Yet Heckathorn knows that behind all the hype and beyond all the slogans, few companies plunk down the money and dedicate the time to back up all the rhetoric. Sure, they might offer a cash-deferred 401(k) plan and provide classroom instruction on investing philosophy; they might even provide news and information in a quarterly newsletter. But when it comes to creating a program that's seamless and understandable—one that a high percentage of individuals use effectively—workers typically tune out faster than you can say aggressive growth mutual fund.
That's certainly not the case at ALCOA. More than 95% of the company's work force is enrolled in its 401(k) plan, and the average annual contribution is 7% of gross salary. The company provides a dollar-for-dollar match for up to 6% of savings—which supplements a long-existing pension plan. But there are also regular workshops and seminars, kiosks that can generate complex financial models in a matter of minutes, an 800 phone number employees can call to reallocate assets and check account balances and a steady stream of clearly designed literature.
"We have tried to shift responsibility to the employees by providing them with the tools and education to make good decisions," says Heckathorn. "We have made every effort to create a program that offers the incentives necessary to boost participation. Our goal is to become the foundation for retirement planning and have employees fully understand what other things they need to do to live happily and successfully later on. That provides advantages for everyone."
Retirement. It's supposed to be quiet afternoons fishing or reading, and trips to exotic locales all over the world. But the reality is often an ocean apart. According to mutual-fund giant Fidelity Investments, one-third of all workers age 40 and older have saved less than $30,000 for retirement—yet half of those polled said they were entirely satisfied with their retirement nest egg. More remarkably, less than half of all Americans have any kind of investment plan. They simply save whatever they can and hope that it's enough. According to The Equitable Life Assurance Society, 68% of those ages 30 to 48 contribute to a retirement plan, while only 49% of those in the 19 to 29 age group put any money away. And then there's this disturbing statistic: More than 60% of all retirement assets remain in fixed-income investment funds—an option that barely outpaces inflation over an individual's life.
"There's a tremendous lack of sophistication among companies and individuals," says Roger Hindeman, partner in charge of employee retirement and financial education for Chicago, Illinois-based Price Waterhouse. "Broad-based financial education is something a lot of companies have been talking about for the last few years, but they haven't been able to pursue their goals effectively. It's a challenge of getting funds budgeted and dealing with a geographically diverse population. It's also a challenge of providing financial models and master plans, so employees can truly see where they'll be in 10 years or 30 years."
It's a daunting task. But some firms are now beginning to take stock of the problem and build comprehensive programs that help employees get on track. Using new approaches and sophisticated technology, they're ushering in a new level of service—and responsibility. Understandably, HR is at the forefront of the shift. In some cases, it involves working with teams—from finance and other departments—to choose financial programs and help make sure they're suitable for a broad base of employees. But HR must also serve as the catalyst for building streamlined systems that can provide employees with the information they need to make savvy decisions.
And those in the financial trenches say it's a good thing. Comments Wayne Bogosian, national director of personal financial education at Wellesley Hills, Massachusetts-based The Wyatt Company: "There's clearly a changing social contract. The job for life concept is dying; the paternalistic approach to providing for employees strictly through a pension plan is disappearing. Employers need to do a better job of providing em ployees with the skills, tools and motivation to plan their financial future." In-house programs, he adds, can cost as little as $2 annually per employee; cus tomized planning and consultations with outside resources can run between $25 to $200 annually per employee. "Unfortunately, most people get their wake up call a few years before they're ready to retire. Only then do they realize they are nowhere near where they need to be in order to enjoy the lifestyle they desire."
How does HR balance the interests of management and employees? How does it adhere to complex legal requirements, including the Department of Labor's 404(c) regulations that require companies to educate their employees about investment options? And how can it battle the entrenched mindset of American workers—who either fail to save adequately or aren't interested? Says Heck athorn: "It requires an ongoing commitment that extends beyond simple words. It means rethinking the way HR does things and turning to outside vendors who can provide specific expertise. The more powerful the program—while remaining simple and seamless for employees—the higher the participation rate. And that's good for everyone."
Retirement benefits aren't a new issue.
For over half a century, corporations have offered pension plans designed to meet at least part of the needs of their work force. Using complicated formulas—usually based on years of service and level of pay—employees walk away with a benefit that typically ranges anywhere from 20% of their pay to 38%—with Social Security usually providing another 40%. However, in today's fast-changing employment environment, such a scenario doesn't fit the needs of a growing segment of the work force—people who now find themselves changing jobs every few years. In many cases, they aren't able to put in the time necessary to earn a pension.
