The Woeful State of 401(k) Participant Education

Because a 401(k) plan has participants making their own decisions on how much to save and what to invest in, and because many, if not most, participants don’t really know the answer to either question, education is required. A prudent plan sponsor will provide this.

So, how is it that 60% of all 401(k) plans don’t offer ANY participant education? Many that do, only offer education when enrolling new employees. This is a serious oversight on the part of plan sponsors.

A recent USA Today survey revealed that 60% of employees have less than $25,000 saved for retirement and 36% have less than $1,000. That’s close to 2/3 of the workforce that will be living totally on Social Security, providing on average 40% of pre-retirement pay, by definition, that is less than 40% for those making over an average income.

In a recent Gallup survey, 35% said they needed help, mostly on investment selection, but also on reallocation. When asked about their main area of need, 30% responded “multiple.”

If 35% of your participants have a problem understanding what is often their only means of providing for themselves during the last 20-30 years of their life, shouldn’t you as a plan sponsor address this?

Put the two surveys together. Only 35% said they needed education but 60% have less than $25,000 for retirement. Obviously, there is more education needed, not just on what investments to pick but on how much to save and how to be able to do that. Which investment to pick is a small problem compared with how much to save and how to accomplish that.

If you are an executive or business owner and your plan has discrimination testing, this affects how much you can put into the plan. When participants don’t understand something, they are more cautious and put less money in and may not participate at all. Because your allowable contribution is tied to the average contribution rate of the non-highly compensated employees, that creates a problem for you and all the other highly compensated people in the plan.

Bottom line: your workforce needs education on your retirement plan and not just on the nuts and bolts.

The most effective education is one-on-one time with a financial advisor or education specialist, preferred by over 60%. Group meetings are good, at least better than nothing, but one on one is far better at producing understanding and meaningful results.

It is hard to overestimate how important it is to get your workforce on track for providing for themselves in a retirement that is increasingly likely to be 1/3 of their adult life.

Call or email me to find out how to provide that education and assistance for your employees. They will be grateful.