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Highlighting Employee Investment Gaps

December 9, 2010

Two years after spinning off from Tyco International, Covidien decided that its retirement plan wasn’t adequately preparing its participants for retirement.

Covidien, a Mansfield, Massachusetts-based maker of medical equipment, thought the old 401(k) didn’t mirror its new corporate values of accountability, collaboration, compassion and diversity. Under that plan, employees who didn’t put some of their salary into their defined contribution plan wouldn’t get a penny in retirement contributions from the company.

In late 2009, Covidien redesigned the plan, giving all enrollees a contribution equal to 3 percent of their pay even if they didn’t contribute to their accounts. Plus, employees contributing 6 percent of pay would be eligible to receive an additional 3 percent match from the company. The new goal was for the company and participant to collectively contribute 12 percent of pay annually to employees’ accounts.

Now that the company felt it had a retirement plan that would help employees get ready for retirement, it had to communicate it effectively so employees would understand, participate and invest effectively, says Joe Mongelli, Covidien’s director of global benefits strategy.

Covidien introduced its Target Retirement Savings Rate campaign—a new communication strategy focusing on getting employees enrolled in the plan. In the first quarter of this year, participants received detailed savings education, and in the second quarter they were introduced to new investment funds and advised on investment strategy.

Separating each step and reinforcing individual messages through multiple communication strategies made it simpler for employees to understand how to prepare for retirement, Mongelli says.

“The company needed to be accountable for what the employees knew about how to have an adequate retirement account balance,” Mongelli says. “It’s wasn’t just about making (investment) tools available.”

The multitiered approach resulted in 19,000 employees participating in the company’s $1.4 billion 401(k) plan, a 10 percentage point increase to 96 percent from 2009. Plus, 45 percent of Covidien’s participants increased their contribution to the plan.

“It was all well worth the investment,” Mongelli says.

With the first wave of baby boomers turning 65 in 2011, many companies are taking Covidien’s approach in re-evaluating whether employees are adequately preparing for retirement.

“We have been far too delicate with retirement education and advice,” says Jennifer Benz, CEO and founder of Benz Communications, a San Francisco-based benefits communications company. Moving into 2011, “we need to be a lot more directive and show employees what their numbers mean to them.”

Covidien sent nearly 17,000 personalized letters showing participants their exact account balances and current investment structure. The letter carefully explained whether participants were contributing enough to be ready for retirement.

With a 45 percent increase to contributions, “we certainly got their attention,” Mongelli says.

Employers are definitely stepping up the information available to participants, says David Wray, president of the Profit Sharing/401k Council of America. Of 1,000 employers surveyed by the PSCA in November, half said they have or plan to increase education efforts to employees. Likewise, nearly 20 percent said they have or plan to increase investment advice next year.

“Employers are working toward having a more complete consultative service for employees,” Wray says.

And account balances are moving in the right direction. While the Employee Benefit Research Institute’s July Retirement Readiness Rating showed nearly half of people ages 56 to 62 won’t have enough money to last throughout retirement, Americans are saving more today than when the survey was last conducted. In 2003, the same group had a 59 percent chance of being at risk.

“We know there is a gap, but employers are helping to close it,” Wray says. “There still is a lot of work to do.”

Employers need to be more direct communicating with employees, because many workers aren’t taking advantage of retirement information available, experts say. In September, a Charles Schwab survey of 1,005 401(k) participants showed that 55 percent said they would use investment advice if offered, but less than 10 percent actually use advice when it’s available.

The Schwab survey showed taking investment advice works: 70 percent of participants getting investment advice increase contribution rates and nearly double their savings accounts.

Beth McHugh, vice president of market insights for Fidelity Investments, says more than half of 11 million active participants have logged onto Fidelity’s benefits portal or have talked with a company investment adviser this year. Participants in Fidelity accounts who are 55 or older have more than doubled from 10 years ago their balances to $211,300 by the end of the third quarter of 2010.

“More individuals are recognizing they need help and they are calling us,” McHugh says.

In looking at next year, experts agree that employers will have multiple communications challenges.

In preparing for retirement readiness, employers will need to see whether employees are rebalancing their accounts and making sure they have an asset mix appropriate for their needs, says Pam Hess, director of retirement research at Aon Hewitt.

Aon Hewitt’s 401(k) Index Observations has tracked a 6 percent steady movement from equities to fixed income in defined contribution plans this year.

“People have locked in inferior performance and they’re not rebalancing,” Hess says, adding companies need to remind participants of the informational tools available.

And with Washington’s new regulation requiring employers to disclose investment fees to participants as well as the possibility of requiring employers who use target date funds to detail more information, employers will have to be very clear and transparent in explaining what fees mean, experts agree.

“The concept may be a surprise to participants because it has never been mentioned before,” Benz says.

A simple comparison of how much cheaper retirement plan fees are as opposed to individual retirement accounts might be a realistic way participants can see the value of investing in their company plan, Benz says.

“Employers will need to do it in a way that makes sense to employees,” she says.

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