In 1978, the Internal Revenue Service recognized the need for employees to save. It approved section 401(k) of the tax code (it also established 403(b) for government and tax-exempt organizations). These plans allow companies to offer a savings instrument specifically tailored for retirement. Workers defer taxes on any income placed in the account—including voluntary contributions provided by their employer. And the accumulated savings—including capital gains and interest—isn't taxed until it's drawn out at retirement. Although the maximum contribution varies depending on the structure of a plan, most allow workers to save 10 to 15% of their gross pay. Then it's up to the employee to de cide how to invest the money.
It has proven a rousing success. By 1984, assets in 401(k) plans topped $55 billion. By 1996, they're expected to hit $725 billion. The appeal? The plans transfer much of the responsibility for retirement planning away from the company and on to the individual.
They also allow a tremendous degree of flexibility and provide an employer with sizable tax incentives. "Most corporations still offer pension plans, but the 401(k) allows companies to better manage costs and often frees them from tedious recordkeeping and administrative costs," says Vernon C. Kozlen, executive vice president of First Interstate Bank of California's Trust and Private Banking Group.
To be sure, a growing number of companies are jumping on the bandwagon. And many of them are finding ways to use the plan to everybody's advantage. Illinois Power is a perfect example. The utility, which covers two-thirds of the state, has 45,000 employees. In addition to offering a pension plan, the Decatur, Illinois-based firm has established a 401(k) plan that provides matching funds on a sliding scale-basis—anywhere from 25 to 50% A couple of years ago, it began offering workshops, seminars, counseling and written materials.
The centerpiece of Illinois Power's program was a one-hour-plus workshop designed to cover the full spectrum of basic financial planning, including retirement modeling, investment strategies and Social Security benefits. The firm brought in a consultant from Price Waterhouse "to give the program greater visibility and more credibility," says Paul Hoffman, the company's director of employment compensation and benefits. From there, it mapped out sessions to provide individual counseling and additional group sessions that cover specific topics in far greater detail. It also has made an effort to supply resource material and keep employees informed via mailings. The bottom line? Illinois Power has increased 401(k) participation from 79% to 85%, while upping contributions from 7.25% to 7.6%.
There's no question that seminars and workshops are a cornerstone of the educational process. "Overall, there's a tremendous lack of knowledge about personal finance issues. Many people don't know where to begin. They need to have the information provided to them if the plan is going to work as it's designed to," says Christopher H. Cumming, vice president of marketing for Diversified Investment Advisors, a Purchase, New York-based company that manages assets for major companies and non-profit organizations. And while lectures serve as a solid basis for information, a wide range of other tools—videotapes, slides and workbooks—can also help a work force better understand the topic. Says Hindeman: "These programs can produce excellent results, but they have to be designed properly. It's not effective to have someone run in and offer a 60-minute session that's intended to cover the entire universe of financial planning. It's also not wise to get so bogged down in the mechanics of using a system—enrolling, transferring funds and receiving account statements—that little or no attention is devoted to the philosophy behind investing. It requires an ongoing, systematic approach."
Employees must understand the relation between contributions and retirement income.
Individuals may place a percentage of their earnings in a 401(k), but they often don't have a clue what their monthly income will be once they retire, Hindeman explains. He points out that one worker might find that 50% of his working salary is sufficient at retirement, while another realizes that amount is woefully inadequate. Yet it's clear that America's work force is deeply concerned. First Interstate Bank found that 52% of baby boomers worry about not having enough money at retirement, while 86% feel that their generation is not saving enough to live comfortably later on. Perhaps that's one reason why computer software has made such a big impact in recent years. Not only can it speed transactions and reduce extra work for the HR department, it offers advanced planning capabilities and allows workers to see The Big Picture. "It makes everything far more understandable. It puts very complex information into a form that people can understand," says Lee Straate, a software developer at Milliman and Robertson, a national consulting and actuarial firm in Brookfield, Wisconsin. Adds Wyatt's Bogosian: "There's clearly information overload. People's eyes glaze over when you toss too many facts and figures at them. They may realize that they aren't approaching retirement effectively, but they don't know what to do."
At Pekin Insurance, a property and casualty life insurance company with 725 employees spread across Indiana, Illinois, Iowa and Wisconsin, computer modeling now supplements conventional materials such as summary plan description notebooks, annual benefits meetings that cover available options and newsletters. Employees simply make an appointment with HR, which provides detailed financial models and tools.
The program not only takes into account an employee's current contributions and standing under the company's pension and 401(k) plans, it can factor in a wide range of other financial vehicles: Social Security income, an IRA, insurance, personal savings accounts and a spouse's retirement fund. In the end, it displays an individual's exact benefits—and income—at retirement. And it allows an employee to view what if scenarios, based on increasing a 401(k) contribution or exacting a higher return on investments, says Charles Stroemer, vice president of HR at Pekin.
