401(k) Advice Can Pay Off for Employees

By Dean Kohmann Jun 1, 2008
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The role that employers play in getting Americans ready for retirement is changing. As traditional pensions and other defined benefit plans become less common, individuals are bearing more of the burden for their own investment decisions and ensuring they are saving enough to retire. But employers can play an integral part in providing their employees with the tools and knowledge they need to maximize their benefits

As an employer, you think you’ve done your part. You offer your employees a 401(k) plan with diverse, institutionally priced investment choices and a generous company match. But study after study reveals that many Americans are either overwhelmed about how to save for retirement or drastically underestimating the amount they need to save given rising health care costs and increased life expectancies.

According to the Employee Benefit Research Institute’s 2008 Retirement Confidence Survey, only 18 percent of workers feel very confident about having enough money for a comfortable retirement. The good news is that legislation like the Pension Protection Act is giving employers more of a green light to be proactive in helping their employees understand how to invest in a 401(k) plan, and many companies are now offering some kind of help and guidance to ease the uncertainty among their workforce.

As more companies take on an increasingly active role in giving employees the tools they need to save in their 401(k), employers are looking to provide a retirement benefit that focuses on results.

Moreover, getting advice and using it pays off in the long run for employees who participate in a 401(k) plan. For example, from 2005 to 2007:

  • An annualized average return of 10.2 percent over the three-year period was earned by participants in Schwab-administered plans who took advantage of advice services offered through their 401(k) plan.*

  • By comparison, an annualized average return of only 7.8 percentwas earned during the same three-year period by those who did not seek advice or use a target-date retirement fund.

This difference can have a tremendous impact when you factor in the power of compounding interest in a retirement savings account over 20, 30 or 40 years.

Offering advice as part of a 401(k) plan can be pivotal in creating employees that are happy, engaged and more knowledgeable about the plan itself, their investment choices and what it takes for them to reach their goal of retiring securely.

Employers who boast the most successful advice programs have found that people prefer to receive 401(k) guidance through a personal, one-on-one interaction, typically over the phone or in an in-person meeting. Many employers also will make advice available online, although the highest levels of employee acceptance and eventual engagement result from speaking with a live expert.

To be sure, there are other considerations regarding how to reach employees with 401(k) advice, whether it is reaching an employee base that is spread out geographically, overcoming language or cultural barriers or working with employees who have varying levels of financial literacy.

Knowing Is Half the Battle

The potential for improved investment returns are not the only benefit to providing employees with 401(k) advice. While the rate of return people get from the investments in their retirement plan is important, consistently increasing the amount of pay they contribute to their plan is arguably even more important. If those getting the best 401(k) returns on the block are only saving 3 percent of their pay into their plan, they are going to have a tough time hitting their retirement savings goals. Employees need to save their way to a secure retirement.

People are generally much more engaged in their 401(k) plan after they get some advice, both in terms of knowing where to invest their savings and also how much they need to save to meet their objectives. In fact, among Schwab-administered retirement plans, employees’ savings rates nearly double once they receive advice, jumping from 5 percent to around 10 percent of pay. A common response coming out of advice sessions is “at least now I know.”

Once people have answers to these questions, the importance of saving in their 401(k) plan becomes much clearer and far less daunting.

Putting Together a Successful Advice Benefit

So what makes up a good 401(k) advice program for employees? Here are a few key things to remember:

  • Show diligence and make sure the advice you are making available is objective and based on sound investing principles.

  • Remember that the goal of advice should be to provide tangible, meaningful and actionable guidance to employees participating in the plan. Advice should be specific to the investments available in your core 401(k) line-up and personalized to the needs and resources of each participant, taking into account their assets outside the plan, such as IRAs or a spouse’s assets.

  • Give employees ongoing access to 401(k) plan advice. This way, your employees can obtain advice when it is important to them, whether it is a life event or a general desire to re-evaluate their situation.

And keep in mind the three key employee questions that should make up the foundation of any advice program:

How much do I need to save?

Where should I invest my savings?

How much money will I have in retirement?

Evolving Role of Employers

As more employees rely on their 401(k) as the primary source of their retirement savings, more workers are looking to their employers as their primary source of financial education. And more employers now understand the fundamental role they can play in helping their employees work to secure their retirements by providing the building blocks to create a more financially literate workforce.

Dean Kohmann is Charles Schwab’s vice president of 401(k) plan services.

* Investment advice for Charles Schwab administered retirement plans is provided by GuidedChoice Asset Management Inc. GuidedChoice is not affiliated with, nor is it an employee or agent of Charles Schwab & Co. Inc. or Schwab Retirement Plan Services Inc.

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