Most retirement plan sponsors understand the need to have educated participants. After all, the more participants know about investing and retirement planning, the more likely they are to end up financially prepared to retire.
This is clearly a hot topic. A recent survey showed participant education is the top concern on plan sponsor’s minds.
The cottage industry of financial wellness has jumped in to help fill this need for employee education. However it appears that most programs focus on budgeting, debt and shorter-term financial responsibilities. As a result, these programs are great for immediate needs but are surprisingly light on investing education.
Employees are noticing. In a recent Bank of America Merrill Lynch report, the workplace financial wellness programs that companies are currently providing don’t appear to be giving participants what they really want. And one of those priorities is more help with investing.
That makes sense. Investing for the future is one of the most difficult tasks any individual can face. Investing is even difficult for trained professionals. But most people do not get professional help, so it is doubly difficult for them to get the results they need.
The Danger In Just a Little Bit of Education
Most financial wellness programs have one small section on investing…usually a module of about 20 minutes in length. But investing is a significant topic. Just type “books about investing” in a search engine and you’ll see tens of thousands of books written on the subject. Like medicine, investing is a specialty that people study for lifetimes. Saving for your future is probably the most difficult task an individual will face, especially in these times of low interest rates and increasing longevity.
Is it really possible to condense this complex topic down to 20 minutes? No…. and of course these programs don’t try to.
But a little bit of information can be a very dangerous thing. In this case, the danger emanates from the fact that investing is not black and white. While yes, it’s technically a simple matter of buying and selling investments in your 401(k) or 403(b), but in reality it is anything but. It is an endeavor fraught with emotion.
A well-meaning module that makes retirement investing seem simple can create false confidence when delivered in the middle of a bull market. Investing almost always “seems” easiest at the end of a trend. Well, we’ve been in a very strong bull market for nine years now. This message of “investing is simple” is reinforced by rising stock prices.
Inevitably, the other side of the cycle will arrive. Stocks will start dropping. Participants will become nervous. And sadly, they often sell in a panic, putting them even farther away from their retirement goals.
Worse, they often swear to keep out of stocks and only re-enter after they’ve gone up again…when they again “seem safe”. This repeating pattern has been studied and unfortunately is what makes retirement saving even more difficult for the average person.
What Can Help
Participants need more help when it comes to investing through all market cycles. But it’s not realistic to turn everyone into an investing expert. So let’s look at what are realistic goals for participant education.
1. Education on Finding The Right Help
The most practical solution is to help empower and educate participants to get the right kind of financial help. This makes sense since studies like DALBAR continue to show that individuals fall prey to their emotions. That causes them to seriously underperform over time. On the other hand, studies show that those who get help tend to save more and get better results.
The ideal scenario is to that every retirement saver have access to affordable professional help. Unfortunately that’s not likely either. But what we can do is empower people so they feel comfortable getting professional help. And then teach them how to get the right help.
Unfortunately Wall Street is full of people who call themselves financial advisors, but who actually are product salespeople. The problem is consumers don’t know the difference and just assume all people who use the title of financial advisor have their best interests in mind. So it’s critical to help people understand who exactly they are dealing with and how to find a fiduciary advisor.
2. Education on Investment Expenses
It’s also critical to help people understand investment expenses. Simply by choosing lower cost mutual funds, individuals can potentially increase their returns with no extra risk. This is a very beneficial lesson.
Sadly, most financial wellness programs don’t provide training on how to understand investment expenses. (Learn more about one program that does provide this critical education).
3. Education on Behavioral Biases in Investing
If people are not going to get financial help, then one of the best things a plan sponsor can do is provide education on the behavioral issues most people face. While it’s not easy, this is also critical education. People need to understand why investing brings out fear and greed in all of us. Then they need to learn how to control their emotions. Teaching simple concepts like dollar cost averaging can help. Also people need to understand what diversification and rebalancing mean and what these strategies can do for them.
Some programs simplistically tell people simply to stay invested during all cycles. However, this could also cause problems if someone is not rebalancing, or is not properly diversified in the first place, which happens frequently with self-directed investors.
Why The Time Is Now …Not Later
The lack of sufficient investing education is especially worrisome given that recent litigation against plan sponsors has occurred while most participant accounts have been steadily rising. It seems likely that participant unhappiness will rise when the next bear market begins. So proactive plan sponsors should be helping their employees prepare by providing good investing education now…not later.
Fees have been a focal point in recent court cases against retirement plan sponsors. By proactively providing practical education on the importance of managing investment expenses, a plan sponsor certainly can show a good faith effort. Being open and transparent with participants in this way could go a long way in preventing problems as well.
Checklist for Your Financial Wellness Program
So given its importance, don’t shortchange participants. Make sure the participant education or financial wellness program you choose has these critical topics covered. Here’s some tips on what to look for.
Make sure your program covers practical topics such as:
- How investment fees work, why they are important and how to make sure you’re not overpaying
- How to hire the right financial advisor
- When to get financial planning help
- The importance of diversification
- What is rebalancing and why it is important
- What are market cycles and how do they impact your emotions in investing
Proactive plan sponsors are smart to be making sure they are addressing these topics now. It’s important for liability prevention, of course. But it’s also simply a good thing to do to help make sure your valued team has a better chance at a great retirement.
Wavelength Financial Content Inc. provides white label financial wellness programs and other digital content for financial advisors.