However, few companies have made such a commitment to computer-based modeling and information as ALCOA. Five years ago, the company began installing kiosks equipped with touch-screen computers to boost employee interest. It now has units installed at virtually every office building throughout the country—all linked to a central data base. The computer can factor in company plans and outside investments and provide eye-catching charts and graphs that can be stored for future use. The software can even show how inflation will affect investments over time. And the system is flexible enough to appeal to workers who don't have a lot of time. An at-a-glance mode provides basic account information in five minutes or less.
The kiosks also automate many processes once reserved for HR administrators. Using them, workers can transfer funds between accounts, set up a 401(k) loan, change payroll deductions and reallocate their investments. "If you want to shift responsibility onto the employee, then you have to give them the means to do that," says Heckathorn. And for those workers who prefer not to use the computer, ALCOA also offers a sophisticated voice-response system tied into an 800 phone line. It offers basic information such as account balances and investment options—and can link a caller to a third-party representative for more detailed information. The system now handles 22,000 calls a month.
However, software can only go so far—especially among older workers averse to using a computer. In order for a plan to succeed, HR must communicate effectively what's available and how various programs work. Some, like Fleet Financial Group, a Providence, Rhode Island bank with branches situated throughout the Northeast, devote a good deal of time and effort to the process. In addition to regular workshops and seminars—including sessions that touch on softer issues like psychological adjustment during retirement—Fleet uses an array of written materials, including a newsletter, brochures and a regular stream of post cards for its 25,000 employees. At least twice a year, HR also targets workers who aren't enrolled in the 401(k) plan or aren't contributing to the 6% level that allows them to maximize on the firm's 75% match on 401(k) funds. It sends out an elegantly simple letter that compares an employee's biweekly pay with the 401(k) and without it. "In many cases," says Patricia C. Fay, vice president of corporate benefits, "those who aren't enrolled can see immediately that they earn almost as much after the tax deduction is factored in—and they also wind up receiving matching funds." She says that the letter typically elicits a 1 to 2% spike in enrollment.
Financial-planning sessions should not overload employees.
Even companies that offer top-notch programs and advanced modeling tools find themselves dealing with an irksome problem: Those who most desperately need information and instruction are often the ones least interested and inclined to use the resources. Hindeman describes the process as "adverse selection." Says he: "Those who already have the knowledge are the ones typically sitting in on the sessions and using the software, while those who need it don't bother. They simply aren't motivated, and they see no reason to change." Some, like Hindeman, insist that attendance at financial-planning sessions should be compulsory. Yet, regardless of how heavy-handed or lax the approach, experts agree that it's essential to structure sessions so that workers receive the information they need in portions they can digest. Bogosian says that one of the biggest mistakes companies make is focusing too heavily on investment options and allocation mixes while glossing over the framework of long-term saving and investing. "People wind up believing they can reach their investment goals simply by shifting their investments around," he says.
Of course, the fallout can be enormous. "Those who steer too conservatively in their investments virtually guarantee failure in retirement," Bogosian adds. "Once you factor in inflation and taxes, they can actually wind up with a negative rate of return using money markets, short-term bond funds and Guaranteed Investment Contracts (GICs)... . Ultimately, they're taking a greater risk than if they invest more aggressively over time." There's plenty of evidence to support his argument. Examine the history of the stock market—corrections, crashes and bear markets included—and you discover that the average rate of return is just under 11% a year, with dividends. That's roughly 5 to 7% higher than other instruments, such as bonds, insurance and money-market accounts. All of which makes it an ideal environment for long-term investors who can weather volatility. "The reason many people prefer not to invest in equities is that they don't understand them," Bogosian points out. "Most people are averse to risk because they aren't educated about how investments work and how the markets operate."
Equally vexing: The tendency of workers to misuse 401(k) accounts. In many cases, those who have accumulated large sums of cash in their savings wind up losing the tax advantage when they switch jobs. Then they begin saving all over again at a new job. And while financial planners agree that tapping into a 401(k) account can be a wise strategy in certain instances—buying a house or funding a child's education, for example—the money is used far too loosely by most. Says Bogosian: "It's not the bucket of cash workers think it is. Many people simply use the money to support a lifestyle. In the end, they're mortgaging their retirement and endangering their future."
It's a particularly nettlesome issue for HR departments, which must provide useful and relevant information to workers without immersing the company in a steaming cauldron of legal risk. Although the Labor Department's 404(c) regulatory rule has allowed companies to reduce their liability, it has hardly eliminated the problem. A company cannot provide specific investment advice. It can only go so far as to provide model portfolios based on age, income and demographic data. Then it's up to the employee to make the appropriate decisions. Nevertheless, 404(c) has helped fuel enormous changes in the nature of retirement programs. For many firms, it has opened the door to a greater number of investment choices while pushing them away from a paternalistic approach. Whereas a decade ago, the typical 401(k) plan offered three to five investment options, many companies have now nudged the number up to five or seven. And many have swapped funds to take advantage of the wide range of options available. Waters Corporation, a Milford, Massachusetts-based scientific instruments company with 2,000 employees worldwide, is typical. Last July, it offered a half dozen relatively conservative funds. It now provides six entirely different funds, ranging from a conservative stable value fund to an aggressive growth mutual fund. What's more, the funds cut across investment company lines. Vanguard, Fidelity and Dreyfus are among the names represented. According to Greg Limoges, manager of compensation, benefits and wellness, the firm has heard almost entirely positive feedback.
