When providing employees with a retirement plan, an organization typically offers an array of investment options for participants of the plan to choose from. In addition, the organization typically offers the ability for employees to defer into the plan (on a pre-tax or after-tax basis as Roth deferrals, or a combination of both). Beyond these basics, fostering awareness of the plan, educating employees about their options and opportunities, and ensuring that the plan is doing what it needs to do are all critical success factors in making participants retirement ready. Retirement readiness implies more than simply picking investments; it signifies that an employee understands the importance of retirement planning, the different options available, and the considerations that need to be made today to help ensure goals are met in the future. For example, education can make a difference by addressing these questions relating to the role of the employee’s retirement plan:
- Will it create income to maintain a required standard of living in retirement, or disposable income?
- Is it to diversify other retirement portfolios, or is it for legacy and estate purposes?
Helping employees answer these questions today — or at a minimum start thinking about them today — can have a significant impact on their retirement readiness in 10, 20, or 30 years. Ensuring that an employee population is retirement ready also has its advantages for employers. Not only does a retirement plan participant education program assist an organization in fulfilling its fiduciary responsibilities, it can also cut down on operating expenses over the long run, as plan sponsors face higher long-term costs if their employee population can’t afford to retire.
The value of an independent eye
Retirement plan providers often bundle some form of an education program into a package deal, and it’s tempting to view this all-rolled-into-one approach as a good option for sponsor and employee alike. However, a one-stop shop — though it may seem convenient — can have its disadvantages, starting with the lack of an independent point of view.
In some cases, a one-stop shop that offers both investment products and education/advice can inadvertently (or, in some cases, blatantly) steer plan participants into its own financial products, investments, or insurance products. If the education program is creating revenue for the educator, this could be problematic. For example, some providers use 401(k)/403(b) plans as a means to generate revenue from the sale of other products. Plan sponsors should be very cautious when a provider promotes the availability of meeting one on one with their employees. If the provider has a “product” to sell, it may be using these meetings to sell the product, such as insurance or rollover IRAs, which creates a potential fiduciary liability for the plan sponsor.
Selecting an education and/or advice provider is a fiduciary decision and should be made with all the care that any other fiduciary decision is made. Therefore, a plan sponsor should consider all of its options, including an independent provider.
By isolating the education process from the investment process, plan participants are receiving sound retirement education stripped of any sales motivation — removing any potential for conflicts of interest or liability from the organization’s perspective. While not all one-stop shops create a potential liability, it’s up to the plan fiduciary to monitor the education program to ensure that it’s not sales driven. Turning to an independent provider substantially reduces this risk.
Another selling point for a one-stop shop can be the implied discount when purchasing bundled services for a single price. However, bundled pricing models can, at times, obscure the actual cost of the individual services. Plan sponsors can and should seek full transparency by asking for the services to be articulated and the pricing broken out. When the costs and services are fully outlined, the plan sponsor can know exactly what it will be paying for and can accurately assess the merits of one bundle against all other options.
Substance over style
A further pitfall that employers face is focusing too closely on the technology features of an education program without exploring the substance of the content or the utilization rates of the tools. While apps, dashboards, and other widgets can be useful, they won’t provide any return value if they are not being utilized or implemented effectively.
Education programs aren't one size fits all
The most effective approach to retirement plan education programs can — and should — vary based on the unique characteristics of the organization and the plan participant population. Some good questions for a plan sponsor to ask before determining a program type are:
How many locations will the education program need to reach?
Would the employee population respond better to web-based, one-on-one, or group sessions?
Are there multi-language requirements?
To be effective, the type of program chosen should align with the organization’s structure and culture.
Finally, how the provider defines and tracks success play a pivotal role in ensuring that an employee population is retirement ready. Certain providers will track individual investment changes, while others may focus exclusively on global metrics, such as savings rates, adding beneficiaries to accounts, and changing asset allocations. There are many metrics to track, but these are the most basic metrics. A growing number of select providers are issuing participant readiness scores. These are similar to a wellness screening completed during the health benefit process, and they help employees (and organizations) understand where they are on their retirement goal path. It also makes it easier to track future progress. Retirement planning should be a foundation of knowledge that stays with employees throughout the course of their careers and the various life events they will encounter. Education is a critical component to ensuring the greatest employee participation and success — and the best value for the organization. By fully exploring the retirement education program options available, plan sponsors can reduce their risk, improve their return on investment, and more effectively build their employees’ retirement readiness.
Plante Moran Financial Advisors
As an independent Registered Investment Advisor (RIA), Plante Moran Financial Advisors has the experience required to help plan sponsors understand the needs of their participants, and to consult on the best education/advice options available to them. With our working relationships with dozens of full-service providers and independent education/advice providers, we are able to work alongside our clients and our network of providers to develop a customized approach to ensure that employees get the knowledge they require to have the best opportunity to meet their retirement goals and objectives. We provide all of this, while also limiting the fiduciary risks of our clients.