Retirement Planning Programs
Getting Help: Formal Retirement Planning Education
With so many retirement savings programs available at worksites, formal retirement-planning education is often provided by employers. Benefits to program sponsors include workers who more fully appreciate their employee benefits package, improved morale and productivity, and increased participation in tax-deferred retirement plans. Employers also offer educational seminars to comply with section 404(c) of ERISA (the Employee Retirement Income Security Act) and to head off future lawsuits by employees who inadequately prepare for retirement.
The U.S. Department of Labor (DOL) encourages employers to provide ‘‘sufficient information’’ so employees can make informed investment decisions. Section 404(c) permits employers to provide certain information to employees without increasing their fiduciary liability. A 1996 interpretation of section 404(c) identified four categories of financial education that do not constitute the rendering of investment advice:
- • Information about an employer’s specific retirement plan
- • General financial and investment information
- • Information about asset allocation models (e.g., the historical performance of combinations of stocks, bonds, and cash)
- • Interactive materials (e.g., worksheets and computer analyses)
Implementing a financial education program with any or all of these four categories can assure employers that they will not lose their exemption from fiduciary status as set forth in ERISA 404(c). In addition, employers must provide plan participants with at least three different investment choices and independent control over their accounts.
There are also benefits to workers who participate in formal retirement-education programs. Several studies have found that workers who attend retirement-planning seminars save more money and make wiser asset allocation decisions. Asset allocation is the placement of a certain percentage of investment capital within different asset classes (e.g., 50 percent of an investor’s portfolio in stock, 30 percent in bonds, and 20 percent in cash).
The 1998 Retirement Confidence Survey found that, among workers who received educational material or attended employer seminars about retirement planning during the previous year, 43 percent reported that the information led them to both change the amount that they contribute and reallocate the way their money was invested. In addition, 41 percent said employer-provided information led them to begin contributing to a retirement savings plan. Similar results were found from a survey of almost 700 plan sponsors by Buck Consultants, a worldwide human resources consulting firm. This study found that, of companies providing financial education programs, 60 percent reported that their employees were making larger plan contributions and 58 percent reported that employees were becoming less conservative in their investment choices.
Some employers go beyond retirement planning and provide seminars on credit and cash management. Others provide individual financial counseling. Especially difficult to reach are low-wage workers. Employers can help employees increase their take-home pay through the IRS earned income credit tax program and by providing services (e.g., child care) that would otherwise consume scarce take-home pay. Savings campaigns, such as saving one percent or more of pay, may also be effective, particularly when employer matching is provided.
Unfortunately, some employers focus their educational efforts on older workers that are within ten years of retirement. This is unfortunate because the earlier one gets started, the less one needs to save. Compound interest is not retroactive. For every decade a worker postpones saving, he or she needs to save about three times more to accumulate a specific sum. For example, a 20 year old needs to invest only $67 per month to accumulate $1 million by age 65. By waiting until ages 30, 40, and 50, the monthly savings amount needed increases to $202, $629, and $2,180, respectively, assuming an 11 percent average annual return.
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