the time to create this document. Many then wonder why their education sessions are so blah. If you don't know where you want to go, you are never going to get there.
Talk about loans and withdrawals. Participants are always interested in the different ways they can receive their balances before retiring. Many 401(k) plans were created with generous loan and withdrawal features and sold to employees as good places to save for a down payment on a home, a child’s college education, etc.
Research has shown that participants aren’t contributing nearly enough to fund their retirements, or anything else. Your employee education sessions should strongly discourage use of your 401(k) plan for anything other than retirement savings.
Discuss your company match. Spend a significant amount of time ensuring that your participants know how to receive the maximum company match. Most 401(k) plans have a sizable employee population that still does not contribute enough to receive the maximum employer matching contribution.
The best possible investment, by far, that participants can make is ensuring they receive the maximum company match. I suggest to all my clients that they send a special mailing (it can be email) to all participants who are not maxing out. Determining who isn’t receiving the maximum match is easy. Your recordkeeper can run a report for you.
Require attendance. Make attendance at your sessions mandatory. Yes, you will get people who come and immediately fall asleep. Yes, it’s a little paternal to order your employees to attend, but if you don’t, your sessions will not be well attended. Schedule the sessions during the work-day. Yes, it will cost you money and lower productivity. But employees who are getting paid to learn are much better learners.
Allow almost anyone to attend. Your employee may not be the financial decision-maker in the household. Allow spouses, partners, and significant others to attend. Allow older children to attend as well. I had a client that had a significant Hmong workforce. The children spoke and understood both English and Hmong well. Those who came provided tremendous assistance to their parents. Also make sure that someone from management, who can and will answer questions about the company, attends every session.
Offer one-on-one meetings. Right after your education sessions conclude, move into one-on-one meetings with your educators. Ask participants to sign up in advance. Meetings should be no longer than 30 minutes. Make sure your educators are not selling products or services in these sessions or you will likely become a fiduciary to those products and services.
Determining your educational format
Progressive employers have found that the best way to educate millennials is via their phones. Online education modules in 10- to 15-minute increments seem to work best. Spend some time figuring out what sort of information-sharing platform will be most effective in your culture. Hour-long, in-person presentations to employees are often no longer the best option.
I believe that all 401(k) employee education soon will take place in an on-demand, online environment. This allows employees to learn along with their spouses or partners at a time most convenient for them. This flexibility can make your education program much more valuable and impactful.
Deciding who will provide services
Many investment advisors have the capability within their organizations to address your 401(k) employee education needs. Most are not as adept at addressing financial wellness concepts.
For help in locating the right financial wellness provider, consider referencing the Program Evaluator that T. Rowe Price has developed. They have researched the universe of financial wellness providers and boiled the list down to the 17 that appear to be best-in-class. Think you may want to RFI the three or four best? T. Rowe has constructed an RFI template to use as well.
Review and update your employee education program today.
Read the other articles in the 401(k) best practice series:
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.