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New Law May Enable More Firms to Offer Workers Face-to-Face 401(k) Advice

November 29, 2006
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Related Topics: Retirement/Pensions, Benefit Design and Communication, Featured Article, Compensation
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Silgan Containers isn’t slacking when it comes to giving its employees educational materials and online tools to help then plan for their retirement. But despite that, the company found that the word wasn’t getting through. Only 63 percent of the company’s 3,800 eligible employees invest in its 401(k) plans.

    There is something else, though, that’s almost as disturbing to Tony Cost, vice president of human resources. Twenty percent of the plan’s assets are invested in a stable-value fund—far too conservative an option for most employees of Silgan, where the average age is 47. The company makes cans and other food containers and is based in Woodland Hills, California.

    "I hear in the news about people retiring with $60,000 in their 401(k) plans, and I just feel that more needs to be done," he says. That amount doesn’t even come close to being enough to cover the expenses of the average 65-year-old couple today, research conducted by Fidelity Investments shows. Out-of-pocket health care costs alone for such a couple over the course of their retirement would be roughly $200,000 today, according to Fidelity.

    Cost believes that in addition to getting employees on the right financial track, offering face-to-face advice would help his company, and other employers, attract and retain talent.

    "I think offering retirement savings advice can contribute to employees’ sense of belonging and give them a sense of security," he says. "People who sit in my chair have to be thinking about these things as a matter of recruiting and retention."

    And while online advice tools are helpful, Cost doesn’t think that most employees are using them. "The number of hits to our Web site is not the kind of number that makes me a happy guy," he says. He wants to provide employees with some hand-holding so that eventually they might be more comfortable using online tools.

    Cost voices sentiments that can be found at hundreds of companies that offer 401(k)s. But until recently, there have not been many cost-effective ways for employers to offer face-to-face advice to employees who are spread out across the country. Under previous legislation, these companies couldn’t ask their 401(k) plan record keepers to provide advice. It was viewed as a potential conflict of interest, since these providers could just steer employees into their own funds.

    But the recently passed Pension Protection Act changes all that. Under the law, 401(k) plan providers can now offer advice to 401(k) plan participants under two scenarios. The first involves the Web. The second scenario allows 401(k) plan providers and money managers to offer face-to-face advice, provided that participants are charged a flat fee for it.

    Experts anticipate that the change in legislation will prompt all major 401(k) providers and money managers to begin offering face-to-face advice. Fidelity Investments has already seen an increase in calls from employers about such offerings, says Jeffrey Carney, president of Fidelity Institutional Retirement Services Co. To accommodate that demand, Fidelity refers employers to advisors through its Fidelity Retirement Income Advantage program, which it launched two years ago.

    The Boston-based financial services firm plans to further integrate its online tools to allow its representatives to assist employees, either on site through its walk-in centers or over the phone.


"The demand for face-to-face advice has always been there, but now providers have a channel to deliver it." --Dirk Pantone, College of
Financial Planning

    One issue with the new law, however, has many money managers and 401(k) providers waiting for more guidance. And that’s the matter of fees. By forcing companies to charge a flat fee, it might be difficult for providers to make a profit from offering face-to-face advice, says Dirk Pantone, vice president of business development for the College of Financial Planning, which trains financial advisors. Traditionally, advisors charge 1 percent of the client’s investable assets, which means that they can earn more as their clients’ accounts grow.

    Despite this, Pantone estimates that all the major 401(k) record keepers will start training their call center representatives to give advice to employees. And Pantone says he is seeing an increase in interest from financial advisors in the College of Financial Planning’s six-month retirement planning course, which teaches financial advisors the ins and outs of the retirement plan market.

    The course already has 1,992 graduates this year, more than double the number of 2005 graduates.

    "The demand for face-to-face advice has always been there, but now providers have a channel to deliver it," Pantone says.

Potential challenges
    Choosing a financial advisor for employees can be a daunting task for employers. It’s particularly challenging in the post-Enron era. That company’s flame­out, brought to a kind of closure by last month’s 24-year sentence for CEO Jeffrey Skilling, put fiduciary liability at the front of employers’ minds.

    To begin considering the choice of advisor, companies need to put together a list of reasonable candidates, says David Wolfe, a partner in the Chicago law firm of Gardner, Carton & Douglas. They need to examine the business models of each of these companies and understand how they generate revenue and apply fees, he says.

"Employers need to go about this process and monitor these advice-givers just like they would with an investment manager," he says.

    The potential for being held accountable for the guidance given to employees is the No. 1 reason that many companies haven’t offered face-to-face advice so far, says Leslie Smith, director in the total rewards practice at Deloitte Consulting.

