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Improving Employees' Financial Literacy

November 1, 2010
Related Topics: Retirement/Pensions, Benefit Design and Communication, Featured Article, Compensation

JB Hunt Transport Services Inc. has been offering investment advice to its 401(k) plan participants for about five years. The problem is getting people to use it.

Mark Greenway, JB Hunt’s senior vice president of human resources, says only 25 percent of the company’s 401(k) plan participants take advantage of the advice. “We’re giving them all the tools available to prepare them for a successful retirement,” Greenway says. In terms of participants using the advice, Greenway adds, “I think we can do better, and we are continuing to sell our case.”

JB Hunt’s situation is emblematic of what is happening in many companies today. About 60 percent of plans offered some kind of investment advice to participants in 2009, the Profit Sharing/401k Council of America’s annual survey showed. That’s up from 51.8 percent in 2008. The same survey, which covered 931 plans with 8.6 million participants and more than $628 billion in plan assets, reported that only 21.6 percent of participants used the advice that was offered.

The 2008 financial crisis had a great effect on what employers were providing participants, says Christopher Jones, chief investment officer for independent advisory firm Financial Engines.

“Employers saw firsthand the damage markets can do and the struggles participants had,” Jones says. “We are moving to a world where 401(k) plans should come with a lot of help built in. Participants are beginning to expect that.”

Financial advisers typically provide recommendations that are based off participants’ plan data. Advisers, who are considered fiduciaries to the plan, can show participants multiple outcome scenarios depending upon various investment mixes. Advice is different from investment education, which is not employee specific, but is a more broad presentation of the investments themselves and the risks associated.

Experts agree that it’s tough getting participants to see the importance of investment advice. In a September Charles Schwab Corp. survey on investor behavior, 55 percent of participants said they would use professional advice if offered, but less than 10 percent of people who have advice available actually use it. Nearly half of the respondents say they would prefer to have saved $100,000 before taking the advice, while a quarter say their daily financial concerns matter more.

“Advice does work when it’s offered,” says Dave Gray, Schwab’s vice president of 401(k) plan sponsor services. “There is a growing sense that outcomes do matter and employers need to play a role.”

About 63 percent of JB Hunt’s employees are enrolled in the 401(k) plan and a quarter is taking advantage of the advice offered through Bank of America Merrill Lynch. For those using the advice, 94 percent are appropriately concentrated in various investment options. Only 28 percent of the participants who are not using investment advice are well-diversified, Merrill Lynch adviser data show.

Just like JB Hunt’s statistics, the Schwab study on investor behavior showed that participants using advice had improved savings rates, better diversification using an average eight investment options, as well as being more disciplined in staying the course in their investments during the financial crisis, which started in 2008.

Gray says people tend to focus on investment advice when it is delivered personally with a face-to-face meeting. About 51 percent of the 401(k) participants in the Schwab survey agree. Other ways Schwab recommends getting participants to engage include synchronizing advice with life changes, using a trusted third party and showing how using advice increases investment returns.

“It’s hard for people to put emphasis on something that is very far away,” says Financial Engines’ Jones.

Still, some believe that offering investment education is what employees need. Annette Grabow, manager of retirement benefits at Minneapolis-based M.A. Mortenson Construction Co., says that a solid but fun education campaign is what drives her employees to become better investors.

Grabow says she isn’t comfortable with rules defining investment advisers, and that the education Mortenson employees receive makes a difference in their financial knowledge.
“Our employees can’t reach their retirement goals without having their finances in general in order,” she says.

Each year, Grabow partners with investment educator Financial Finesse Inc. and initiates a financial education campaign for Mortenson’s 401(k) plan participants. This year’s theme, Got Your Wires Crossed, is designed to improve workers’ financial literacy, including budgeting, advanced investing and Social Security workshops.

Grabow’s approach has worked. To date, 93 percent of Mortenson’s 2,200 employees participate in the plan and on average contribute 7.6 percent of their salary to their 401(k) plan accounts. The Profit Sharing/401k Council’s national survey showed participants contributed an average 3 percent of pay.

After last year’s education campaign, 89 percent of participants said they did something to improve their financial situation, like reviewing 401(k) asset allocation or reducing credit card debt. “This is real education for our workers,” Grabow says. “We have seen a real growth in our employees’ financial knowledge.”

Workforce Management Online, November 2010 -- Register Now!

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