Best Practice #3: Financial Education for Your Plan Participants

October 24, 2013—Welcome to the Alliant Best Practices Series for 401(k) Plan Sponsors, in which we offer 10 best-practice essentials for helping plan participants achieve retirement plan success. Here’s the third best practice in our series.

 “An investment in knowledge always pays the best interest”

— Attributed to Benjamin Franklin

In our last post, Offering Individual Consultation, we discussed the best practice of providing your plan participants with access to professional advice, so they can save and invest confidently toward retirement. It’s also important for participants – or any investor, for that matter – to learn a few financial basics to guide their way. By helping participants understand how their 401(k) plan fits into their bigger financial picture you’re acting as a good steward for your company plan. You’re also increasing the odds that participants will enroll to begin with, and save and invest properly once they do.

Why It’s Important – Additional Exploration

Bottom line, all the sound financial advice in the world is of little use if it’s delivered in a foreign language to the recipient. In the 2013 third quarter issue of BenefitsQuarterly, an article “Participant-Proofing the DC Investment Fund Lineup,” reported statistics indicating that the average corporate defined benefit plan had outperformed its defined contribution plan counterpart by nearly 1 percent between January 2006 (the inception date of the index being used to track the information) and September 2012 – 5.5% versus 4.6%, respectively.

Where did that extra point go? The article’s author suggested that among the greatest drags on returns was participants’ own behavior … or misbehavior, to be more accurate. We would propose that participants who have not learned to speak the basic language of investing won’t be equipped to navigate around the common pitfalls. As a result, they’re far more likely to fall short of what they can truly accomplish within a well-managed plan.

How It Works

Especially when your financial education program is complemented by ongoing access to a professional advisor, your participants don’t have to acquire skills equivalent to a defined benefit professional to readily digest the essentials they need to thrive. Neither are we talking about slapping up a web page with a laundry list of random articles and calling it a day.

There’s a happy medium found somewhere between acquiring an advanced degree in financial economics on the one hand, and relying on a broad Google search for “financial education” on the other. Within that sweet spot is found the best-practice solution to financial education. We would suggest your program contain two elements:

  1. Basic financial concepts
  2. Retirement planning concepts

These two elements combine to ensure participants can learn how to best use their retirement plan, as well as how it fits into their overall financial scheme.

A robust educational program should cover all the bases. It should:

  • Begin at participants’ initial enrollment meeting
  • Offer online learning through a variety of webinars or other multimedia resources
  • Be enhanced by access to a professional advisor as described above and in our previous post.

Financial education should be targeted and clear, and treated as a value-added extension of the participant’s relationship with a professional advisor. It should be accompanied by a continued ability to interact, ask questions and clarify key concepts that might otherwise go misunderstood. Essential subjects worth covering over time include:

  • Investment Basics (how markets operate)
  • Investor Basics (how individual decision-making impacts outcome)
  • Retirement Income Planning
  • Financial Planning Basics
  • Estate Planning Basics
  • Retirement Basics
  • Social Security Planning
  • College Funding
  • Long-Term Care
  • What You’re Delivering: Improved Confidence

Numerous surveys conducted by nearly every defined contribution provider you’ve ever heard of substantiate time and again: participants know what questions to ask. They want to feel confident that they know how much they need to save to secure their retirement. They want to know what other major expenses they should plan for during their lives, and how to integrate these costs with their retirement plans.

But there’s a discomforting gap between knowing what to ask and knowing what to do about it. For example, a Pensions & Investments article reported on one such survey by State Street Global Advisors and Boston Research Group. The article describes, “According to a report about the [SSGA] survey, 78% of respondents said it was important to determine how much is needed to ‘have a secure retirement,’ but only 33% said they knew how to do it. And 82% said it was important to make retirement savings ‘last a lifetime,’ but only 28% expressed knowledge how to achieve it.”

That’s where education comes in, to shore up the low levels of participant confidence also reported in this and other plan participant surveys.

Next Up, Auto-Enrollment

With access to sound, professional investment and a well-designed educational program, plan participants are optimally positioned for benefiting from the next component in our 401(k) Best-Practice Series: Auto-Enrollment. Stay tuned to read more soon.

Do you like what you’ve read so far in our Alliant Wealth Advisors 401(k) Solution Best Practice Series? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.