By Jon Vogler, Senior Analyst for Retirement Research
Retirement plan participant education used to include only information about plan features and maybe a few illustrations of typical asset allocations for individuals based on age. But participant education has become the new frontier of 401(k)s with the convergence of four circumstances:
- Investment menus have become more complex.
- Balances in 401(k)s have been battered by a few recessions.
- Many baby boomers are confronting meager retirement savings they'll have to somehow stretch over longer life spans.
- Legislators and regulators are tinkering with fixes to shore up 401(k)s as the primary retirement savings vehicle for millions of Americans.
Over the last several decades, the transition from employer-paid pensions to 401(k) plans funded by employee/employer contributions has foisted the responsibility for retirement readiness on a woefully unprepared public. The mandate is clear — Americans need a financial literacy boot camp in general and investment education in particular. And the responsibility for providing the latter falls largely on the shoulders of plan sponsors.
Failing financial literacy
The need for financial education has deep roots. To gauge the financial literacy level in the US, the Life Insurance and Market Research Association (LIMRA) asked 2,000 Americans a series of questions about basic financial and retirement topics, including:
- Calculation of interest accrued in a savings account for a certain number of years.
- The difference between a single stock and a stock mutual fund.
- How annuities work.
- Tax implications of a Roth IRA.
- When Social Security benefits can be collected.
- Details about 401(k) contribution limitations.
The results are disturbing. Only one in eight Americans could correctly answer most of the questions, while 36% of respondents failed the quiz, "answering no more than half of the questions correctly," according to LIMRA.1 LIMRA says only 27% of Americans responding have a "high level" of financial knowledge based on the results.
Lack of retirement confidence
The pervasive lack of financial literacy in the US may be a contributing factor to the low levels of retirement confidence and retirement savings among plan participants. Without a basic knowledge of financial concepts, they typically feel overwhelmed by the responsibility to save enough for retirement and manage their retirement income.
The 2013 Retirement Confidence Survey (RCS) published by the Employee Benefit Research Institute found that the percentage of workers confident about having enough money for a comfortable retirement is essentially unchanged from the record lows observed in 2011 — only half express some level of confidence, with 13% very confident and 38% somewhat confident, while 28% are not at all confident, and 21% are not too confident.2 Possible reasons cited in the RCS for the low levels of retirement confidence include:
- Realization by many workers of just what will be needed to secure a financially comfortable retirement.
- More immediate financial concerns about job uncertainty and debt.
- Concerns about the cost of retirement.
And given the modest level of retirement savings, the lack of confidence is warranted. Among RCS respondents, 28% said they have less than $1,000 in retirement savings. In total, 57% reported that the value of their household's savings and investments — excluding the value of their primary home and defined benefit pension plans — is less than $25,000.
Money matters from classroom to cubicle
A critical start to resolving the financial literacy deficit is teaching financial basics as a regular part of the school curriculum. LIMRA noted that only 24 states have some type of financial literacy education requirement for kindergarten through high school. Not surprisingly, LIMRA also noted the correlation between financial literacy and retirement savings — students exposed to financial education in high school tend to have higher savings later in life.
Beyond the classroom, plan sponsors play a crucial role in fostering the critical financial skill of saving enough for retirement. It will require a two-pronged approach:
- Structuring 401(k) plans to promote retirement savings.
- Educating participants to maximize the value of the 401(k) plan benefit.
Retooling 401(k) plans
Two plan changes that can potentially increase savings include:
- Adding plan features like automatic enrollment and automatic escalation.
- Reframing the employer matching contribution — for example, by switching from a match of 100% on the first 4% to 50% on the first 8% — to encourage higher deferral rates.
Rethinking participant education
While plan sponsors, like teachers, can't guarantee learning will occur, they can offer a variety of financial learning opportunities. Here are some suggestions.
- Hold classes in the workplace — and make information available digitally and in print — on various topics, such as:
- Transactional activities, such as how to enroll in the 401(k) plan and how to select among plan options. Making iPad® mobile digital devices temporarily available for employees to enroll at the end of the enrollment meeting is a powerful tool to spur participation.
- Definitions of basic financial terms in simple language — no jargon.
- Saving strategies, such as saving early and regularly, avoiding loans or cashing out at termination of employment and other basic retirement savings skills. Plan sponsors may want to consider enlisting a financial advisor to assist.
- Retirement goals, with a focus on incremental steps participants can take to achieve those goals. This is especially timely in light of the Department of Labor's recent advance notice of proposed rulemaking that would potentially require lifetime income projections on participant benefit statements.
- Acknowledge and address differences.
For example, LIMRA notes that men and women have different perceptions about their knowledge about money; men are more inclined to think they're very knowledgeable about it. According to LIMRA, "Differences in confidence levels, as well as actual knowledge levels, should be addressed as part of a targeted education program."
- Communicate resources.
Plan sponsors can make participants aware of the many resources and tools available to them — websites, financial institutions, books, organizations or financial advisors. People need to be reminded about where to go for this information, as well as how important it is to pursue it.
The need to foster education among plan participants is especially critical in today's environment where defined contribution plans have become the primary retirement investment vehicle and participants are responsible for accumulating sufficient savings, making investment selections and drawing down benefits in a sustainable manner during retirement. They need help, and plan sponsors must be proactive in providing it.