Tout the Tools

Recent research finds too few employees use the financial tools available to them for retirement planning; HR needs to step up the encouragement, education and communication.

Wednesday, December 1, 2010
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Year after year, HR and benefits managers work hard to deliver -- and convince employees to use -- online tools and face-to-face advice to help them effectively manage their defined-contribution plans, typically 401(k)s.

Based on recent research by Charles Schwab, it might be time to try a new strategy, because the current one apparently isn't working very well. There are, however, effective ways to ensure higher use of retirement-planning help, according to financial and benefits experts.

Schwab, a San Francisco-based investment firm and 401(k) service provider to about 1.5 million company retirement-plan participants, released a study of 1,005 employees revealing that, although many 401(k) participants seek help and guidance for their plans, very few actually use the help when it's offered.

For example, while 55 percent report they would use free, personalized guidance if their employer were to make it available to them, the Schwab study, called The New Rules of Engagement for 401(k) Success, found about 10 percent of people with access to all forms of advice/help (online tools, personal contact, etc.) actively use it.

In other words, employees report they are confused, want tools and/or advice on managing their 401(k), but when employers actually make that help available, that's where it ends.

"Even though most people say they would use professional help or planning tools if they were available, the reality is, more often than not, procrastination, distraction or confusion prevents them from doing so," says Catherine Golladay, Charles Schwab's vice president of 401(k) education and advice.

Bill Losey, an independent financial adviser who specializes in retirement planning, says he's not surprised about the 10-percent figure when it comes to actively using advice, whether via online tools or face-to-face help, adding that he also wouldn't be surprised if most of those taking advantage are nearing retirement.

"Employees in their 20s or 30s, unless they are extremely anal retentive or love personal finance, will not use the help. They just don't care enough," says Losey, author of Retire in a Weekend! The Baby Boomer's Guide to Making Work Optional. "The other reason is people basically are financially illiterate and do not use this sort of help because they don't want to be embarrassed. It has to do with the fear of looking ignorant."

Losey surmises that many employees will only take action on their 401(k)s when they are in some sort of financial pain, and with retirement 10 to 25 years off, people will always do what is easiest for them; i.e., follow the easy, safe path.

"Unfortunately, they typically only will use online tools or seek out face-to-face help if they are uncomfortable," he says.

In Schwab's study, employees cite a number of reasons for not using 401(k) advice, even if it is offered in their plans:

* 27 percent say they are getting financial advice elsewhere outside of the workplace;

* 26 percent say they have more immediate concerns, such as day-to-day financial matters;

* 23 percent don't think they have saved enough money to warrant spending time to get help; and

* 49 percent want to have more than $100,000 saved before taking the time to get advice.

The true downside about the 10-percent-usage figure is that an analysis of 401(k) plans serviced by Schwab finds the use of advice can have a significant positive impact on people's 401(k) plan results. For example, 70 percent of participants who actually receive 401(k) advice (both online and via financial experts) enjoy savings rates nearly double those who don't.

For HR and benefits professionals, it takes more than simply offering 401(k)-account-management guidance, whether through online tools or face to face. Education, communications and an ongoing effort to drive home the benefits of such help is a critical success factor in participation.

What Employers Can Do

Schwab's Golladay identifies strategies for employers to help increase 401(k) participants' use of professional third-party advice and/or online tools:

* Offer one-on-one consultations. Fifty-one percent of 401(k) investors surveyed say they prefer a personalized touch over online tools (23 percent) or brochures (4 percent).

* Show participants the money. Sixty-five percent of survey respondents need some kind of motivation to use advice, and more than one-third (34 percent) of them says they would like some kind of proof that advice would improve their investment returns.

* Work with a trusted third party. According to the survey, 74 percent of people trust personal financial advisers and 59 percent trust financial institutions as a source for savings and investing information and guidance.

* Know when to engage. As Losey noted, the majority of survey respondents cited "approaching retirement" as the top reason to seek help with planning -- when it can be too late to maximize the potential savings in a 401(k) plan. Other life events prompting people to seek help include changing jobs (29 percent), stock-market volatility (28 percent) and the loss of a spouse or partner (23 percent).

Most of all, employees often will not understand the nature of advice -- including how and when it is available -- without direct and obvious employer involvement.

"Once an approach to advice is selected, employers who sponsor the retirement plan must totally support it within the workplace," Golladay says.

That is what happened at Major Brands Inc., a St. Louis-based wholesale distributor of wines and spirits (and a Schwab client). The Major Brands senior-management team (not just the HR executive) literally walked the halls, encouraging employees to participate in a retirement-plan-advice consultation.

