Informal research shows that DC industry spends over $1 billion annually on employee education, and maybe more if the time and efforts of advisors are included. But what’s the ROI? The consensus is that education efforts within participant directed plans have mostly failed, especially when compared with the effects of automatic enrollment, auto deferral, QDIAs and auto escalation.
Many advisors do a terrific job with their plans and participants, but their resources and reach are limited. Is there a real alternative to helping people prepare for retirement at a time when private companies and governments in the U.S. and around the world are withdrawing their support?
Being an optimist, the short answer has to be yes — because, if the answer is no, then the entire system may blow up and all our clients will move into a government sponsored Thrift Savings Plan that charges participants 2 BPs.
Defining the Problems
If behavioral finance is the only answer, then the cost of the value added by providers and advisors may not be justified. So is there a real alternative to helping individuals within participant directed plans save enough money to retire comfortably? There are no simple answers or silver bullets, but based on many surveys and anecdotal evidence, maybe there are different directions we can take. Let’s start with some of the problems.
• For participants: Most don’t have the expertise or interest to make the right financial decisions. It starts with financial literacy, and is compounded by fear, uncertainty, irrationality, inertia and even shame for not saving enough.
• For plan sponsors: It may be hard — or even impossible — to get employers to force their employees to do something or take time from their work day, especially since employers don’t want to be in the benefits business anyway.
• For providers: There is a trust deficit with financial services companies among plan participants, especially in the wake of the 2008 recession. Education is not providers’ core competency, and therefore they will never attract the best and brightest educators or web designers. And omnibus record keeping systems are opaque and do not allow for outside assets to be integrated.
• For advisors: Many who are good at selling corporate plans are not good at marketing or speaking to plan participants. Costs and fiduciary issues make it hard to do one-on-one education, especially with so many low account balances.
• The current system: Trying to teach investment education is like trying to teach high school students algebra in a 30-minute, optional course given once a year. Materials branded by providers are suspect at best — and a one-size-fits-all approach is just plain foolish.
Possible Solutions
Given the lessons learned, here are some alternative suggestions:
• Keep it simple and fun: Enrollment meetings should focused and short. If you can make people laugh, even better. Use stories, illustrations and pictures; stay away from text and charts. Education, advice and guidance should be done separately, one-on-one if possible.
• Fees: Why not charge one fee for institutional work for the plan sponsor that benefits all participants (like fund selection and benchmarking, for example) and another fee for participants who want one-on-one education and advice?
• Delivery: Materials and websites should be branded by the plan sponsor (perhaps with the advisor) and customized by age, salary and ethnicity. Some first-generation participants are savers, not investors, for example. Let’s make it more entertaining — perhaps leveraging Hollywood celebs for age customization. Set up a company-sponsored page on Facebook and get employee opinion leaders to post ideas and host discussions, guided and coached by the advisor. Leverage mobile devices and online games.
• Make participants educators: One of the most powerful ways to teach someone is to train them to be a teacher. With 70 million people in DC plans influencing many more people in their families, these plans offer a great opportunity to teach financial literacy to the masses. What if we created a system designed to teach plan participants what they should be telling their children and families about financial literacy, including retirement planning? If we teach parents what to say to their children, guess who also learns something in the process?
• Cooperation vs. competition: As an industry, we can’t be tempted to try to beat our competitors on the basis of who can best educate, guide and advise participants. It’s too big a task for any one provider or broker dealer, who will never be able to attract the best and brightest research, technology or educational talent. Our competition is the Thrift Savings Plan. Can we create an industry-wide, impartial, not-for-profit organization in which any and all providers, broker dealers and advisors can participate — differentiating themselves through the application to their clients? Can we afford not to?
• Giving back: Attorneys are given an exclusive license by society to deliver legal advice, and in return they are expected to do pro bono work for those who can’t afford to pay. Where is the pro bono requirement for financial professionals, who make a good living because of the licenses we’re given to work with investors? Many advisors, especially those with established practices, are eager to give back but are unsure about how or where to get started. Educating plan participants and teaching financial literacy — whether within a DC plan or at local high schools and colleges — must be delivered in person to have the maximum impact. With the need so great and the resources that are available, it seems pretty straightforward what needs to be done — the question is how and who.
