Retirement with a Plan

As 401(k) plan managers fret over how to improve their plan’s participation rate, they all agree that advisory services and education about current plan choices and how they will impact post-retirement life are essential to the plan’s success. But how? Even venerated fund families such as Vanguard report that given the option, only 7% of the employees ever click deep enough into the website they post to find out the answers to these questions.

Is it the way the information is portrayed? Do the authors of this material give the education in the same way pollster Frank Luntz suggests in his ten commandments of effective communication? Mr. Luntz believes that a simple message, delivered in brief from a credible source are key. There should be a consistency to the message and a novel way to get the subjects attention (and keep it). Making the understand the message with something they can relate to, what they might become or achieve and do so with clear repetitive tones.

In the original argument for the 401(k) was based on control. The architects of these plans made the assumption that the employee wanted more control when in fact, decades later, this has not proven to be the case. Congress, via the Pension Protection Act, acknowledged that: The average American worker has been unwilling, perhaps even incapable, of assuming responsibility for planning and funding his retirement.

We need all the help we can get. Yet we are fickle.

The employer has no obligation to offer a retirement plan. None. They do so in order to get and retain employees much the same way pensions were designed to do. Nor do they need to force employees to participate. The difficulty is with how the employee reacts.

Disgruntled employees who have poor performing retirement plans, even if the lion’s share of the fault falls in how they participated, the employer is usually in the crosshairs. And perhaps they should be but a court of law is not where you want these plans laid bare or the company’s fiduciary responsibility questioned.

Mr. Glass suggests that some of the problems companies could face happen when the fiduciary: “did not make participants aware of their insufficient
contributions because they put the sponsor’s financial interests
(avoiding increased matches) and human resource goals (using the
401(k) plan to attract, motivate, and retain employees) ahead of their
duty of loyalty to participants.

“Participants,” he continues, “incurred damages because they contributed less than what they would have had the fiduciaries made them aware that their
current contribution levels were too low.” A judge might look at these factors, the chance that the company or the fiduciary “deliberately provided participants with misleading communications that omitted material information which their employees needed to make informed decisions. In fact, such a case is now in the Court of Appeals for the Second Circuit.”

The bottom line seems to be rather simple. Employees need to know what kind of future awaits them and they need to be reminded of it in the most consistent of ways. Social Security and Medicare may not be in its current form or funded as they may have expected. Inflation poses a risk as well as taxes. Consumption (what it takes to live more than a day-to-day lifestyle) needs to be considered when the employee makes a decision to participate and how much to contribute. And they need to understand risk, the consequences of too little and the downside (and upside) of too much.

Employers need to understand that, although they may not feel as though they should “force” and employee to watch out for their future, they may be held responsible if those employees don’t come close to where they expected that future to be.

Part One can be found here