From enrollment meetings and newsletters to videos and interactive computer programs, plan providers offer a wealth of asset allocation education tools. But how can sponsors know what they should get for their education dollar, and more important, whether participants will use the information?

Investment Education Guidelines

Last year, the U.S. Department of Labor (DOL) issued an interpretive bulletin on how plan sponsors can provide investment-related information and education to 401(k) plan participants without rendering “investment advice” under the Employee Retirement Income Security Act of 1974 (ERISA). Many plan sponsors had been concerned that providing investment education could cause them to be considered investment advisors with fiduciary responsibility — and potential liability for — employees' investment decisions. Under the four safe harbors articulated by the DOL, companies can safely provide the following types of information:

Plan information about the benefits of participating in the plan; the benefits of increasing plan contributions; the impact of pre-retirement withdrawals on retirement income; the terms of the plan; and plan operations. Companies can also provide information on investment alternatives described in ERISA section 404(c), such as descriptions of investment objectives, risk and return characteristics, historical return information, and related prospectuses.

General financial and investment information such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment. This can also include information on the historic differences in rates of return between different asset classes based on standard market indices; the effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance.

Asset allocation models for hypothetical individuals with different time horizons and risk profiles fall within the guidelines, but must be based on generally accepted investment theories, disclose all related assumptions, and be accompanied by a reminder for participants to consider their other assets, income and investments when creating an asset allocation mix.

Interactive investment materials such as questionnaires, worksheets and similar materials that provide participants the means to estimate their future retirement income needs and to assess the impact different asset allocations can have on retirement income. Generally accepted investment theories must be used and all related assumptions must be disclosed.

Fear, ignorance and lack of motivation to change are just a few of the reasons why employees may not be investing their 401(k) plan assets aggressively enough (or too aggressively) to ensure a secure retirement. As plan sponsors, companies can — and to a degree must — take a lead role in educating employees to overcome these obstacles.

Two factors are easing the way for companies' efforts to educate their employees on appropriate investment decisions. Last year, the U.S. Department of Labor released an interpretive bulletin on safe harbors in investment education, providing companies with guidelines to follow in investment education that will allow them to forgo fiduciary responsibility for their employees' investment decisions (see Investment Education Guidelines, right).

At the same time, increasing competition in the 401(k) plan services industry has not only made investment education support readily available as part of a bundled package of plan services, but plan service providers are working hard trying to outdo each other in participant education offerings. In this competitive market, investment education expertise and programs have become a key differentiator for many plan service providers. As a result, some level of asset allocation education support is likely to be available to even the smallest companies; however, exactly how much will be available tends to vary by a plan's asset size.

Determine the Budget

How much vendor-provided asset allocation education support can companies reasonably expect for their plans? Overall, companies that either use one provider for all 401(k) plan services (bundled) or use multiple vendors (unbundled) annually spend an average of $5 to $7 per participant on education, according to Access Research, a Windsor, Conn.-based financial services consulting firm. However, many 401(k) service providers that include education support as part of a larger plan administration fee calculate their own version of a plan's education budget. Therefore, the first step in developing an asset allocation education plan is to determine what the plan's education budget will be and what that amount represents in terms of actual educational support (number of meetings, amount and types of printed materials, video/multimedia presentations, and so on).

“Companies think their vendor is going to come in with all kinds of meetings, print and video, and employees will immediately understand the plan,” said Wendy Wallach, president of Wallach & Associates, a Ft. Lee, N.J.-based 401(k) consulting firm. “But it doesn't happen that way.” Instead, she says companies that have plans with $100 million in assets, for example, could reasonably expect enrollment meeting support, group educational meetings in locations with more than 100 employees, and an off-the-shelf printed brochure about asset allocation that can be customized with inserts containing specific plan information and investments. Plans with $300 million or more in assets can probably expect the same level of support but with the addition of video and multimedia presentations that can be customized to include plan-specific information. In short, the larger a plan's asset size, the more support the company can expect.

Even so, companies that are dissatisfied with the level of support their vendors are providing should not hesitate to do some competitive benchmarking and work to negotiate a better program with their vendors. “There's always room for negotiation,” said Wallach. However, she also pointed out that companies whose plans exceed $50 million in assets are likely to have greater leverage and better results. “A $10 million plan may have to take what it can get, but [the company] can at least look at what other vendors are offering,” she said.

Can You Do It Yourself?

Companies that want to try a do-it-yourself approach to asset allocation education to augment or to replace vendor-provided education may be able to negotiate education support out of vendor fees and contracts. In these cases, the company may be able to put together an effective program using specialized vendors and resources, as well as their own internal resources, such as benefits experts, treasury personnel and even plan participants.

Many service providers offer subscriptions to retirement planning-related newsletters and magazines and other printed education materials, such as payroll stuffers, that can be used as part of a do-it-yourself education program (see Education Tools of Choice, below for the most frequently used education tools). For example, Hewitt Associates and Money Magazine publish a quarterly newsletter “Managing Your Future,” which covers a variety of financial and retirement planning-related issues (cost $2.80 per participant per year for up to 5,000 participants, 250 subscription minimum; bulk pricing available for subscriptions over 5,000).

