Recently in defense of their 401k program a CFO told me that they provide 401k education to their employees. He felt that by providing 401k education that that should be good enough for the regulators. Much research has shown that 401k education isn’t working or maybe more broadly financial education. In my analysis I have seen that what is often called education is simply information provided by using a PowerPoint presentation.
What education looks like
Reflecting on your academic education, did you just receive PowerPoint presentations or chalkboard presentations? If you’re like me your teacher or professor, provided a syllabus, learning objectives and assigned lots to read along with homework. Your homework was graded and given back to you. You took tests and at the end at the end received a grad of A through F. I also learned in my education that all teachers and professors aren’t great educators. Often they know the information themselves would find it difficult to pass that information on to others.
401(k) education for CERTIFIED FINANCIAL PLANNER™ professionals
As part of the course work to be a CERTIFIED FINANCIAL PLANNER™ professional I had to take a two day exam. Along the way I had to show how to calculate how much someone had to save given a certain rate of return, etc… In most 401k presentations I’ve seen, they don’t help employees calculate their retirement need. Many discuss the need for diversification in investment planning. However, the plan doesn’t provide the employees correlation coefficients. These are tools that a professional would probably demand.
The number one factor leading to future account balances is not what you invested in but how soon and how much you actually invested. That is the power of compound interest and systematic investing. However, many a presentation does not emphasize savings behavior. Maybe it’s because some of those doing the education are either investment providers or stockbrokers who claim expertise and investing. It is likely in their interest to see one save in to their investments.
Do you assess your employee’s level of 401k education?
I believe that a better way to provide increased savings is to start by assessing where your employees are now. How would your employees answer the following?
Do you know if you’re on track to replace 70% or more of your income?
Do you understand the difference between investing in stocks and bonds?
These questions will give us an idea of the level of education and a curriculum that your people need.
401k education vs. 401k advice
I believe most people should be defaulted into an advice program where an investment fiduciary gives personalized savings and investing advice. That means that the advice must be impartial and for the sole benefit of the employee. Most plans have stockbrokers that cannot work in this capacity.
The 401k education can act has an additional foundation to help ease the nerves in volatile markets and to reinforce the need for continued savings. A broad financial education program can also get at the root of the problem of why your employees likely are not saving adequately for their retirement. 401k education without a solid financial education typically isn’t going to work. Think back to when you were in school. You had to graduate from eighth grade before you could graduate from high school. Far too often we make assumptions about an individual’s background. Firms like LPL Financial, through their Worksite Solutions program have created a coordinated 401k education and advice program to scale from small to large firms. If your employees are not saving at least 10% of payroll, you owe it to them to reevaluate your plan’s 401k education and advice.
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