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Three Ways to Deliver Investment Education

July 15, 2002
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Related Topics: Retirement/Pensions, Compensation Design and Communication, Featured Article
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Lucrative retirement benefits are supposed to help you attract and retain the best people. But if employees don’t understand how to invest them, how valuable are they? “Large segments of employee populations don’t understand how to take advantage of financial benefits, such as 401(k)s, and they don’t realize how important it is,” says Lori Lucas, a defined contribution consultant at Hewitt Associates, a benefits consulting firm in Lincolnshire, Illinois. It’s not uncommon to find 401(k) utilization rates at a low 15 percent, she says. She attributes this largely to lack of financial-planning education.

When employees do take advantage of company-sponsored investment programs without proper guidance, they often make costly mistakes. William Arnone, a partner in the financial education and consulting group at Ernst & Young LLP in New York, says the most common problems are that employees don’t diversify effectively, don’t understand the impact of borrowing from their retirement savings, and mix investments among lifestyle funds that are designed to act as a single place to put investment income. This frequently happens because rank-and-file employees, whom Arnone defines as those making $20,000 to $80,000 annually, don’t understand what they are doing. And as people come to rely on 401(k)s as their primary resource for retirement income, these kinds of investment mistakes can have a disastrous impact on their future plans.

Recognizing employees’ lack of financial education, many companies offer investment guidance and advice services to complement their retirement packages. According to a survey done by Xylo, Inc., a work/life solutions company in Bellevue, Washington, 76 percent of employers provide financial services to their employees. The most popular are retirement planning (66 percent), insurance advice (50 percent), and investment advice (42 percent).


Financial-education offerings can range from presenter-led sessions on specific investment topics to Web-based self-help tools.

Some companies offer programs out of the goodness of their heart, or as part of their commitment to work/life programs, Arnone says. Others do it to avoid litigation by employees who find that they don’t have enough money to retire because of bad investment decisions. Still others view investment programs as a way to get the most bang for their benefits buck. “Employers invest a lot of money in benefits programs,” Arnone says. “Financial-education services help employees understand and appreciate the value of those programs, while helping them make better investment decisions.”

Financial-education offerings can range from presenter-led sessions on specific investment topics to Web-based self-help tools. The most common are on-site workshops, hosted by HR staff or financial-services vendors, at which employees can learn the basics about investment planning and other money-management concerns. Vendors might also host information booths on-site where employees can pick up brochures and ask questions about their personal needs.

For those employees who don’t have the time or inclination to attend seminars, online tools are a popular way to get do-it-yourself guidance, Lucas says. They help users do budget-forecasting based on contribution rates, build sample portfolios, and do risk assessments. The tools are easy to access and don’t take as much time as the workshops, she says. They also offer privacy to people who may not want to talk directly with someone about their financial situation but still need help planning for their future.

The one thing that most of the tools and workshops don’t do is offer specific investment advice. “Giving advice creates a completely different set of fiduciary responsibilities for the plan sponsor,” Lucas says. Even if the advice is delivered through a third-party vendor, a lot of due diligence is required to assess and monitor the guidance being offered, which is a hassle that few companies are eager to take on.

“Delivering advice to each employee based on their specific needs would be daunting and costly,” says Martin Sallee, manager of HR benefits at State Farm Insurance in Bloomington, Illinois. He feels it’s more beneficial to educate employees so that when they pursue investment advice on their own, they know what questions to ask and what their critical issues are.

Employers that opt not to offer advice can give employees a great deal of assistance before they cross that line, Lucas adds. They can make employees aware of what their plan offers and how to use it, help them decide what level of contribution is appropriate, and show them how to put a portfolio together. They can also guide them over other financial hurdles, like tax planning and money management.

“For many people, you can’t start thinking about investing until you’ve figured out how to pay your bills,” says Vonda Rodgers, senior analyst at State Farm. “Financial-education workshops can teach people better spending habits as an approach to planning for the future.” State Farm delivers a series of 12 ongoing financial-education workshops to its 80,000 employees, covering everything from retirement planning to debt reduction. “We want our employees to understand what they don’t know,” Sallee says. State Farm’s commitment to providing investment education but not advice is common. Hewitt’s 2001 401(k) trends survey shows that only 18 percent of large plan sponsors offer any outside investment advisory services, with another 18 percent considering the services in the next 12 months.

But for many employees, education and guidance aren’t enough, Arnone says. “Some people are unwilling or unable to make prudent investment decisions unless they have advice on exactly what to do.”

Workforce, May 2002, pp. 66-69 -- Subscribe Now!

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