Indeed, although 401(k) and 403(b) plans have changed the face of retirement planning and provided some workers with fat returns, many retirement plans have succeeded in spite of themselves. Thanks to a raging but aging bull market, investment mania has stampeded from Wall Street to Main Street. "A steadily growing number of people are investing in mutual funds because they see the high returns that are possible," notes Randy Thurman, president of Retirement Investment Advisors Inc., an Oklahoma City firm that offers financial planning to individuals. "Unfortunately, many people don’t understand the investment options and the risks in a 401(k)."
It’s no small problem. According to international consulting and actuarial firm Towers Perrin, based in New York City, 39 percent of all 401(k) participants say they don’t know how their savings plan assets are allocated; 32 percent believe an investment in bonds presents no risk; and 14 percent think a mutual fund has no risk. To be sure, it’s one of life’s great ironies: Workers spend decades pulling down a paycheck and fretting over bills but devote nary a moment to understanding personal finance and planning for retirement. "It’s something that a lot of individuals just don’t want to deal with," says Brian Ternoey, a principal at William M. Mercer Investment Consulting in New York City.
As a result, companies end up with employees who invest too conservatively to ever meet their retirement goals, workers who aren’t prepared for a severe and prolonged downturn in the stock market and individuals who don’t take full advantage of matching funds from their employers. And there are others who, because of the exceptional returns during the ’90s, have warped expectations about saving and borrowing. "They expect to earn a return of 20 percent a year—they plan their retirement around it—and that’s simply not possible over the long run," states Arnone. He adds, "The current generation of investors have never experienced a prolonged bear market and watched the value of their retirement accounts drop by 25 percent, even 50 percent."
The upshot? "When such an event takes place—and it’s only a matter of time until it does—workers who aren’t prepared are going to get upset and take legal action against their employers," says Arnone. In fact, the U.S. court system is already littered with lawsuits swirling around pension plans and 401(k)s. Litigants can file lawsuits for any number of reasons. For example, a handful of cases claim that specific employers failed to educate and inform workers in a manner consistent with the Employee Retirement Income Security Act of 1974 (ERISA). The act offers guidelines for administering a retirement plan. Litigants also can challenge their employers who fail to provide enough options.
For human resources professionals, that translates into some serious challenges. Yes, HR wants to give employees "real control" over their investments, which reduces employers’ liability for the results of those investments. That’s why program design and employee access are important. But both elements are meaningless without a strong, continuous educational program that permits sufficiently informed decisions. Because education is the weakest link, HR still needs to sit in the driver’s seat.
Start with a meaningful design.
Over the last two decades, companies have pushed workers to take control over their own retirement planning. Although many organizations continue to administer pension plans, and some use stock options and deferred compensation as employee benefits, the 401(k) has steadily moved into the spotlight. In a sense, it’s an ideal way to attract and retain quality workers while supporting the concept of employee self-determination. Today, nearly $1 trillion is held in 401(k)s, and about 66 percent of all eligible workers participate, according to KPMG.
According to experts, the trend is for companies to offer a greater selection of funds. A dearth of choices makes it difficult to invest effectively and could lead to litigation—if irked employees are unable to reach retirement goals and decide to blame their employers for the shortfall. Historically, says Michael Dickerman, director of the Professional Development Institute at Towers Perrin in Philadelphia, the trend has been for workers to invest too conservatively—particularly women. "There’s a tremendous risk of not meeting your retirement goals if you put all your money in a GIC," he says. (A guaranteed investment contract, GIC, uses an index to provide interest at predetermined dates.) And while that situation has begun to change—the William M. Mercer "Survey on Employee Savings Plans 1997" found that employee contributions to equity funds rose from 38 percent to 44 percent in 1996, while GIC investments dropped from 21 percent to 18 percent—it’s clear that many individuals still aren’t prepared for the future.
When Mercer conducted its survey, it discovered that employers have steadily improved the quality of 401(k) programs over the years. Today, the typical savings plan participant has more than 8.2 investment options available, up from 7.7 in 1996. A decade ago the figure typically hovered between three and four choices. Moreover, today’s employers are more likely to add equity options to the mix—including international funds, bond funds and balanced funds. The use of life-cycle funds—which add the ability to use asset allocation—grew from 7 percent to 11 percent of all funds in 1997.
New York City-based J.P. Morgan & Co. Inc. is one company that takes choice of investment seriously. By all accounts, J.P. Morgan’s program has been a success. Both the participation and savings rates exceed industry averages. All 10,000 domestic employees are eligible for the plan, and 73 percent sign up. The typical employee contributes 9 percent of his or her income to the 401(k) and receives an additional profit-sharing bonus that typically ranges from 13 percent to 20 percent of base salary per year—half of which is deferred into the 401(k). Employees can choose from 10 investment funds—including an international equity fund, various U.S. stock funds, bond funds, a GIC and J.P. Morgan’s stock. "It’s essential to offer a range of choices that reflects today’s investment opportunities," says Naylor.
