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401(k) Trends: Employers Respond to Workers' Desire for Advice, Personalized Education, Improved Plans

By Clifton Linton Senior Writer, mPower

Saving in a 401(k) plan used to be pretty easy -- put money in, watch it grow. Not any more.

Before 2001, the issues of how much to save in the plan and what investments to choose were almost afterthoughts. As long as you put your money in equities, the rising market tide lifted all boats.

Then the stopper came out. That rising tide ebbed and many 401(k) balances were left aground. Workers found that managing their 401(k)s was more complicated than it used to be.

Now, they are pleading for a life rope. They want employers to provide more financial education and investment advice for their 401(k) plans, one survey shows.

And, they need it, another concludes. Many workers don't understand the basic concept of investment risk, or how investments work. Further, they believe that investing in company stock is actually safer than putting money in a well-diversified portfolio, a third survey says.

Finally, they may have run aground simply because it was too hard to sort through the increasing number of investment choices offered in their plans.

Employers are responding by stepping up oversight of their plans. And they are also offering more education and investment advice. The question: Will employees use it?

Employee Ignorance

Over the past 10 years, the 401(k) plan became the dominant retirement savings tool available to workers. Flexible rules and relatively low administrative costs made 401(k)s attractive to employers. Many who previously couldn't afford to offer a plan, now could.

But, the 401(k) is different from the defined-benefit pension plans that dominated in the past. Employers hired professionals to manage those pension plans and determine savings rates in order to meet guaranteed benefits. With the 401(k), that responsibility fell on workers.

They haven't handled it well, concludes a 2002 John Hancock Financial Services study of 401(k) participant behavior.

	"The majority of participants have a relatively low level of investment skill and understanding and are largely unprepared to manage their retirement portfolios successfully by themselves." John Hancock Financial Services study

"The majority of participants have a relatively low level of investment skill and understanding and are largely unprepared to manage their retirement portfolios successfully by themselves," the study said.

For example, only 8 percent of participants knew that money market funds only contain short-term securities. And respondents rated their familiarity with money market funds as second only to company stock.

The study's conclusion is especially troubling because it's based on similar results from seven surveys over the past 10 years -- not just on a single year's results.

So, during one of the greatest bull markets, employees never learned retirement planning skills.

Company Stock Blind Spot

One blind spot for employees is company stock. Many think it's a safe investment. Reality has shown the opposite. A large holding in a single stock is far riskier than a similar investment in a mutual fund, which holds a basket of stocks.

Enron's and Worldcom's declines showed the dangers. In better days, many of these companies' workers invested their 401(k) savings in company stock. Today, those holdings are practically worthless.

Yet, few 401(k) participants saw these stories as a reason to sell their own holdings, said a Boston Research Group study.

	"Participants are not moving away from company stock. And very (few) fear that their company stock is any less risky than anything else." Warren Cormier, president of Boston Research Group

"Participants are not moving away from company stock," said Warren Cormier, president of Boston Research Group.

The Hancock study was more blunt. "Participants perceive a lower level of risk for their company stock than for domestic, diversified stock funds," it said. "This is true despite all the publicity about Enron. There appears to be the attitude, 'that may have happened at Enron, but it wouldn't happen at my company,'" the study said.

Asking for Help

Workers are starting to ask for help.

A CIGNA Retirement & Investment Services study said 89 percent of employees want their employer to make personal financial planning advice available.

This is an area where many employers and the benefits industry appear to have let workers down.

"The industry has not done a great job of educating workers," said Deanna Miller, vice president, communications with CIGNA Retirement & Investment Services. "We have provided information, not knowledge."

She also said that the material many employers have provided isn't adequate, given employees' varying levels of investment knowledge.

Currently, the law does not allow employers themselves to advise employees on how to invest their retirement money. Department of Labor rulings, however, encourage them to offer advice from an independent provider. Even so, many employers worry they might be held liable if an employee is unhappy with the results of the advice. (mPower, the publisher of this site, provides independent investment advice to retirement plan participants.) Congress is considering legislation that would clarify the liability question.

Employer Response

Employers are responding in several ways:

1. More are offering advice.
2. More are offering investments, like lifestyle funds, that let employees hand the investment decision-making to a professional.
3. They are intensifying their reviews of their plans.

The Profit Sharing/401(k) Council of America's annual survey of profit-sharing and 401(k) plans said 41.4 percent of plans offered some kind of investment advice in 2001. That is up from 35.2 percent the previous year.

Employers are paying more attention to plan administration. But, some don't know what to do.

For instance, many small plan sponsors don't know they need an investment policy statement in order to run their plan responsibly, said McHenry Consulting Group, a 401(k)-plan research firm in Berkeley, Calif. This document defines why and how investments are chosen. The firm, in September, released preliminary results of a study of retirement plan sponsor needs.

It's one thing to have this document. It's another to use it, and many haven't. But now, many employers, worried about lawsuits, are dusting theirs off.

That's changed the work coming to Trisha Brambley, president of Resources for Retirement Plans Inc. Most of her work used to be helping employers design plans. Now they're asking her to develop investment policies and to review and evaluate funds.

McHenry's study backs Brambley's anecdotal evidence. It found that many employers do not have systems for monitoring fund performance.

Some employers have added funds when employees asked, but haven't questioned whether adding the fund was appropriate for the plan.

As a result, plans are becoming overstuffed with funds. In 2001 the average number of funds offered by plans was 15, the PSCA said. Too much choice can be counterproductive, though. Plan participants become overloaded with information. Consequently, they don't make a choice at all.

	"There is an increasing recognition that there are too many choices in plans. We are at the saturation point." David Wray, president of the PSCA

"There is an increasing recognition that there are too many choices in plans," said David Wray, president of the PSCA. "We are at the saturation point."

What is needed are fewer, better choices with broad parameters. That way, employees "get good asset allocation," he said.

One solution has been to offer lifestyle funds. Workers choosing this type of fund need to pick a risk level. Based on that, the fund manager chooses investments.

The PSCA said 32.1 percent of plans offered lifestyle funds in 2001. That was up from 27.6 percent in 2000.

Still, offering a lifestyle fund requires the employer to educate workers on how to use it. Take a 401(k) plan with four investment choices. It's common to see workers evenly split their savings among all four. When the lifestyle fund is added, the employees split their savings among all five investments. Workers "don't realize the lifestyle fund is diversified by itself," said Lori Lucas, defined-contribution consultant with Hewitt Associates.

Employee Action

Will workers take advantage of employers' efforts? Possibly not.

Employers and workers have historically taken a skimpy approach toward 401(k) education. Workers don't make it a priority, Lucas said. "The typical 401(k) plan participant doesn't want to spend more than 20 minutes a month" learning about or reviewing his or her plan, she said.

A Deloitte & Touche survey, to be released in October, found that 50 percent of employers say the biggest barrier to success is the lack of employee understanding of the plan.

Still, many employers only devote a single one-hour meeting a year to the subject.

Neither is devoting enough time, industry experts say.

What's needed is for workers to go back to school, Cormier said. "They need to be tested, corrected, lectured to and tested," he said. "That's not happening."

Indeed, CIGNA found it needs to hound employees to act on their plan. "To transfer a concept, you need to reinforce seven times in 21 days," Miller said.

It's almost as if there's a job opening for a professional nagger. Hello, Mom?

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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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