Employee retirement plan education has come a long way. It had to. Decades ago when defined benefit pensions were the norm, the only thing employees needed to know was when they were eligible to participate, when they vested in the plan and what benefit they would receive in retirement. Employers spent their time collecting beneficiary forms and preparing retirement income projections for near-retirees.
As employers started to replace pension plans with 401(k)-style defined contribution plans, workplace retirement plan education became paramount. Employees went from needing to know little to nothing about their retirement plan to needing to know how to choose among various investment options, often for the first time in their lives. They had to learn financial lingo and concepts, and they had to contribute more of their earnings toward a plan with no guarantee of receiving adequate retirement income.
Initially, and for far too long, employers relied on HR benefits staff to recite the features of these new plans. Getting new hires to fill out an enrollment form consisted of choosing a percentage of their pay to contribute and which mutual funds to contribute to, and selecting a beneficiary.
This approach has been more about administration than education. Many of the HR professionals charged with educating employees about their plans learn alongside the people they teach. And even if they thoroughly understand all of the provisions of the plans they administer, few have a deep understanding of financial markets. Most of what they know about retirement plans comes from communications with record keepers/third-party administrators (TPAs).
Evolution of Retirement Plan Education
The typical defined contribution retirement plan needs the right balance of highly paid and lower paid employees to enroll in the plan. This ensures that the plan meet legal nondiscrimination requirements and also allows highly paid employees to contribute as much as possible.
But getting lower paid employees to enroll in retirement plans and contribute higher amounts requires more than helping them complete an enrollment form. So large employers started adding financial advisory services to their benefits program. Noticing the trend, TPAs added financial advisory services to complement the administrative services they already offered.
These services include group seminars that focus on basic retirement plan terminology and concepts like tax deferral, dollar cost averaging, and compound interest. They also include one-on-one financial counseling by outside vendors, as well as online tools, targeted e-mails and hardcopy communications. Some employers have won awards for their retirement plan education programs. But even they will admit that it is a constant struggle to get all but the most diligent employees to take advantage of the educational services available.
Stepping Up the Retirement Education Game
Unfortunately, workplace retirement plan education has resonated more with the already engaged than the average employee. It is time for employers to do the hard work of educating the most difficult to teach segments of their population. This next level of retirement planning education will take some HR retirement plan professionals out of their comfort zone because it requires that they too increase their knowledge about retirement planning. They will need to:
- Learn more about how fees impact retirement savings.
- Learn more about Social Security benefits and election options.
- Learn more about the barriers to participate in 401(k) plans for low income employees.
Below are specific issues related to the above challenges that HR benefits managers should focus on.
- Plan fees not taken into consideration. When the Department of Labor (DOL) passed fee disclosure regulation 408(b)(2), employers' cursory knowledge of this important aspect of their retirement plans was exposed. Based on several survey reports, almost half of employers acknowledged that they did not know their plans had fund-level fees or did not know what the fees were.
As employers now know, fees have a significant impact on the amount of retirement savings an employee can accumulate in their workplace 401(k)-style plan. Some estimates claim that plan fees can reduce retirement savings by nearly 30 percent. This is huge.
Going forward, employers need to incorporate detailed fee information in all of their retirement plan education efforts—new hire orientations, seminars/webinars, one-on-one counseling sessions, etc. They should also insist that TPAs provide a retirement investment fee calculator on their website. Relying on the required annual fee disclosure notice to inform an employee about one of the greatest hazards to their retirement savings is not that different from what occurred before the fee disclosure regulation; it’s simply not enough. Fee and performance information should be included in every component of the education process.
- Social Security choices are ignored. This is especially crucial for the hard-to-engage low paid workers that employers find difficult to educate about saving for retirement. So why aren’t employers talking about how their workplace retirement plans can supplement Social Security benefits that replace less than 40 percent of pre-retirement income for these workers? And why aren’t employers providing information to these workers about the options for delaying benefits in order to get the maximum Social Security benefit for themselves and their spouse?
By not providing education on Social Security, HR benefits professionals are overlooking a major component of retirement planning. By incorporating this education into their current financial education program, they may be able to increase 401(k) plan enrollment and contributions as employees realize that Social Security alone may not meet their retirement needs.
- Not saving enough for retirement isn’t a character flaw. Some people think that everyone can save for retirement if only they are willing to forgo some of today’s purchases. The reality is that saving for retirement is difficult, especially if your take-home pay is low and you experience periods of unemployment. Even 401(k) experts agree that it is almost impossible for all but the comfortably middle class and greater to save for retirement using a 401(k) plan.
In addition to educating lower paid employees about the benefits of participating in their workplace retirement plan, employers may want to make these plans more attractive to this population. One option is to offer a safe harbor plan that offers employer contributions in addition to matching contributions.
Educating employees about their workplace retirement plans has gone from unnecessary to essential. While more employers are automatically enrolling employees in their plans and providing educational benefits such as online calculators and professional advisory services, these are not enough to assist the workers most in need of retirement planning. Now is the time for employers to expand their focus to address plan costs, integration with Social Security, and the real barriers to consistent participation.
Denise Perkins, CEBS, is the founder/creator of the employee benefits blog and website BenefitsAll. She has over 15 years of experience working as an employee benefits professional in public, not-for-profit and private sector organizations.