Offering enough choices to fulfill the retirement needs of your workforce is the first step. Communicating the significance of those options is the second. HR people have gotten the message that they need to communicate often about what they have available to drum participation levels. Mary Nell Billings, a manager of savings and retirement plan administration at Memphis-based Harrah’s Entertainment, is one such person. She has blitzed workers at Harrah’s Entertainment with educational materials over the last few years. There are eye-catching posters trumpeting the company’s dollar-per-dollar percentage match up to 6 percent of pay, as well as colorful newsletters, postcards and promotional items. This year, the company will offer 72 retirement planning workshops while continuing to send informational packets to new employees. As a result, approximately 65 percent of the firm’s 20,000 employees, who tend to be young and nonprofessional, participate —up 4 percent in the last year alone.
At J.P. Morgan, new hires attend a one-day seminar; existing employees can attend financial planning workshops that are offered once a month; and employees can take advantage of personal retirement planning. The company also uses newsletters, brochures and videotapes. And, every quarter, employees receive detailed statements that display charts, graphs and asset allocation information. In addition, every year on April 15, Gary Naylor, vice president in the profit sharing/401(k) department, sends a personalized letter to every employee who hasn’t signed up for the plan. Last year, that totaled more than 1,500 messages, altogether netting about 280 new participants.
What J.P. Morgan does that many companies forget, however, is to enhance these communications with communication about how to invest. Too often companies get so focused on participation levels they don’t notice that employees are making poor investment decisions—such as investing 100 percent of their savings in their company’s stock or in a GIC.
But a workforce that doesn’t understand how to diversify investments, can’t recognize the benefit of the matching component within a 401(k) plan and is willing to raid its retirement accounts for routine expenses, can turn around and blame HR later for not properly informing them of their options. This becomes an even greater issue as more and more 401(k) funds get invested in the stock market. "Historically, bear markets have been part of the investment picture. Over the last two decades —during the entire existence of the 401(k)—investors haven’t had to deal with substantial losses over a long period of time," says Arnone. It’s his belief that a grinding bear market—such as the one that last appeared in the 1970s when stocks dropped nearly 50 percent over two years—could leave some workers running for the exits. "Unless employees understand that such an event could take place, unless they know how to deal with it, many are likely to panic and sell their holdings at a great loss," says Arnone. "At that point they’re going to blame their employers and follow that with lawsuits."
To avoid such situations, Arnone suggests employers follow U.S. Department of Labor ERISA 404(c) guidelines established in 1994 (which reduce legal liability when an educational program is in place), as well as a 1996 interpretative bulletin on investment education. The latter says employers and service providers can provide three categories of information and material without being liable for losses arising from workers’ investment decisions.
Provide easy access.
There’s one final and essential piece to the 401(k) puzzle: Ensuring that employees receive a high level of customer service. According to Thurman, that translates into offering reasonable expense fees, quick and easy account access, and a program that’s understandable. "It doesn’t matter how good your choices are and how excellent your education program is if people can’t make heads or tails out of it," he says. Adds Adam Their, vice president of product marketing at Lawson Software, a Minneapolis-based vendor of Web-enabled HRMS systems that manage defined benefits, "There’s a growing regulatory environment that’s forcing companies to give people better access to their retirement data."
For an increasing number of companies, technology is helping to solve the problem. Most major 401(k) providers and several leading consulting firms now offer stand-alone software and Internet sites that can help employees conduct sophisticated modeling and plan their retirement. The ability to view charts, graphs and hard numbers can help many individuals better understand what is otherwise a murky and confusing topic. In many instances, these workers are able to plan their retirement in the comfort of their own homes.
In addition, companies are migrating away from unwieldy interactive voice-response systems and toward Web-based 401(k) access via kiosk or desktop computers. William Mercer found that half the companies it surveyed plan to use the Internet or an intranet within the next two years. Already, at Compaq Computer Corp., employees can directly access their accounts through an extranet that links to The Vanguard Group. They can check account balances real-time, receive a fund prospectus electronically, and they’ll soon be able to purchase funds and shift investments online. Says Arnone, "Electronic commerce is the key to the future of retirement planning."
That might be so, but ultimate responsibility for 401(k) participation will always remain with human resources. The finance department might design the program and IT professionals might put all the technological components in place, but persuading employees to save and invest wisely requires a well-conceived strategy and plenty of persistence. As William M. Mercer’s Ternoey puts it: "Ultimately, human resources professionals must know what’s possible and what’s appropriate for employees." They have to establish a plan that works and then commit to selling it. Only then will HR deserve to sit behind the steering wheel.
Workforce, April 1998, Vol. 77, No. 4, pp. 70-77.