    Sixty-three percent of companies that don’t offer financial advice choose not to do so because of concerns around fiduciary liability, according to Deloitte.

    That’s exactly the reason that Silgan Containers might in the end decide against offering face-to-face advice, Cost says.

    "Clearly, the fiduciary question weighs heavily on me and my colleagues," he says. "If we take a conservative position, we won’t go forward with this idea because of the anxiety caused by the Enrons of the world. Some of us really want to help our employees, but we are hesitant to pull the trigger."

    Such concerns didn’t stop Basic American Foods, a Walnut Creek, California-based food services company, from mandating that all of its 1,700 employees meet with a financial advisor before they enroll in one of the company’s 401(k) plans.

    "There are several benefits to offering face-to-face advice," says Sally Smedal, treasurer and controller. First, offering financial advisors to employees helps to ensure that they will be able to retire when it’s appropriate, she says.

    "Also, I think employees feel better about themselves and better about the employer," she says. "So they are more likely to stay with you."

    Four years ago, Basic American was struggling to increase the participation of hourly workers in its 401(k) plan. Only 45 percent of these workers were enrolled in the plan. Basic American didn’t believe that online tools would work. The company didn’t think the Web would be the best way to reach the company’s Hispanic employees, who make up 60 percent of the workforce, Smedal says.

    Language was just part of the issue.

    "If you understand the Hispanic culture, there is a lot of mistrust of anyone managing their money for them," Smedal says. Also, it is common in the Hispanic culture for older relatives to rely on their families to support them after they retire, so they don’t necessarily see the reason to save the money themselves, she says.

    The face-to-face sessions help Hispanic employees to realize they can trust the company’s efforts on their behalf. They also better understand that it’s important to save for retirement, whether they retire in the U.S. or go back to their home country, Smedal says.

    Basic American began requiring all new hires to meet with a representative from Charles Schwab & Co., the company’s 401(k) plan record keeper. The company had offered the face-to-face sessions since 2001, but they weren’t mandatory.

    During the sessions, Schwab’s financial planners, who speak Spanish and English, spend about 30 minutes with each employee, going over their risk profile and suggesting funds.

    The service is part of Schwab’s total 401(k) package, so there is no extra fee for Basic American to pay. But the company does have to absorb the costs of taking its hourly workers off the floor. For the first couple of years, those costs averaged $15,000 annually. But that has now leveled out to $2,000 to $3,000 a year.

    The cost seems to be worth it. The company has seen 401(k) participation among its hourly workers jump to 65 percent since it began offering the service, Smedal says.

    The company keeps close track of fees and revenue-sharing to make sure it understands how Schwab is making money from the service, she says. "We keep track of what they are netting in terms of profit to make sure it’s appropriate," Smedal says.

Choosing the right model
    Some employers may decide to work with independent financial advisors to offer advice to employees, experts say. Doing this helps them avoid potential conflict-of-interest issues, says Mark Berg, a financial advisor with Timothy Financial Counsel in Wheaton, Illinois.

    Berg says his firm has seen a rise in demand from employers in recent years. "HR likes us because they don’t have to be concerned about conflicts of interest since we have nothing to sell," he says.

    Timothy Financial charges $210 an hour.

    Some financial advisory firms have discussed creating financial advisory networks to accommodate large employers with employees in different locations around the country, says David Wray, president of the Profit Sharing/401(k) Council of America.


By offering advice, "employees feel better about themselves and better bout the employer. So they are more likely to stay with you."
--Sally Smedal, Basic American Foods

    But many independent financial advisors might shy away from this market because they don’t see how they can make money, says Paul Yossem, vice president of qualified plans at Wheeler/Frost, a San Diego financial advisory firm.

    That might mean that 401(k) plan providers and money managers will dominate this business, observers say. If that’s the case, companies just need to make sure they understand every aspect of the providers’ revenue-sharing agreements and fees, Wolfe says.

    Some employers may refer employees to walk-in centers, where they can go visit with a financial advisor, Smith says. But that doesn’t get rid of the potential for conflict of interest.

    Cost and Silgan’s consultant, Mercer Human Resource Consulting, continues to weigh the pros and cons of offering face-to-face advice.

    The easier route would be to just automatically enroll employees into a target-date fund, but Cost thinks that doesn’t really get employees thinking about their retirement.

"Automatic enrollment into target-date funds is an option," he says. But Cost doesn’t want to do that just because everyone else is. "We want to challenge the norms and see if something else can be done," he says.

Workforce Management, November 20, 2006, pp. 34-35 -- Subscribe Now!

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