OK, they’re not entirely clueless.
Sure, they know whether they have a defined benefit or a defined contribution plan. You may have even overheard them bragging at a recent cocktail party: “Dahling, I’m contributing the ‘max,’ 15 percent, toward my 401(k). And you?”
But the fact remains, most baby boomers -- the next giant wave of retirees -- are basically in denial about how much income they’ll actually need for retirement. According to the Eighth Annual Retirement Confidence Survey released in June by the Washington, D.C.-based Employee Benefit Research Institute (EBRI), only 36 percent of employees age 45 to 54 have ever even tried to figure it out. Of the few who have tried, only half could come up with any amount at all (50 percent of 36 percent is only 18 percent). And less than one-third of that half were confident of their results (33 percent of 18 percent is only 6 percent).
It’s no surprise that educating employees to become better “retirement consumers” is a tough job. In terms of stocks, for example, employees may downplay the risks in favor of whatever type of security is performing best during a bull market. During a bear market, they may swing in the other direction -- becoming too conscious of risks and only focusing their investments in the safest securities.
Pension experts warn that individuals who invest too conservatively can also jeopardize their long-term financial needs. Education about asset allocation helps employees balance their risks and rewards. Therefore, employers need to provide employees with the fundamental elements of their plans, the diverse investment options and the rules of governing contributions -- and those governing transfer of funds within the plan. Failure to impart this information could make your company liable under Section 404(c) of the Employee Retirement Income Security Act. To reduce your liability, offer diversified investment options and allow frequent opportunities for employees to change the mix.
As you evaluate your company’s retirement education programs, also make sure you provide information in a varied fashion, including face-to-face communication. And this contact should occur more frequently than once every quarter. An employee who loses his or her retirement nest egg after a company goes under isn’t likely to agree that a few brochures qualify as ‘sufficient information to permit informed investment decisions’ (the phrase is articulated in the law). Don’t let these debates unravel in court -- it can cost time and dollars.
One of the best strategies for HR is to partner with the right experts. “Education has to be a daily activity,” says Curt Morgan, principal at PricewaterhouseCoopers, Kwasha HR Solutions in Fort Lee, New Jersey. “The educational initiatives must be supported by every level of the organization.”
Those levels include internal or external administrators and record keepers of the plan, technology specialists who manage the computer database with pension information, investment professionals and the company CFO or controller. Each of these parties, Morgan says, can speak to the broad range of questions that most employees have. By assembling the right team of experts, HR can ensure that employers are fulfilling their legal obligations and that employees are getting the information they need.
Talk dollars and sense.
By most measures, employees increasingly are participating in 401(k) plans. But once they’ve determined what percentage of their salary they want to contribute, they come to a screeching halt. Very few really understand the risks and rewards of the available funds in which they can invest their contributions. HR’s role is not to give advice, but to provide the tools and professional experts to help employees select how to allocate their assets to yield the best investments.
Retirement investment experts at New York City-based Kemper Funds advise that HR’s approach should be to help the employee identify the following patterns: his or her financial objective (investing for retirement), risk-tolerance level, investment time horizon (how many years until the person retires) and general attitudes about investing.
For example, if employees want to invest in stocks, it’s important for pension experts to warn individuals against false euphoria and unnecessary panic. Employees must realize that the stock market fluctuates.
Consider the recent plunge in the Asian stock market. “When you present one-year rates of returns, people focus on that,” says Olivia Mitchell, professor of insurance and risk management at Philadelphia-based Wharton School, University of Pennsylvania. “Well, if past history is a good prediction of the future, things should recover. We shouldn’t get cold feet just because stocks are acting up.”
In a recent newsletter for its retirement plan investors, Kemper Funds posed the following useful risk-assessment questions. Your HR department can include such material in your employees’ pension curriculum:
- Do you accept high risks in order to pursue a higher return on your investments?
- What would you do if your investments lose money over the course of a year?
- Which of the following financial scenarios make you the most uncomfortable?
- What long-term potential do you need on your retirement investments?
- How would you describe your understanding of investment concepts, such as risk and returns, the stock market, inflation, mutual funds and retirement issues?