"The impact of participants using retirement-plan advice was clear," says Patrick Quinn, Major Brands' chief operating officer. "Seventy-three percent of our employees received help and guidance with their retirement-planning questions, use of enrollment advice tools and help increased 288 percent, and those who used help increased their savings rate by 67 percent on average."

Most companies are running very lean in terms of staffing, so it is even more important to keep people focused on their work -- and providing financial help and advice can be one step in the right direction, Golladay says. In the case of Major Brands, many worried workers (the company has 600 employees) even came to Quinn's office seeking guidance and reassurance during times of market volatility.

"Even if the employees didn't choose to implement the full recommendations, the personal conversation with an advice consultant helped them to better understand how to begin saving to reach their financial goals and feel more personally in control," he says. "The impact in the workplace was positive."

DENSO, a global supplier of automotive technology, systems and components with U.S. operations headquartered in Southfield, Mich., used a combination strategy to boost the number of employees taking advantage of 401(k)-investment-management tools and advice.

At DENSO, which has 9,000 employees in North America (120,000 worldwide), the company and its HR staff have a long-held commitment to providing participant education and guidance, according to Michelle Morey, vice president of retirement education at Prudential (DENSO is a Prudential client).

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"DENSO's HR staff are strong supporters of the education process and have been responsible for driving significant improvements in employees saving and investing behavior," says Morey, noting that at least half of DENSO's eight North American locations conduct 401(k) financial-planning meetings with Prudential advisers on a quarterly basis (or even more often), including one-on-one sessions.

DENSO also has been successful increasing employee participation in GoalMaker, Prudential's automatic asset allocation and guidance tool, as a result of these meetings and one-on-ones.

In fact, 60 percent of DENSO employees who have 401(k) plans use the tool (with it, they simply input a few factors, such as age, risk preference and desired retirement age, and the application allocates funds for them to reach their goal). Overall, 97 percent of DENSO employees are in the 401(k) plan.

"We have really uncharacteristic high participation rates," says Sherry Youngblood, a senior specialist in HR at DENSO.

With new employees, Youngblood says, HR is very proactive in making sure they understand the 401(k) plan's value.

Plus, she adds, if they sign up for it but don't choose an allocation, they are defaulted automatically into GoalMaker.

"We do have a lot of people who choose it on their own," she says. "But it's something we always communicate up front, either way."

In North Carolina, another Prudential client, the North Carolina Department of State Treasurer, also offers defined-contribution-plan advice, mainly via online tools. In this case, State Treasurer Janet Cowell says the state felt the most effective way to accomplish it was by making guidance the default option via GoalMaker -- thereby avoiding the challenge of having to motivate employees to participate in a meeting in order to receive advice.

"The State of North Carolina has always been sensitive to the need to provide guidance to its employees," says Cowell, who was elected as state treasurer and began her term in January 2009. "But all these investment options can be overwhelming and we've seen the research. If you have too many choices, even if you get personal advice, it's still hard to do. The main difference is this type of tool does it for you."

So far, North Carolina, which uses this tool for both of its supplemental defined-contribution plans -- 401(k) and 457 plans, the latter a special government-employee version of 401k) -- has racked up some impressive participation numbers. In the past year, for example, 81 percent of new enrollees in the 401(k) plan and 84 percent of new enrollees in the 457 plan are using GoalMaker, either by selecting it themselves or via the default option.

"We have relatively high rates because we moved this option to the top of the list as the default option," Cowell says. "We want people to be savvy with their money, especially when they are saving for retirement. We are always working on financial literacy. It's a broad goal, and wherever we can make a difference, we try our best to optimize the situation."

Prudential's Morey emphasizes that HR needs to play a critical role in the effort to boost participation is using retirement-planning tools -- online, face to face, or both.

"HR [professionals] should be asking their 401(k) record-keepers to train local HR reps in how to identify relevant day-to-day opportunities to get the messages out to participants," Morey says, adding that Prudential offers a Plan Advocacy program, whereby it conducts training to help make local HR contacts true "advocates" for the plan and for the guidance offered.

"Sometimes, employees just need a second or collaborative opinion," says Losey, adding that as part of any education effort, HR must create scenarios that detail what can go seriously wrong if 401(k) plans are not managed.

"HR needs to say, 'We want you to use this planning tool or offer financial advice because we don't want you to end up unable to extend your retirement dollars,' " Losey says. "It's a very personal issue, and at the end of the day, it's an emotional issue. But one that has to be dealt with."

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