Many experts don’t believe that 401(k) employee education works. The challenges of educating adults, who may not be excited to learn more about their 401(k) plan, are sometimes difficult to overcome.
What can your plan sponsor clients do to make their 401(k) employee education sessions more effective? After more than 30 years of conducting education meetings, I suggest the following 401(k) education best practices.
1) 401(k) Education Best Practices
Correct the misperceptions
Participants have a long list of misperceptions regarding 401(k) plans. The most frequent I hear include:
- You should stop making contributions when the stock market falls.
- It is a good idea to take a loan from the plan.
- I only need to contribute enough to receive the maximum company match.
- Money market funds are a good place to invest.
- You should sell when the market falls to avoid losing everything.
- Allocating more of my balance to funds that are performing the best is a good investment strategy. I don’t want to miss something!
Plan sponsors’ education sessions should focus on communicating the right practices to follow when investing in a plan. If a sponsor is able to dispel most common myths and misperceptions, he or she will have achieved a lot.
Integrate financial wellness concepts
Experts agree that the most important employee wellness component is financial wellness. Lack of financial well-being causes employees the most stress. Research from Aon Hewitt shows that employees want to learn about budgeting, debt reduction, health care (especially HSAs) and purchasing a home.
Many employers have found that an investment in financial wellness education not only results in greater employee appreciation of their benefits package, it also leads to more productive employees. If your plan sponsor clients don’t offer financial wellness education now, advise them to consider starting a program soon. This is one of the newest 401(k) education best practices.
Stick with education, not counseling
Some employers have found that financial wellness counseling resulted in added liability for their companies when counselors pushed their own products, especially to their executive group. Plan sponsor clients should hire educators, not counselors. Sponsors should let employee participants find investment advice and products on their own.
Include behavioral finance/economics elements
Participants are their own worst enemies when it comes to being successful investors. They practice destructive behaviors like loss aversion, mental accounting, overconfidence, anchoring, myopia, and inertia. Advise plan sponsors to help participants understand how to manage the emotions behind their fears. This is one of the most important 401(k) education best practices. It will give participants a better shot at reaching retirement readiness and financial wellness.
Incorporate retirement readiness concepts
Participants need to understand what they should be trying to achieve. Tell plan sponsors to talk about what retirement readiness means and what employees have to do to get there. Most participants would be surprised to learn that they need to add at least 15 percent to their 401(k) plan accounts each year to build a retirement-ready account balance.
Develop an Employee Education Policy Statement
If plan sponsor clients are really serious about employee education, they should develop an Employee Education Policy Statement and let it guide their planning and execution. Most plan sponsors don’t take the time to create this document even though this is one of the most important 401(k) education best practices. Many then wonder why their education sessions are so blah. As the saying goes, “If you don’t know where you want to go, you are never going to get there.”
Talk about loans and withdrawals
Participants are always interested in the different ways they can receive their balances before retiring. Many 401(k) plans were created with generous loan and withdrawal features and sold to employees as good places to save for a down payment on a home, a child’s college education, etc.
Research has shown that participants aren’t contributing nearly enough to fund their retirements, or anything else. Encourage plan sponsor clients to use employee education sessions to strongly discourage use of 401(k) plans for anything other than retirement savings.
Discuss company match
Of all the 401(k) education best practices, this one is the most basic. Sponsors should spend a significant amount of time ensuring that participants know how to receive the maximum company match. Most 401(k) plans have a sizable employee population that still does not contribute enough to receive the maximum employer matching contribution.
The best possible investment, by far, that participants can make is ensuring they receive the maximum company match. I suggest to all my clients that they send a special mailing (it can be email) to all participants who are not maxing out. Determining who isn’t receiving the maximum match is easy. Any recordkeeper can run a report for you.
Require attendance
Advise sponsors to make attendance at education sessions mandatory. Yes, they will get people who come and immediately fall asleep. Yes, it is a little paternal to order employees to attend, but if a plan sponsor doesn’t, it’s likely sessions will not be well attended. Schedule the sessions during the work-day. Yes, it will cost the company money and lower productivity. But employees who are getting paid to learn are much better learners.
Allow almost anyone to attend
Employees may not be the financial decision-maker in the household. Allow spouses, partners and significant others to attend. Allow older children to attend, as well. I had a client that had a significant Hmong workforce. The children spoke and understood both English and Hmong well. Those who came provided tremendous assistance to their parents. One of the smartest 401(k) education best practices is to ensure that someone from management, who can and will answer questions about the company, attends every session.
Offer one-on-one meetings
Right after education sessions conclude, participants should be allowed to meet with educators one-on-one. Plan sponsors should have participants to sign up in advance. Meetings should be no longer than 30 minutes. Educators should not sell products or services in these sessions or plan sponsors will likely become a fiduciary to those products and services.
2) Determining Educational Format
Progressive employers have found that the best way to educate millennials is via their phones. Online education modules in 10- to 15-minute increments seem to work best. Plan sponsor clients should spend some time figuring out what sort of information-sharing platform will be most effective in their culture. Hour-long, in-person presentations to employees are often no longer the best option.
I believe that all 401(k) employee education soon will take place in an on-demand, online environment. This allows employees to learn along with their spouses or partners at a time most convenient for them. This flexibility can make an education program much more valuable and impactful.
3) Deciding Who Will Provide Services
Many investment advisors have the capability within their organizations to address 401(k) employee education needs. Most are not as adept at addressing financial wellness concepts.
For help locating the right financial wellness provider, consider referencing the Program Evaluator that T. Rowe Price has developed. They have researched the universe of financial wellness providers and boiled the list down to the 17 that appear to be best-in-class. Think you may want to RFI the three or four best? T. Rowe has constructed an RFI template to use as well.
Review and update your employee education program today using these 401(k) education best practices.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.
