As the economy starts to stabilize, retirement-plan experts say plan sponsors need to stress certain elements of their retirement education and advice programs to get workers back on track with saving.
The first thing employers need to recognize is that employees are ready to hear the message again about saving for retirement, says Barrie Christman, vice president of individual investor services at the Principal Financial Group.
"We have emerged from the bunkers, and now we are dusting ourselves off. It's time to dream again," Christman says. If employers are in a position to promote their 401(k) plan, then now is a great time to promote a retirement readiness message.
Steps to take
"Automatic enrollment with auto-escalation of salary deferral rates is the most powerful tool a plan sponsor has as its disposal. There is always a lot of talk about education, communication and other plan features, but nothing matters as much as getting participants to participate and contribute as much as possible," says Mike Alfred, CEO and co-founder of BrightScope.
To win back employees who stopped contributing to their 401(k) accounts, plan sponsors will have to play the psychology card.
"One way is to make sure that the match structure takes full advantage of human nature and participant psychology. If you're matching 100% to 3%, why not match 50% to 6%? Participants seem to respond strongly to this type of incentive," explains Alfred.
He also prefers automated programs such as Financial Engines or Guided Choice, where the participant is not forced to make investing decisions.
"Participants often make poor decisions and trade too often when left to their own devices. Target-date funds are a good idea conceptually, but many of them are fraught with high fees and conflicts of interest, so you have to be very careful," Alfred adds.
Dave Shute, vice president and director of marketing at Transamerica, recommends that plan sponsors institute an educational policy statement listing strategies on how they are going to address employee education within the 401(k) plan.
The statement can examine the key pieces of the plan structure, such as deferral percentage and participation rates. In addition, having an educational policy statement allows the plan fiduciary to stay on course with its retirement education goals. The statement helps with driving consistent activity.
"The more tools and programs you can put in place to drive consistent activity around saving for retirement, the more effective your education is going to be for your employees," says Shute.
In addition, financial literacy can't be overstated, because it is on ongoing process, which means employers need to develop tools and programs that address the different levels of financial literacy within their workplace, Shute explains.
"This time of year is a great opportunity for folks to take stock of their retirement plans and the progress they are making toward saving for retirement," explains Beth McHugh, a vice president of market insight for Fidelity. This may mean adjusting their savings and investments to ensure they are on the right track.
As economic optimism grows, plan sponsors should also work with their providers to get a handle on who may not be contributing up to the match. Increased confidence over the economy is a perfect time to take a targeted approach to communication and try to help individuals incorporate a more holistic view of their retirement savings, McHugh says.
"You want to help participants get a clear understanding of where they need to be."
The adoption of auto-increase programs has really increased the saving rates among plan participants, so anything plan sponsors do along those lines is a plus, she adds.
As the economy rebounds, auto-plan designs cannot be overlooked.
During the financial crisis, "we saw some plan sponsors pull back from implementing programs in the auto-plan design space," says Amy Cribbs, head of participant experience at Vanguard.
With a rebounding economy, there's more opportunity to reinvigorate efforts on auto-increasing participant's savings rates and defaulting them in age-based target-date funds, Cribbs says.
"A strong economy can get those plans that have not adopted auto-plan design or have chosen more conservative designs to implement optimal plan designs that will get people saving and investing in the proper way."
Education is a great reinforcer. Cribbs believes participants who stayed the course in saving for retirement did so because of the reinforcement and encouragement of 401(k) educational programs.
In addition, financial advice programs have given participants built-in confidence, because they have access to an expert or the program provides validation of what they had already being doing.
To the extent that plan sponsors don't offer a 401(k) educational and financial advice program, the economic upswing presents a huge opportunity for plan sponsors to reenergize retirement-education programs through targeted education and the broadening of financial advice programs.
"The most effective plan education programs are repetitive. No single contact is going to be successful. It's communicate, communicate and then communicate some more. Best-practice employers find ways to periodically present employees with information about their plans and investment education," says David Wray, president of the Profit Sharing/401(k) Council of America.
Plan-related education is also more effective when it is tailored to an employer's workforce and even to specific segments of that workforce, he adds.
Wray further explains that educating in-person through seminars and workshops is an effective approach.
An example of an effective program would be periodic newsletters customized for a company's participants augmented by in-person seminars and workshops, he contends.
Employers going the extra distance implement individually targeted communications. For example, a special reminder e-mailed to all those at the company who are not saving enough to get the full company match can be an effective approach.
"As we move into the future, more customized communication and education will be done using new technology supported approaches. These will likely include social networking sites such as Facebook and Twitter and direct communication to handheld devices such as iPhones," Wray explains.
"Companies supporting participants who want to dive deep into the subject matter have extremely robust websites. Advice is most effective when provided face-to-face. If face-to-face is not practical or too expensive, then the most effective approach is a telephone call center," he adds. "Most companies provide advice using Internet websites because such websites are accessible 24/7 by participants and are inexpensive. However, studies have shown that participants are considerably less likely to make a change using Internet-provided advice only." LCB.
Retirement best practices guide
* Meet one-on-one with employees as needed. Meeting individually with employees when they become eligible for the 401(k) plan helps make sure they understand their options. Consider also meeting with employees who could participate, but aren't, to show how much money they're leaving on the table.
* Offer targeted education for older employees. Employees age 55 and older are facing a major transition in their financial goals and can benefit greatly from education about the decumulation phase.
* Show younger employees how their savings could grow. Give young employees examples of what they could accumulate by age 65 if they started in their mid-twenties. Seeing what they could accumulate in black and white can be a strong motivator.
* Tell lower-income employees about the Savers Credit. Be sure to inform new employees about this little-known tax credit, which is like a matching contribution from Uncle Sam. Visit irs.gov for details.
* Make retirement education meetings mandatory? The American Immigration Lawyers Association makes one-on-one meetings with a financial professional mandatory for employees age 35 and older.
* Implement automatic enrollment. Getting employees started in the 401(k) plan can be one of the biggest challenges. Automatic enrollment has been proven to be very effective at helping to boost participation.
* Offer automatic deferral increases. Automa tically increasing retirement plan deferrals can help employees boost their savings a little at a time. Consider lifecycle investment options for the qualified default investment alternative (QDIA). These investment options may make it less intimidating for employees to begin participating in the 401(k) plan.
* Match catch-up contributions. Offering a match on catch-up contributions can encourage employees who are age 50 and older (and who are participating in the plan at the maximum level) to take advantage of that opportunity.
Source: Principal Financial Group
Two simple ideas for improving DC plans
By Pamela Black
There are two proposed pieces of legislation sitting in Congress that would seem to be no-brainers for helping people save for retirement.
The first is the Lifetime Income Disclosure Act, which would require 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance.
The second piece of proposed legislation is an evolutionary and revolutionary step forward in small business retirement plans. The Multiple Small Employer Plan would allow numerous small businesses (those with fewer than 100 employees) to essentially pool their retirement plans for greater economies of scale. This would reduce the burden of administration on the small business owner, lower the costs of providing a plan to both employers and employees and would vastly increase the number of people with access to retirement savings.
The features are numerous but among them would be auto-enrollment and escalation of contributions with an employee opt-out; they would not require an employer contribution, non-discrimination testing and would allow for default investment options; and the IRS would provide a roadmap for plan design and implementation.
While neither proposal is getting much attention right now, Jamie Kalamides, senior VP of retirement solutions at Prudential Retirement, says both would be easy to reach bipartisan consensus on in a year when Congress needs badly to look like it's doing something about helping people with retirement.
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