People generally don’t take education for granted, yet education can easily be overlooked when it comes to building investment knowledge among 401(k) plan participants.
Many plans don’t do much in the way of participant education beyond statement inserts or one-time seminars during enrollment periods. But plan sponsors can find long-term value from investing in education for 401(k) participants, to make the program more robust and relevant.
The value in education comes in the better outcomes participants can achieve when they feel confident in their knowledge and make better decisions with their investments. Plus, when participants feel they are on track for a more secure retirement, they worry less about their personal financial situation and can focus on their responsibilities at work.
Here are three questions to consider when you’re thinking about investing in investment education for your plan’s participants.
Who’s Your Audience?
Every participant in your plan may be using it for the same purpose—to save and invest for retirement. But that doesn’t mean you should treat all participants the same way when it comes to education.
Participants at different ages and different stages of life have varying retirement planning needs. Younger participants need to take advantage of the power of compounding and understand how taking sufficient risk with their investments can help them achieve adequate returns. Older participants are more concerned about the transition to retirement—specifically, how to make all of the money they’ve accumulated in their 401(k) account last for as long they may need it.
It’s important to consider the differences between older and younger workers—as well as those in between—when developing an education program for your retirement plan. Consider segmenting your program into different age categories, and tailoring different lessons to the specific issues each age group faces.
What do They Need to Know?
Start with the basics—how to sign up for the plan. Communicate your enrollment deadlines and your schedule for enrollment meetings. Make sure participants complete their beneficiary designations so that money in their account will pass to a spouse or other family members under unfortunate circumstances.
Next, discuss contributions. How much do they need to contribute out of each paycheck to reach their goals? This is where online tools and calculators can come in handy.
Also, discuss the fact that contributions come out of participants’ pre-tax earnings, so they keep more of the money they make by contributing to their retirement plan before taxes are taken out of their paycheck.
If your plan offers matching contributions, be sure to cover how important it is for participants to contribute enough out of their own pay to qualify for company matching contributions. This “free money” from their employer can be a big incentive toward encouraging plan participation.
Third, educate participants on the investment options available in their plan. Your program should hit upon the differences between stocks and bonds, the trade-off between risk and return, and how diversification helps manage risk.
Most 401(k) participants have a low understanding of the basic tenets of investing. Many have never heard terms such as “equities” and “capitalization,” or know how interest rates work with bond investments. So keep it simple for the majority of investors, and help others build their investment knowledge over time by addressing more complex issues.
Last (but certainly not least), include a discussion of fees in your education program. Especially because a majority of fiduciary duty lawsuits are centered around excessive fees, lessons on investment costs can help demonstrate a commitment toward meeting your responsibilities as a plan fiduciary.
How do Participants Like to Learn?
People within all age categories have different learning preferences. So build some flexibility into your 401(k) education program to accommodate those who like to absorb information passively through reading, as well as those who are more active and learn better by doing.
Even between different age groups, participants lean toward certain preferred methods of acquiring investment knowledge. Participants in their 20s and 30s see online tools and calculators as most helpful in using their workplace retirement plan. That’s according to a Transamerica survey of plan participants from June this year.
Older investors—those in their 50s and 60s—tend to rely more on quarterly statements and, not surprisingly, show less interest in mobile applications and social media.
You don’t have to use ALL available channels of communication. But a good mix of educational approaches—printed materials, interactive tools, video presentations and more—can go a long way toward building knowledge and engagement too.
Encourage Continuous Learning
The goal of your education program shouldn’t be to turn plan participants into investment experts. But they should know enough to feel more confident in the decisions they make. And that confidence won’t appear overnight—it takes time and practice to help it grow.
Think of your plan’s education program as a long-term endeavor, adapting to the needs of plan participants as they build their nest eggs and get closer to retirement. A written plan for continuous participant education can help the lessons evolve over time.
Also, integrate a review of your education program as part of your plan’s annual review. Lessons can grow stale, even if the content doesn’t really change. Plus, an annual review can help you make changes to your program to keep it relevant to participants and focused on issues that are important to their retirement security.
Your 401(k) plan is a benefit you are providing to employees to help them plan for a more comfortable financial future. Investing in their education and financial literacy help your plan’s participants make the most of the benefits you offer.
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