Once your employees have assessed their risk quotient and learned to recognize what asset categories their investments can fall into, encourage them to work with a financial representative to develop their portfolio. HR can bring in such experts for periodic seminars. For instance, specialists on pension laws are especially important because government regulations change so often.
Remind your employees that their portfolios should be reviewed periodically. It’s not uncommon that their investment goals and objectives might change. Also introduce the concept of rebalancing one’s account. This process refers to investing one’s current balance, by percentage, in the same manner as future contributions. Depending on your company’s choice, your employees may rebalance their accounts automatically, via the Internet, voice response systems or through retirement plan service representatives.
Remember that each of your employees has different goals, circumstances, risk tolerance and ways of processing information. Create a team of pension experts that can address all aspects of a retirement curriculum.
Train employees to think long term.
Shlomo Benartzi, a business school professor at the University of California at Los Angeles (UCLA), says employees often select their 401(k) plan options much like children select candy. Like the children who are offered two candy bars at the same time, employees are offered several investment options at once. “Like the children, they tend to take one of each,” he says. But given too many choices, how should one decide the best mix?
Employees need to learn how to diversify their assets appropriately. Generally speaking, it’s more beneficial if all assets aren’t tied to the same type of investment. Discuss the merits of mixing between bonds and stocks. If a portfolio is made up of only bonds, for example, employees’ investments may suffer if the market isn’t favorable for them. At the same time, be aware that your employees are likely to make choices depending on the way you present the information.
In his research with colleague Richard Thaler, a business professor at the University of Chicago, Benartzi also found that when presented with historical one-year returns, surveyed employees allocated 40 percent of their contributions to stocks and 60 percent to bonds. However, when employees were presented with simulated 30-year returns, they allocated 90 percent of their contributions to stock.
Therefore, one of the implications for plan sponsors and communication specialists is to focus on long-term growth, rather than concentrating on short-term market movements. The main objective is to educate your employees to read charts and figures calculated over different time periods.
At the same time, financial experts also should explain the risks of being too cautious. The worst situation would be for retirees to run out of money too soon. “One of the most common misperceptions is that conservative investments have less risk, when in fact, the risks are different,” says PricewaterhouseCoopers’ Morgan. “As more plans convert to lump sums and employees carry their balances into IRAs, HR and financial experts need to help future retirees determine the appropriate pace at which to use their assets or provide an efficient means to annuitize these values.”
If investment choices seem confusing to you, imagine how confusing they are to other employees who are not immersed in pension plan administration. That’s why Barbara Hockfield goes several steps further than the quarterly report and vanilla-style handouts.
As director of compensation and benefits communications at Lucent Technologies in Morristown, New Jersey, she ensures that her employees receive information between four to six times a year. Lucent offers its employees information electronically and in print. Employees receive material through group presentations, mailings, newsletters, the Internet and vendor mailings. When asked what HR has learned in the course of training, she says: “[Provide] ongoing, progressive messages that raise awareness and balance the needs of the employee with the needs of the company.”
Lucent, Hockfield says, also partners with its vendor, who sponsors the topic-driven seminars about investment strategies. By working together, the company is able to leverage its resources without duplicating training efforts. “[Our staff] in compensation and benefits ensures that whatever message is being provided by our vendors gives the same message the company distributes through our electronic and print platforms.”
In addition to the seminars -- held twice a year -- Lucent employees also receive a quarterly compensation and benefits newsletter. A supplement with special reports also is mailed to employees’ homes whenever there’s late-breaking or significant news that could affect the investment plans.
“The most common misperception is that by putting all of their eggs in the company basket, they’ll be safe,” says Hockfield. “That’s why we offer a diversified portfolio within our 401(k) plan.” Lucent offers 13 funds that include company stocks, mutual funds and lifestyle/retirement funds.
Indeed, the educational challenges may seem daunting, but retirement planning can be manageable, if addressed step by step. And don’t forget to allow periodic times for one-on-one sessions. Because each employee’s retirement goals are different, he or she may feel more comfortable asking specific questions in private. By partnering with investment managers, financial staff, technology experts and other neutral pension experts, HR doesn’t have to tackle the responsibility alone. With the right team in place, you can empower your employees to plan a realistic future.
Workforce, December 1998, Vol. 77, No. 12, pp. 109-113.