What do your employees need to make the most of the 401(k)? Here’s a summary of what national surveys reveal about the type of help employees want in retirement planning. I’ll also review the 401(k) investment advice and employee education you can request from your 401(k) adviser.
Employees Want 401(k) Advice from Their Workplace
In our 401(k) Wellness in the Workplace survey, we found that seven out of every 10 American workers failed a basic quiz about 401(k) and finance.1 From that statistic alone, it may be enough to say that Americans need help, but they’ve also overwhelmingly indicated that they also want 401(k) support from their employers. In fact, 77% of people prefer to work for an employer who offers 401(k) support over one that doesn’t.2 Perhaps the reason for this is that people generally just don’t want to go it alone when it comes to their financial future.
In a working paper produced by the RAND Corporation, researchers found that 73.7% of employees will consult with an adviser about their personal finances if that sort of arrangement is made available to them.3 I’m compelled by the researchers’ notion that for many individuals, financial literacy is something of a “use it or lose it” skillset; it’s hard to maintain financial know-how on an ongoing basis. It makes sense, then, that even among those demographic groups who have the highest self-assessed financial literacy, 67% of employees report that they want more information—but they want it in the right context.4 When it comes time to enroll in a 401(k) or not, for example, or to decide how much to save, or how to invest, those are the times when people are most likely to want support.
This aligns with what we’ve seen at my firm as we meet with groups of employees around the country. Whenever we pass around a sign-up form offering one-on-one help, something like three out of every four employees take us up on it.
Determine the Right Level of 401(k) Investment Advice for Your Employees
How do you determine the correct level of support for your staff in particular? When employers ask my firm what their employees might need in the way of financial education and support, I typically recommend going right to the source. Using a simple 401(k) employee survey, you can gauge a lot about how confident your employees are in their ability to plan for retirement. You may find that your employees feel prepared for retirement and comfortable with things like their 401(k) investment choices, but you may also find that your employees need more help.
If your employees are anything like the rest of American workers, you shouldn’t be surprised if you find that they do want more education—especially when it comes to investing. The RAND Corporation survey found that 57% of workers place a high value on support with determining how to allocate their savings across various investment options, and 41% want help simply understanding investments in the first place.5 Compare that to broader financial topics; only about a quarter of employees place a high value on advice relating to future financial planning like tax strategy or estate planning. To me, this indicates that employees generally know the difference between which parts of retirement planning they feel comfortable researching on their own, and which parts warrant speaking to a retirement specialist.
Compare the answers you receive on your employee survey about their 401(k) needs to your current employee service contract—are there opportunities to offer more help? You may have the most immediate success by focusing on securing one-on-one counseling to help your employees answer their most pressing investment questions. This could happen on the phone, but in my experience employees are initially more comfortable working with an adviser who has the ability to come out and meet with them onsite and offer 401(k) investment education with a personal touch.
Whatever you choose, keep in mind that this doesn’t have to be all or nothing. If your current 401(k) service provider isn’t providing one-on-one consultation, I’d suggest complementing any educational services you do receive with one-on-one support. Perhaps you can start with just 25% more services, like one-on-one enrollment support before adding on additional services to all, or even just some, of your employees. From there, you’ll be able to see if your staff embraces this kind of help or not and document how the process goes. This documentation will help you meet your fiduciary obligation to make reasonable decisions, and will also make it easier for you to track how your employees respond to the help your provider gives them.
401(k) Education for Employees: A Question of Fiduciary Responsibility
If your business decides to add on more employee support, who pays for it? In my experience, there are two options here, and the first is the simplest: you pay for this with company money. It’s not uncommon, and it could be worthwhile especially if one of your goals for your 401(k) is attracting and retaining key employees. Since you know employees prefer to work for employers who offer this kind of support, this is a good benefit to offer if you can afford to foot the bill. Part of the reason this is simplest is because it doesn’t really introduce a fiduciary challenge; you pay for the service, so you can offer what you think is best.
That said, it’s not the only way to go. It’s also common for this education to be paid for out of your employees’ plan assets. If you go that route, however, it’s very important that you understand your fiduciary responsibility to find the right level of support for a reasonable price. Here are the two ways employee service is paid for out of plan assets:
• Fee-only: This means that your employees will be charged a fee that is directly tied to the service they receive. It’s easy in this setup for you to trace exactly what is being paid, to whom, and for what service. Especially if you go through a documented process like I described above to determine what support your employees want, you’re in a good position to do some research to make sure you’re getting a good price to give them those services.
• Revenue sharing: Sometimes, rather than an individual line item, employee services are paid for as part of the investment fees employees pay, inflating those costs to cover the additional service. This isn’t inherently wrong, but it does make it a lot harder for you to trace the flow of funds out of the plan for distinct services, or to know who is getting paid what.
If possible, I recommend employers avoid revenue sharing arrangements to pay for employee services. Focus instead on transparent providers who make it easy to understand who is being paid, and for what service.
Be thorough as you document your prudent process for evaluating different providers based on cost, level of service, and their experience. I’ve seen that there are a wide range of skill levels when it comes to providing employee education, so you’ll want to do some due diligence to make sure your provider is experienced and qualified in this specific area of service. Also evaluate whether or not your provider has additional products they might want to sell to your employees and, if they do, that your employee’s best interests come first. Finally, ensure your provider will be able to give you reports on their activities and the outcomes of educational services so you know your employees are getting what you (or they) are paying for.
Keep the records of your evaluation—as well as any reports your provider offers about their education service—in your fiduciary audit file and review your providers periodically to make sure your employees are getting a good deal.
Remember that the whole point of your company’s 401(k) plan is to help your employees get on track for a dignified retirement. Focus on the needs of your employees and take the time to find the right provider to give them the education and consultation they need. I’ve seen firsthand how this kind of focus can empower employees to prepare for a dignified retirement, and I believe it can work for your company, too.
1 Fisher Investments 401(k) Wellness in the Workplace Survey
2 Fisher Investments 401(k) Wellness in the Workplace Survey
3 Hung, A. A., & Yoong, J. K. (2013). Asking for Help: Survey and Experimental Evidence on Financial Advice and Behavior Change. The Market for Retirement Financial Advice, 182-212. doi:10.1093/acprof:oso/9780199683772.003.0009
4 Hung, A. A., & Yoong, J. K. (2013). Asking for Help: Survey and Experimental Evidence on Financial Advice and Behavior Change. The Market for Retirement Financial Advice, 182-212. doi:10.1093/acprof:oso/9780199683772.003.0009
5Hung, A. A., & Yoong, J. K. (2013). Asking for Help: Survey and Experimental Evidence on Financial Advice and Behavior Change. The Market for Retirement Financial Advice, 182-212. doi:10.1093/acprof:oso/9780199683772.003.0009