Illinois Power is another company that has increased its investment options. Like many firms, it has always offered its own stock as part of the retirement plan, and it previously had four other funds available. Today, it has a total of eight funds—including an international mutual fund that reflects the diversified nature of investing in the 1990s. That, along with an ongoing education program that includes newsletters and mailings, has persuaded workers to shift assets from fixed instruments and GICs to mutual funds that offer a far higher return.
To be sure, balancing the needs and desires of today's investors with the complexity of the marketplace requires deft and dexterity. As Cumming puts it: "If you offer too many funds, plan participants get overloaded. They fail to make good decisions. If you offer too few, they cannot diversify effectively based on their risk level and where they're at in their life." What's more, "The greater number of funds a company offers, the more difficult it becomes to adequately communicate all the necessary information about them," says James H. Gately, senior vice president in the institutional division at the Vanguard Group, a Pittsburgh-based mutual fund group that handles more than $30 billion in assets and works with more than 2,000 companies that offer 401(k) plans.
In fact, the growing complexity of the situation is forcing many companies with 401(k)s to reevaluate their fundamental approach. Many are now offering at least one or two lifestyle funds, which allow a money manager to shift and tweak investors' assets based on a risk-reward model appropriate for an individual's age and demographics. Not surprisingly, that eliminates much of the mystique and confusion over specific asset allocation. "But it does not eliminate the need for financial awareness and education," warns Hindeman.
HR must determine the needs of the company and the workers.
First Interstate's Kozlen, who has worked with dozens of companies to establish 401(k) plans, believes that HR must help analyze the age, education, economic level and knowledge of the work force. It means studying what similar companies offer and what options 401(k) providers have available. Finally, it means working with other departments—particularly finance—to determine what makes economic sense for the company. "Whether it's done internally or through an outside consultant, it's necessary to examine options and then choose the pieces that best fit the needs of the company," he says.
When ALCOA began studying how best to revamp its plan, it created a 12-person cross-functional team that included information systems, tax and legal experts, payroll, accounting, HR and representatives from various business units. The group spent months studying a wide range of issues—such as what percentage of matching funds would be appropriate for the 401(k) and what mutual fund vendors seemed best. It also relied on expertise provided by New York-based Buck Consultants. Says Heckathorn: "There's no question that it's far more difficult to work as a team. It makes the process more complicated and difficult to manage. But, instead of walls and barriers being erected, you create a plan that benefits the workers."
To be certain, ALCOA has stripped away many of the bugaboos that can bring a retirement plan crashing down. Consider its enrollment process: Unlike most firms, which require an employee to provide a year of service in order to become eligible for a 401(k), it signs up workers immediately and offers the $1 matching benefit as the carrot. "If people get used to money being deducted from the very beginning, they learn to live with it. After they have lived on a salary for a year, it's tough to make the change," says Heckathorn. But ALCOA also makes the sign-up process a snap. The firm mails an information package out immediately; new hires can use a personal identification number to enroll by phone or at a kiosk. And once online, employees can access and track a wide array of other benefits.
But the commitment doesn't stop there. Although quarterly participation statements are no longer necessary because workers can access account data any time they desire, ALCOA continues to mail them out. While many companies would view that as an unnecessary expense, Heckathorn views it as an opportunity to communicate with workers. The mailing includes fliers with financial tips, short surveys and plan updates. In early 1995, the firm will roll out an ambitious financial-education program that will cover retirement, college tuition planning, buying a house and understanding financial markets. "Financial planning doesn't occur in a vacuum. All the components—including retirement—fit together," says Heckathorn. Indeed, such innovations have proven popular and effective. At the end of 1993, ALCOA surveyed its work force and found that the redesigned system garnered an approval rating ranging from 92% to 98% for nine different criteria. That compares to a 70% approval rating with the old program. Notes Heckathorn: "We view our employees as customers, and we embrace the attitude that we have a product to sell. We have adopted a profit-center orientation, which has transformed us from administrators to consultants." And that's a philosophy that appeals to financial experts. "Getting employees educated and involved is part of stewardship," concludes Hindeman. "A company may experience layoffs and have ongoing budget problems that make it difficult to focus on financial planning. But, in the end, it's crucial to send a message that employees are an important resource. The reward for companies that succeed is stronger earnings, greater productivity and a better and more satisfied work force."
Personnel Journal, November 1994, Vol. 73, No. 11, pp. 38-44.