Plan Member Education = Secure Retirement
By: Brian Hayhoe
Members of Defined Contribution pension plans face critical decisions about their retirement futures. However, says Brian Hayhoe, of Acquaint Financial, many are ill-equipped to make those decisions.
For millions of employees across Canada, Defined Contribution and other types of Capital Accumulation Plans are the primary vehicles used to save for retirement.
Under these plans, employees must make a number of critical decisions such as how much money they need to save and which funds to invest in. In essence, the risk that was once born by the employer in Defined Benefit plans has been shifted to the employee. Unfortunately, most employees are not educated enough to make these decisions on their own. In fact, there are a lot of employees across Canada today that don’t even know their plan is voluntary and that they are not automatically enrolled.
The employer, however, is still left with the task (and subsequent risk) of ensuring the employee understands the plan and has the proper knowledge to make appropriate decisions. A growing number of employers are realizing this risk. In the 2004 ‘The Road Ahead Report’ conducted by Sun Life Financial, 48 per cent of plan sponsors rated member education/knowledge as their primary challenge when it comes to managing their DC plan. In addition, 80 per cent agree that DC plan member education through the plan sponsor will be a necessity in the future to avoid financial liability.
In the past, most employers focused their education efforts on the plan itself and not on the fundamentals of saving, making investment decisions, and projecting a retirement income.
Today, evolving pension regulations, such as the CAP Guidelines that will be in place by the end of this year, are causing employers to take a much more holistic approach in their financial education efforts. According to ‘The Road Ahead Report,’ “almost half of plan sponsors (47 per cent) feel that it is necessary to provide members with education on basic personal financial planning skills.”
A more holistic approach involves not only teaching plan members about the plan itself and how it works, but educating them on important concepts like how their pension plan fits into the rest of their retirement plan. An effective strategy includes education on making proper investment decisions, estimating how much they will need to save for retirement, and all the various income sources that will make up their retirement income.
One of the most overlooked areas of financial education is helping people determine where their savings will come from. Most employees today know that saving for retirement is important, but what they often have the most trouble with is finding enough funds to save. Asolid financial education program will address all these issues by demonstrating the importance of having – and sticking to – a monthly budget, learning the differences between discretionary and non-discretionary expenses, and how to live within realistic means.
When deciding on the type of financial education to provide, employers need to consider the demographics of their employees and then work with their provider to put together a program that will meet their mandates. Location, age, education level, job type, and income level all play a role in devising an effective program that works.
The method used to educate employees should satisfy the various learning styles and preferences that individuals have. Some individuals are visual learners, while others may be auditory or kinesthetic learners. Some individuals will prefer the convenience and self-serve nature of learning online, while others may prefer a seminar or one-on-one help.
Putting together a program that incorporates a range of different learning methods – such as seminars, online resources, individual counseling, telephone counseling, and print materials – should be a top priority. Employers should also take into consideration the employee’s level of financial proficiency along with their age or career stage so that the program is structured in a fashion that allows the employees to get the maximum benefit.
Finally, remember that communication is the key! You can put together the best program possible, but if it is not communicated well it will not give you the results you are looking for. Notifying employees through invitations, statement stuffers, eMails, service brochures, sign-up sheets, and software demonstrations all work well to get them acquainted with your program.
The results of providing employees with financial education go well beyond fulfilling an employer’s responsibility to members of the pension plan. One benefit comes in the form of increased plan participation and contributions. This should be welcomed news for the 25 per cent of plan sponsors that said employee participation in the pension plan is their top challenge.
A study released earlier this year by Steven A. Nyce,from the Wharton School of the University of Pennsylvania, shows the effects of a good financial communication program on participation rates and contributions. The study covered more than 300,000 employees and looked at how improving a financial communication program in four main areas (plan information, financial education, retirement income projections, and web based education) affected participation rates and contribution levels in 401(k)-type plans.
In terms of participation, the central finding of the study was that financial communications – projections, financial education, and web intensity – have a statistically significant effect on employee participation. Figure 1 shows that for a firm that provides a very basic financial communication program, 62 per cent of employees are anticipated to participate. By introducing an enhanced financial education program on par with that offered by the average firm, participation increased by five per cent to 67 per cent. For firms offering retirement income projections similar to those offered at the average firm, participation rates rise by another two per cent for a combined rate of 69 per cent. Using the internet has the greatest impact on participation as it increases enrollment by another six per cent for a combined gain of 12 per cent. For those employers who offer a financial communication program significantly above (high communication) the average plan, participation rates for the average worker rise to 84 per cent.
The influence of financial communication also impacts participant contributions for the average worker. For a firm with a meager financial communication program, the average contribution is 5.5 per cent of annual salary. Enhancing plan information to that of the average firm has only a marginal effect (0.1 per cent) on savings rates. Enhancing financial education material only had a small effect on savings – raising savings by another 0.1 per cent. Providing employees with retirement income projection tools to a much broader group of employees than the average firm can increase savings by 0.4 per cent. The largest effect on participant contribution rates came from raising the concentration of materials offered via the web – boosting savings rates by 0.8 per cent.
Overall, a company that brings its meager financial communications up to the level of an average firm can boost savings from 5.5 to 6.9 per cent and companies that improve their communication program to above average (high communication) can raise savings by another 1.35 per cent for a total increase of 2.7 per cent. Overall, the study found that the largest impact on participation and contribution rates was for firms that highly utilized the internet and web-based tools as an information and financial education medium. It also confirmed that enhancing a financial communication program can boost employee enrollment as much as increasing the company match rate does. This is good news for employers as the cost associated with increasing the company match rate can be significantly higher then raising the bar for their financial communication program.
Providing employees with financial education has several other benefits that are often undervalued when the primary decision to provide these services is for pension reasons. Educating employees on financial issues has been shown to reduce absenteeism, increase morale, and attract/retain key employees.
A study done by the Heart and Stroke Foundation in 2000 found that one in five (21 per cent) employed persons in Canada said they have financial stress. This type of stress is normally brought on when individuals are already in a financial crunch and need to react to yet another financial problem. By providing employees with a proactive financial education program, they will be better equipped to avoid these financial obstacles in the first place. Even if these problems occur, employees will be better equipped to recognize them sooner and have a better understanding of how to deal with them effectively before they turn into larger issues.
In summary, a financial education program will not only help plan sponsors satisfy their pension responsibilities, it can have a significant impact on plan participation, contributions, and plan appreciation. A dedicated program will also contribute to overall corporate wellness by providing employees with the help they need to deal with any financial issues and concerns they may have. The end result is employees that are better equipped to make informed decisions about not only their retirement plan, but their personal finances as well.
Brian Hayhoe is chief operating officer of Acquaint Financial www.acquaintfinancial.com.
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