Tuesday, April 10, 2007

401k Advice

PF101 left an excellent comment in response to my post titled Retirement Survey: The Results, that I thought was worth posting in its entirety. Hopefully this response can help other people trying to improve their company's 401K plans. It also offers further insight into the nature of people and the plans that they make for their future. Here is post:

"...I conduct benefits training with businesses of all types an sizes and it’s rare that even 25% of the participants know even the basics about their retirement plan options. Based on this experience I have a few suggestions for you:

1. Implement an automatic enrollment policy. This would require employees to opt-OUT of participation instead of opting-in. Their contributions would, unless they choose otherwise, go into the Target Retirement Fund that is appropriate for their age. This option is great for the people who just don’t know what to do or are just too lazy to sign up. Much of non-participation is fear or just laziness. I presented to a non-profit the other day and of the 15 people in that session, 10 hadn’t enrolled just because they kept forgetting. I made them go get their forms, explained the different funds and how to do asset allocation and we got them all enrolled right then. Make it as easy as possible and you’ll find that people won’t complain.

shadox response - great suggestion. We are implementing this.

2. Make sure you offer Target Retirement Funds. They’re great for people who don’t know and don’t want to know how to invest. This will by far be the biggest group of people so make it as easy as you can.

Shadox response - another great suggestion. One of the problems with our existing 401K is that we do not have any target retirement funds. The new plan we will implement will have that option and I think that many will choose to use it.

3. I think it’s good for some people that your company is including a self-directed brokerage option, but do your employees a favor and see about requiring some sort of “prove yourself” system before people can choose that option. This will protect the people who think they’re Warren Buffet but are closer to Jimmy Buffet in their stock picking capabilities.

Shadox response - we are still trying to figure out if something like this is possible. Regardless, in the self directed 401K option we will probably have the employees bear the cost of any trades, to discourage day trading or other kinds of excessive trading. I must say, I am concerned about people using the self directed 401K option without having adequate knowledge.

4. Conduct employee training. I would double check Vanguard’s education services. I used to work in their Institutional Services department (401ks) and when I was there they definitely offered on-site education services. That was several years ago so it may have changed but I would double check. If they don’t I would check into 3rd party training. You could hire someone like me who would come in and teach the people who really need to know.

Shadox response - I contacted Vanguard and they actually sent me to a local fee only broker who sells their solutions. Apparently they do not directly serve their customers. I was disappointed to find out that this is the case.

Like I said above, I present to all kinds of companies and 99% of the time the entire presentation is about WHY you should save for retirement, how the different types of accounts work, what compounding is, what different types of investments are, why you want free money, etc. It’s personal finance 101 (hence the name of my company!). I can guarantee you I’d be cheaper than Fidelity and I’d guess there’s someone in your area who could provide a similar service. "


TFB said...

What about doing employee training in house? If Vanguard or any other provider sends someone over, you have to pay for travel and lodging, either directly or indirectly. Vanguard has those plain talk library booklets which you can order. If they are not free in quantity, they shouldn't cost much.

Shadox said...

The problem with self training books is that people simply don't read them...

Anyone who wants to get trained can find a wealth of information on the internet. All those training materials you mention can probably be downloaded from the net. Problem is, people don't bother. In fact, many of them don't even read the materials they get in the mail from our current 401k provider...

Truly, I don't understand people, but there you go.