Participants in 401(k) plans often express one overriding concern: “Will I have enough money when I retire?” Because the answer to that question depends in large part on how the investments in their retirement accounts perform, employees today look to their employers for investment advice and guidance. In fact, recent Merrill Lynch research found that almost 70 percent of employees say they would like advice about their 401(k) money from a financial adviser.* Companies increasingly are looking for the tools to meet their employees’ needs for advice and guidance. (Some employers refuse to give employees any advice about the investment of their 401(k) money, citing potential liability.–ed.)
In a new study commissioned by Merrill Lynch and conducted by International Communications Research in April, 99 percent of companies surveyed that offer advice and guidance for 401 (k) participants consider their programs successful – with more than half saying their programs were extremely successful.
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Small Companies Lead the Way
In our survey of more than 150 companies having 25 to more than 1,500 employees, we
found that about three in ten retirement plan sponsors currently offer specific advice on investments in participant-directed defined contribution plans like 401(k) and 403(b) plans.
Surprisingly, perhaps, small companies were more likely than large companies to offer investment advice services. Of companies employing 25 to 499 people, 31 percent offered investment advice services, while only 22 percent of companies employing 500 to 1,499 people offered these services.
Those who did not offer investment advice most frequently said the reason they did not is that they are concerned about legal or fiduciary liability. Clearly, some employers would welcome ways to offer investment advice services that limit their liability while providing their participants with high quality advisory services.
Employers and Employees Divided
Even though employees overwhelmingly say they want assistance with investment decisions in their retirement plans, some employers are not yet convinced. In our survey, about one in four employers said they thought it was unimportant for their company to provide investment advice.
About three-fourths of employers also said they thought their employees are somewhat prepared or very well prepared for their retirement. This perception is at odds with how we have found employees feel about their preparedness for retirement.
In our latest annual survey of pre-retirees and retirees, we found that only 16 percent of currently employed people felt very well prepared for retirement, while.28 percent of those who had retired felt they were very well prepared when they retired. The vast majority said they felt “somewhat prepared,” “not too prepared,” or “not at all prepared.”
This lack of confidence coincides with an increase in the number of employees who must direct their own retirement investments. In the nine years that we have surveyed employers, the percentage that offer defined benefit plans – the traditional pension plan – has dropped from 55 percent to 31 percent. This year, 91 percent said they offered a 401 (k) or 403(b) plan, in which employees make investment decisions.
Offering Advice and Guidance
Offering 401 (k) plan participants investment advice and guidance is not a one-size-fits-all proposition. Because your employees will have varying comfort levels with investing and retirement planning, your investment education program should offer a customized continuum of education and planning tools and services to suit the needs of each individual.
Your program could emphasize how a comprehensive financial plan can help employees meet long-term financial goals. Once employees learn how to pinpoint their financial objectives and address their saving needs, they will have the knowledge and tools necessary to make wise investment choices.
Such a program would be in line with federal guidelines that allow employers to provide information about general investment principles without crossing the line to providing investment advice.
The goal of any program you offer should be to assist employees with key decisions such as how much to save and how much risk to take with their investments.
Employees need to see clearly the impact of these decisions on how well they will live in retirement.
Online Advice and Guidance
Intranet and Internet access is fast becoming a preferred way to communicate benefit information. In our survey, 30 percent of companies said they offered online access, a number that has doubled since last year.
The enhancement of online access with advice and guidance services might convince more employers to use technology to help their employees make investment decisions. In the survey, 17 percent of the employers who did not currently offer Internet access to retirement benefits said they would be more likely to do so if that access included the ability to offer advice and guidance over the Internet.
The Internet is the great equalizer for investors, enabling individuals to have the same sophisticated tools at their fingertips as were once only the province of pension fund managers. Unbiased online investment advice can help improve employees’ forecasting abilities. Through simulation technology, online services can forecast a range of possible future values of an employee’s specific investments. They can also provide daily monitoring of investment performance and let users know if adjustments are needed as markets change.
By providing a spectrum of educational materials and investment services to your 401(k) plan participants, you can help your employees make their own investment and retirement decisions with a higher level of confidence. Talk with your business adviser about how you can offer customized, high-quality advisory services for your work force.
Patrick J Walsh is Senior Vice President and Director, Group Employee Services, for Merrill Lynch.
* Source: The 1998 Merrill Lynch Retirement and Financial Planning Survey of Employees
