Advising on Retirement

Here is some 401(k) advice that can pay off for employees.

Friday, August 1, 2008
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The role that employers play in getting Americans ready for retirement is changing. As 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 healthcare costs and increased life expectancies.

According to the Washington-based 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.

The fact of the matter is that 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, participants in Schwab-administered plans who took advantage of advice services offered through their 401(k) plan earned an annualized average return of 10.2 percent over the three-year period. (The advice was formulated and provided by GuidedChoice Asset Management, Inc., which is not an employee of, nor affiliated with, Schwab.)

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

The three-year return analysis is based on an average of 551 plans, which represented an average of 319,617 participants, with an average age of 43.

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, the investment choices you have made available to them 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 will also make advice available online, although the highest levels of employee acceptance and eventual engagement result from speaking with an expert live. 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 your employees with 401(k) advice. In fact, 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.

People can get the best 401(k) returns out of everyone on their block, but if they are only saving 3 percent of their pay into their plan, they are going to have a tough time hitting their retirement savings goals. Your 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 the retirement plans we serve at Schwab, we see employees' savings rates nearly double once they receive advice, jumping from 5 percent to around 10 percent of pay. What we hear coming out of advice sessions is "at least now I know."

And the three primary questions that retirement plan providers and employers should aim to answer for people are simple: 

* How much do I need to save?

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* Where should I invest my savings?

* How much money will I have in retirement?

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 Offer

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

* Do some due diligence and make sure the advice you are making available is objective and based on sound investing principles.

* Remember, the goal of your advice offer 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 of course remember the three key employee questions that should make up the foundation of any advice program: (1) How much do I need to save? (2) Where should I invest my savings? (3) How much money will I have in retirement?

The Evolving Role of Employers

Financial difficulty or uncertainty can significantly detract from employee productivity, and as mentioned above, very few workers feel very confident about having enough money for a comfortable retirement.

Added to that, an exponentially growing number of people are relying on a 401(k) to be the primary source of their retirement savings. There are also a rapidly growing number of workers who look to their employer as the primary source of financial education and get their first exposure to investing in the workplace.

With all these factors in mind, more and more employers now understand the fundamental role they can play in helping to prepare their employees work to secure their retirement and, at the same time, providing the building blocks to create a more financially literate workforce.

Dean Kohmann is Charles Schwab's vice president of 401(k) plan services. Charles Schwab serves more than one million corporate retirement plan participants. More information is available at (0608-3533)

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