Magazine article Risk Management

Helping Direct Self-Directed Plans

Magazine article Risk Management

Helping Direct Self-Directed Plans

Article excerpt

IN DAYS GONE BY. retirement planning was a simple affair. Companies provided their employees with demed benefit pension plans, which guaranteed the amounts of the payments that were made at retirement. With these plans, employees were free from having to make retirement investment decisions. Today, however, all that has changed. Since defined plans require companies to pay out these guaranteed amounts regardless of how effectively the investments backing them performed, many firms have dropped them in favor of demed contribution plans, which transfer the investment responsibility and financial risk to the employees. As a result, defined contribution plans - which are also known as self-directed plans - are becoming very popular; The Wall Street Journal reports that the money invested in these plans now totals over $1 trillion, closing in on the $1.4 trillion invested in mutual funds.

Since self-directed plans require employees to choose their investment vehicles, they must be savvy enough to make the right choices. Yet many employees, uninformed about the variety of available financial options, are not making the best possible investment decisions, especially with 401(k)s, one of the more popular types of self-directed plan. In light of this trend, risk managers responsible for administering their companies' benefit plans can help employees with their retirement planning and improve company morale by developing and implementing a well-organized investment counseling plan.

The 401(k) plans allow employees to authorize their employer to withhold a certain percentage of their before-tax salary for investments such as qualified savings plans, stock bonus plans or profit-sharing plans. The employee then chooses where the money is invested. Additionally, contributions to a 401(k) reduce taxable income, and some companies match their employees' contributions with a certain amount per dollar invested. "However, some workers are electing not to use their 401(k) at all, or are contributing too little or are putting too much of their money into highly conservative investments such as guaranteed investment contracts," says Kirk Loury, a marketing executive with New York Life Insurance Co. And for workers at retirement age who have amassed a large sum of money during their years of labor, the ability to make wise investment decisions becomes particularly critical.

"With the advent of self-directed plans such as 401(k)s, many employees at the rank and file level have a great deal of money at retirement," says Edgar Brick, a president of Brick & Kyle Associates Inc., a financial planning consultant firm based in Newtown, Pennsylvania. "These people may end up committing all their funds to a brokerage house that may get them questionable investments." Since employers and employees want to avoid this at all costs, "The big question then becomes how they will invest that lump sum."

Strategic Planning

TO AID THEIR employees, many companies are providing them with investment planning strategies. "Among the Fortune 500, many are offering some form of retirement information for their workers," says Bill Custer, research director with the Employee Benefit Research Institute. "Other companies, however, are saying to employees, `Here's the plan, take advantage of it,'" says Mr. Brick. "But many employees don't have the information needed to make the right decisions."

So, how can companies offering self-directed plans help their employees make the right investment decisions? …

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