Other vendors or even internal finance and benefits managers can fill in the gaps by providing face-to-face asset allocation workshops and meetings. Many service providers offer “train the trainer” programs so companies' own personnel can provide education support. Some providers even extend this training to individual plan participants so these individuals can become “mentors” to their peers by helping them understand the plan and investment options.

Jeffrey Watson, CFO of CSO Architects Engineers & Interiors Inc., an Indianapolis-based professional design firm, has been augmenting vendor-provided education workshops with a personal approach to asset allocation education. While vendor-provided enrollment meetings and educational seminars are an important component of the company's education efforts, Watson finds himself having a lot of individual discussions on asset allocation with participants.

Allaying Market Fears

A key point in these discussions was employees' fear of entering the market after it achieved such high returns over the past few years. “A lot of people want to know if the market is 'too high' for them to be investing in,” said Watson, who happens to be a Certified Financial Planner (CFP) in addition to being a CPA. “So I've tried to emphasize the importance of asset allocation and dollar cost averaging rather than market timing in working with employees.” In fact, he said his latest memo to participants emphasizes the results of a study that indicates 91.5 percent of portfolio returns are a result of asset allocation rather than market timing or individual securities selection. For employees concerned about a market crash or correction, in the memo, Watson also compared the to-date investment returns of two hypothetical individuals, one of whom invested in the market the day before the crash in October 1987 and another who invested in the market on the day after the crash. The example showed a minimal difference in returns.

This approach has worked. With a very young workforce — Watson estimates that only about 10 of its 100 employees are over 45 — employees had invested 35 percent of all plan assets in cash or fixed income instruments in 1994. But through asset allocation education, the amount declined to 18 percent of assets in 1995 and then to 15 percent of assets in 1996.

Make the Most of What's Available

Whether working on their own or with a vendor, once the education budget has been set, companies need to make the most of their education resources. That means identifying the employees' level of understanding and their concerns about the plan and asset allocation, and then tailoring an education approach that will meet those identified needs.

Focus groups and surveys can be important tools in this process. External recordkeepers or internal plan administration software programs can produce detailed reports on participants' asset allocation status. And companies shouldn't overlook the input of knowledgeable internal resources such as benefits managers who work with plan participants and answer their questions every day.

Using the gathered information, plan sponsors must create a compelling reason for employees to think about and act on their asset allocation mix. To do this, sponsors can help employees through workshops or self-study to determine how large of a retirement nest egg they need to accumulate through the plan to retire when they want. Plan providers can be a good resource during this exercise because virtually all of them have developed worksheets, software or Internet sites to help employees with this calculation.

For the employees of Degussa Corp., a chemical manufacturer, motivation wasn't a problem. “Our employees, especially our hourly employees, were crying out for education,” said William C. Kennedy, the company's benefits manager. With a plan participation rate of 92 percent and an average deferral rate for non-highly compensated employees of about 6 percent, the plan was being heavily utilized. The problem was that nearly half of all new money flowing into the plan was going into a fixed income fund. And with a workforce with an average age of about 40, that percentage seemed a bit high, said Kennedy.

To address the asset allocation issue, Kennedy held asset allocation workshops at every work site for all 1,800 plan participants. The workshops focused on helping employees understand their risk tolerance level and presented illustrative asset allocation mixes for various age groups and risk tolerance levels. At the same time, the company increased the number of investment options from four funds to nine (seven equity funds, a fixed income and a bond fund), so the workshops devoted a great deal of time discussing and explaining the different risk levels associated with each fund. Three months after the meetings took place, contributions to equity funds had increased from 48 percent of new contributions to 63 percent.

No matter what the circumstances, the basic asset allocation message remains the same and it is up to companies to package that message in ways that will gain and hold employees' attention. It is also important to remember that there is no one right way to invest assets. For that reason, an education approach should help employees to identify their level of risk tolerance and to understand some specific concepts related to asset allocation — the importance of dollar cost averaging, the importance of asset allocation to total investment returns, and the importance of not trying to time the market. This last point is becoming more important as participants cast anxious eyes toward the very high, very volatile stock market averages.

Monitor Results

Once an education program has been in place for a defined period of time, it's important to measure the results using before-and-after plan asset allocation reports. Depending on the company's needs and the goals of the program, this report may need to be broken down demographically, by work site, or however the company targets its education approach. And it's also important to remember that asset allocation education is an ongoing process. “Employees' risk tolerance changes as they get older and their circumstances change,” said Shellie Unger, a principal with The Vanguard Group Inc. “Just being nervous about high stock market averages can turn an aggressive investor into a moderate or conservative investor.”

Education Tools of Choice

According to a recent survey, here are the tools companies are using to educate their employees about asset allocation.

Summary Plan Descriptions73 percent
Employee Newsletter61 percent
Videotape for group viewing61 percent
Pamphlets60 percent
General seminars53 percent
Handbooks53 percent
Newsletter/magazine devoted to 401(k) plan investment and savings48 percent
Financial planning/pre-retirement planning seminars41 percent
One-on-one meetings41 percent
Computer-generated comprehensive benefit statements35 percent
Slide show32 percent
Videotape for home use30 percent
Investment seminars29 percent
Computer-generated investment history/earnings27 percent
Interactive computer program/projections for home use18 percent
Interactive computer program/projections for group use12 percent
Employees' PC linked to internal network6 percent
Kiosk4 percent
Employees' PC linked to Internet3 percent
Source: Buck Consultants