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Coming Soon From a 401k Plan Sponsor Near You: A New and Improved Focus on Participant Education

October 29
00:25 2013

For years, fiduciary advisers tried to convince 401k plan sponsors to adopt a comprehensive Investment Policy Statement (IPS) for their plans. At first, the legal community was split. Some ERISA attorneys said an IPS would help reduce the 1210285_83239519_coming_soon_300fiduciary liability of plan sponsors by documenting relevant procedures that can be duplicated and filed for some future DOL audit. Still other ERISA attorneys expressed concern that, by documenting such procedures, it exposed plan sponsors to greater fiduciary liability should they fail to provide evidence they practiced what the IPS preached.

Today, creating an IPS is a generally accepted standard. Many now believe it can be written in a manner that can make documentation easier; thus, alleviated those earlier concerns. Besides, as Wilford Brimley was fond of saying, “It’s the right thing to do.”

Well, brace yourself. There’s a new policy statement debate that sounds strikingly similar to the IPS debate. It’s consistent with the current evolution going on in the 401k arena – and it might just give employees a better chance to meet their retirement goals. It’s called the Education Policy Statement (EPS).

Readers interested in learning more about creating an Investment Policy Statement might want to read this: Adding Categories: A Sample of a New and Improved 401k Investment Option Menu

At the 2013 Annual Meeting of the American Society of Pension Professionals and Actuaries, Rick Rodgers and Susan Simoneaux offered their thoughts on how to create a new and improved emphasis on 401k participant education. spoke to each of them after their presentation to obtain further insights on this growing trend among 401k plan sponsors. The two explain both the nuts and bolts of the process as well as the dangers in implementing a strategy without a commitment to carry it out.

It all begins with the premise that the 401k industry is shifting away from emphasizing investments and back towards emphasizing savings. Rodgers, Principal and Co-founder of InSight Employee Benefit Communications in Denver, Colorado, recounted how participant education has changed in a manner consistent with the dominant investment theory of each era. The initial savings era – the 1980’s – saw firms produce “beautiful, glossy, 64-page booklets” that were promptly ignored. This might have been understandable given the 401k plan’s fixed income rate option often exceeded 10%. During the ascendency of the investment era – the 1990’s – we saw a growing number of group meetings and individual presentations that focused on the complexities of asset allocation and investments. Today we’re moving away from the do-it-yourself mentality and towards professionally managed portfolios – e.g., Target Date Funds, target risk (e.g., “lifestyle”) funds and balanced funds.

For more information, read: How Investment Theory Explains 401k Plan Sponsors’ Evolving Fiduciary Duties

This change in investment focus coincides with a renewed concentration on savings. As a result, we’ve seen a concurrent stress on upgrading participant education. “I believe most participants have a ‘savings’ problem, not an ‘investing’ problem,” says Rodgers. “I would like to see our industry allocate greater resources to ‘the war on financial literacy.’ Also, I believe we, as an industry, could do more for the rapidly growing number of American workers nearing retirement age. The primary focus of most participant education is dedicated to the accumulation of assets. When a demographic analysis reveals a large or growing number of participants over age 55, I think it makes sense to include a pre-retirement workshop or series of workshops in the Annual Education Program (AEP).”

Rodgers sees an AEP as having certain advantages over an EPS. “Like the IPS, the EPS is a document intended to be maintained in perpetuity; whereas the AEP is designed for one year,” he says. “Therefore, plan sponsors are creating an additional responsibility for themselves by establishing an EPS, and could create liability if they fail to properly maintain the document. In other words, the EPS contains written representations – if you fail to execute and maintain written policy, such as the EPS, you likely create liability. The AEP is a document that generally contains written objectives, plan of execution and monitoring criteria for a single year.”

Besides reducing potential liability, an AEP tends to be more flexible compared to the EPS. Rodgers says, “The EPS would likely have relatively equal weighting, because it contains high level objectives (i.e. provide on-site fundamental investment education; offer programs to improve financial literacy; promote personal responsibility, etc.) and describes potential methodology (i.e. on-site meetings, web site, etc.). The AEP will generally be skewed in favor of a specific objective, because it’s created based upon the results of a demographic analysis of the group. The purpose of the analysis is to identify problem areas and execute programs that target improvement with the same. If the analysis reveals low overall participation, the AEP would have a greater percentage of the resources allocated to saving and financial literacy rather than investment education.”

Readers might also like this: The 4 Critical Elements of a Successful 401k Plan Education Program

Once you’ve identified an appropriate education program, next you’ll need to identify the best way to deliver it. That is Simoneaux’s specialty. She is Founding Partner, Simoneaux & Stroud Consulting Services and has offices in Marco Island, Florida and Mandeville, Louisiana. She points out the importance of face-to-face communication when she explains our body language accounts for 55% of our communication; our tone yields 38% of our communication; and, finally, our words account for only 8% of our communication.

You can see how, in an era where more and more of our communications is delivered through emails and texts, we’re creating a, perhaps, unnecessarily high likelihood of failure to communicate. You don’t have to be a cool hand like Luke to know this can only lead to misunderstandings. Fortunately, Simoneaux suggests demographics may be on our side, with younger people more likely to prefer non-personal technology-driven education. She says, “Creative technology solutions are key to 401k education. Mobile apps, easy to understand YouTube videos, wizards that allow participants to select a face-to-face meeting or a meeting via FaceTime or Skype are key to offering several different communication options to participants.”

Simoneaux feels there are two common misconceptions on the part of participants. First, “Understanding that they can (and should) defer more than the match cap (typically 6%) and that they can elect to defer in a later year if they opt out in their first year of eligibility.” She feels “we need better communication to those who are zero deferral or low deferral rates.” Second, she cites another common misconception as “understanding how target date funds work.” She believes “most enrollers and/or advisors don’t explain the equity component well – especially if a participant is forced to liquidate to take a loan or a hardship withdrawal, which often coincides with an economic downturn, meaning that they may be selling at a stock market low point.”

Although Simoneaux doesn’t see fees as being “a big concern with rank and file employees,” many other plan advisers have found it a challenge when participants, suddenly aware they are paying fees, falsely believe these are new fees. Simoneaux advises against blaming the participants for their naiveté regarding 401k fees. Rather, as with any time one must deliver bad news, she says, “Remember empathy” and counsels one to say “you have every right to be upset.” And, whatever you do, don’t delay. Deliver bad news quickly.

Regardless of the method of delivering education, Simoneaux says, “Relationship managers, enrollers, advisors and anyone communicating with participants or plan sponsors should be trained in how to effectively communicate qualified plan issues that can be frustrating and confusing to these audiences.” Until this communication education becomes generally accepted, it may be safer to rely on an AEP rather than a EPS.

Interested in learning more about hot to create a better 401k plan and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on benchmarking, including how to create an plan “report card” to better evaluate its effectiveness.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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