I offer my employees the option to invest in a 401(k) as a method to save for retirement. To encourage them to invest, I match 50 cents for every dollar that they invest, up to 3 percent of their compensation. When the market was going up, things were great and my employees loved the plan. Lately though, I want to hide in my office on the days that they receive their statements. Some have stopped contributing completely, and others have moved everything to the money market. Even worse, many have started coming to me for advice. I’m very good at running my own business, but I don’t feel qualified to offer financial advice to my employees. I’m pretty sure they’re making some costly mistakes, but I don’t want the responsibility or liability. Any solutions?
If it helps, yours is a common problem. 401(k)s have become the retirement plans of choice in the last few decades over the traditional defined benefit plans. One reason is portability. The days of working for one company for an entire career are long gone. Many employees never stay long enough to become vested in a defined benefit plan, but they are always 100 percent vested in their own contributions that they make to a 401(k). Employer contributions typically are vested over a 5-year period.
The problem is that while 401(k)s are more portable, they place investment decisions in the hands of employees who don’t have the knowledge necessary to make these decisions or truly understand the risk involved. During the 1990s, it was pretty easy to make money, and many people confused their own brilliance with what is otherwise known as a bull market.
Investment decisions were made based on which mutual funds had the highest performance and not on what underlying investments were inside the funds. Consequently, an employee may own shares in five funds inside of the 401(k), and in many cases they are five different versions of the same fund — containing many of the same companies’ stocks. That’s great for returns when they are all going up but devastating when the market takes a turn in the opposite direction.
If employees stop contributing to their retirement accounts because they fear losing more money, they not only are hurting themselves, but they are severely limiting their future financial security as well. Through financial education — and I really believe this is your answer — these employees can understand that they should continue contributing because they are buying more shares at a lower price with their ongoing contribution. In addition, they can learn to properly diversify their portfolios, given the plan choices and their individual time horizons and risk tolerance.
The question is, how do you, the employer, provide this education without sticking your neck out? Many 401(k) providers offer some type of financial education to their participants. Most are willing to conduct some on-site sessions when the plan is first implemented and send newsletters along with the statements. The problem is that most of your employees probably don’t read the newsletters or don’t know how to apply the information to their personal situations.
Another option might be to bring in a local financial adviser to meet with your employees and offer advice. This could pose a problem if you have operations in several different areas of the city or country. How can you be sure that the message and advice that is given is consistent, and what if an employee has a question when the adviser isn’t around?
A better option might be to hire a company whose sole purpose is to provide financial education to your employees as an employee benefit. These companies typically charge a fee per employee and will customize a program incorporating your specific benefits. One such firm, Financial Finesse, offers workshops on-site in addition to interactive online seminars (www.financialfinesse.com) that the employee can work through at their own pace and knowledge level. These topics can range from 401(k) investing to understanding stock options. In addition, they provide a toll free financial help line that is staffed by certified financial planners.
As an employer, you will find it virtually impossible to take the angst out of investing for your employees. The market goes up, the market goes down. That’s just the way it is. Unbiased financial education can offer a solution to the employer who is concerned about giving advice but feels responsible for helping his employees succeed. Ruth A. Forsyth, MS, CFP, CSA, is an investment advisory associate and registered representative with The Advisors Group, Acacia’s registered investment advisor and broker/dealer. She also co-hosts radio show “All Things Financial” every Wednesday from 7-8pm on 1410 KQV. Reach her at (412) 922-4360 or at [email protected].