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Market Mess Exposes Gaps in 401(k) Savers’ Knowledge

October 13, 2008

Heading into work September 15, Linda Garcia knew she was in for a long day.

That morning, amid a financial market meltdown, Bank of America announced it was acquiring Merrill Lynch. Garcia, vice president of HR at Seffner, Florida-based Rooms To Go, knew employees would have questions regarding the deal’s effect on their 401(k) plans.

What Garcia didn’t expect was the kinds of questions she received from employees. While she knew there would be specific concerns with Merrill Lynch as the record keeper for the furniture company’s 401(k) plan, she didn’t realize how little employees understood about what that meant.

“We were getting questions about how the decline in Merrill’s stock price was affecting their 401(k)s,” she said. “People didn’t understand what the role of a record keeper was or how it all worked.”

Garcia is one of a number of HR managers who have realized in recent weeks that despite all the financial education they offer, many employees still don’t understand the fundamentals of 401(k) plans.

George Lane, a principal at Mercer in Washington, said the crisis has revealed deep misconceptions among workers about how 401(k) plans work. Last month, as Wall Street imploded, Lane traveled to an employer to facilitate a town hall-like discussion for employees on retirement benefits. One employee mistakenly believed that her 401(k) was protected by the Federal Deposit Insurance Corp.

“She said, ‘We don’t have to worry about our 401(k)s because they’re insured up to a hundred thousand dollars,’ ” Lane said. “I just shook my head.”

Such questions always come up in times of crisis, said Don Stone, a Chicago-based 401(k) consultant.

“It illustrates that people aren’t educated about investing and not reading the materials that are made available to them,” he said.
The good news is that as a result, many investors are stuck in a state of inertia in times of market volatility, which is, usually, what they should do so they can be fully invested when the markets recover, Stone said.

And that’s why many companies have decided in the past few weeks to hold off on sending communications to employees about the market crisis, he said.

“By sending out communications, they may be raising people’s temperature instead of lowering it,” Stone said.

Novi, Michigan-based Trinity Health Services delayed sending communications during the height of the crisis about the importance of investors staying the course, said Silvia Frank, manager of defined-contribution plans.

“We pulled back on that because the message wasn’t different from the guidance we have been giving,” Frank said. “We want to be careful with what we communicate given the magnitude of what’s happening.”

Rooms To Go has taken a different approach. In fact, the week of September 15, Garcia sent an e-mail explaining what the Bank of America acquisition meant, which was followed by an e-mail from Merrill Lynch.

Later that week, Garcia sent another e-mail to the company’s plan participants about money market funds. “We are just trying to keep putting e-mails out on different topics to make sure people don’t panic and do something foolish with their investments,” she said.

Ultimately, employers need to come to terms with the reality that there will always be employees who don’t pay attention to their investments, Stone said.

“That’s why a lot of people are pushing for auto-everything on 401(k) plans,” he said. “The reality is, most people are not investment gurus and we aren’t going to get them there.”

Jessica Marquez and Jeremy Smerd

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