Have you tested the financial literacy of your employees? Several studies have highlighted the poor financial literacy of Americans. Are your employees the exception? If not, how can you steward your employee 401(k) plan around this obstacle?
You may want to check out the security and exchange commission survey entitled block. It addresses a wide range of questions surrounding financial literacy. You shouldn’t blame employees for their poor financial literacy. It’s not regularly taught in the schools. In fact, the phrase means different things to different people. For some it is a focus on paying your bills, controlling debt, understanding stocks and bond, and things like options, calculating the savings rate to replace 70% of your income throughout your retirement.
Financial literacy savings
Most people have no idea of how much they should be saving for their retirement. It is unlikely they could do so unless they are a CERTIFIED FINANCIAL PLANNER™ professional CFP®), Chartered Retirement Planning Counselor™ or actuary. In a defined-benefit plan actuaries actually do the savings and investment calculations. A CFP® or CRPC™ do these calculations for people on an individual and customized basis.
However, the challenge with pensions quite often is behavioral .knowing what to do and not doing it or being overly optimistic regarding investment returns. Take the state of Illinois for example that did not fund its pension well for decades and now has found itself in a crisis that hasn’t been able to figure its way out of. For some of that time it used unrealistic investment assumptions to justify inadequate funding. You may or may not have established the default savings rate for your employees. If you have many of those people will anchor on that number believing that you have done some calculation for them and that’s the right number. Others have heard the free money conversation. That you should at least save to get the free money if that’s a 3% match they save 3%. Yet that may not be adequate for their particular situation. This is too important of a decision to give to someone with poor financial literacy and no support.
Financial literacy investments
A client of mine who works at the University of Chicago Hospital system sought me out to help her with her retirement. For almost 20 years she had been putting all of her money into a money market investment because she didn’t understand her other plan options. She accepted my recommendation to invest and in a portfolio that was about 60% stock and 40% bond. Later, I discovered that she actually did not know the difference between a stock and a bond. With a lack education on investments it’s no wonder why some people would pick extremely safe investments. We often default to what we know when dealing in areas where we lack understanding.
Further most people I’ve talked to don’t understand how systematic investing (dollar cost averaging) works in their 401(k) or ERISA 403(b) ups and downs of the market may benefit them
Financial literacy and being an investment fiduciary
Congress determined that companies offering retirement plans would have to operate the plan for the benefit of the employees, not themselves. Under the law this means become an investment fiduciary. However, you do not sign anything letting you know that you are. An Alliance Bernstein defined contribution survey uncovered that about 40% of executives in a fiduciary capacity in their plan did not know and/or were unsure if they were a fiduciary. You cannot expect someone to carry out fiduciary investment process without a foundation in those concepts.
According to the Center for Fiduciary Studies keys consideration in determining your investment menu is the employee financial literacy. This should be incorporated into understanding terms like passive and active investment strategies, beta, alpha etc. Further, you should have a plan benchmark portfolio which you compare your employee’s returns to.
Assessing what steps you can take
If you are not aware of the issues that I’ve outlined that possibly you are not working with the right retirement plan advisor or. While you may perceive that financial advisors are commodities that is not the case. Their designations like Chartered Financial Analyst and CERTIFIED FINANCIAL PLANNER™ give you an idea of the differentiation. Advisors focused on retirement plans typically are Accredited Investment Fiduciary and, Professional Plan Consultant or Qualified Plan Financial Consultant. Some like me have fiduciary knowledge in incorporating various values such as workplace diversity, women’s leadership and climate change into the investment menu. While this may not have personal appeal for you, likely there are participants where that is important. It doesn’t make sense to have them invest in poor investments and/or investments that conflict with their belief system.
Are you working with advisors that have acknowledged they are fiduciaries on your plan? You may have a fiduciary advisor for your investments in a separate fiduciary advisor helping your employees calculate their savings and investment allocation. If you’re not familiar with the terms ERISA 3(21) investment advisor and ERISA 3(38) investment manager you probably don’t have that type of advisor. I believe these to be keys and helping your employees overcome their lack of financial literacy. My associates and I look forward to helping you develop a plan that gives you the benefits of happy employees on track to retire who are invested and aligned with what is important to them.