Magazine article Workforce

Clarify Risks & Rewards

Magazine article Workforce

Clarify Risks & Rewards

Article excerpt

An employee who loses his or her nest egg may blame you for the damage. Partner with experts to help employees understand their investment choices and risks.

Mention "asset allocation" to employees and watch them say, "Huh?"

OK, they're not entirely clueless.

Sure, they know whether they have a defined benefit or a defined contribution plan. You may have even overheard them bragging at a recent cocktail party: "Dahling, I'm contributing the `max,' 15 percent, toward my 401 (k). And you?"

But the fact remains, most baby boomers-the next giant wave of retirees-are basically in denial about how much income they'll actually need for retirement. According to the Eighth Annual Retirement Confidence Survey released in June by the Washington, D.C.-based Employee Benefit Research Institute (EBRI), only 36 percent of employees age 45 to 54 have ever even tried to figure it out. Of the few who have tried, only half could come up with any amount at all (50 percent of 36 percent is only 18 percent). And less than one-third of that half were confident of their results (33 percent of 18 percent is only 6 percent).

It's no surprise that educating employees to become better "retirement consumers" is a tough job. In terms of stocks, for example, employees may downplay the risks in favor of whatever type of security is performing best during a bull market. During a bear market, they may swing in the other directionbecoming too conscious of risks and only focusing their investments in the safest securities.

Pension experts warn that individuals who invest too conservatively can also jeopardize their long-term financial needs. Education about asset allocation helps employees balance their risks and rewards. Therefore, employers need to provide employees with the fundamental elements of their plans, the diverse investment options and the rules of governing contributions-and those governing transfer of funds within the plan. Failure to impart this information could make your company liable under Section 404(c) of the Employee Retirement Income Security Act. To reduce your liability, offer diversified investment options and allow frequent opportunities for employees to change the mix.

As you evaluate your company's retirement education programs, also make sure you provide information in a varied fashion, including face-to-face communication. And this contact should occur more frequently than once every quarter. An employee who loses his or her retirement nest egg after a company goes under isn't likely to agree that a few brochures qualify as `sufficient information to permit informed investment decisions' (the phrase is articulated in the law). Don't let these debates unravel in court-it can cost time and dollars.

One of the best strategies for HR is to partner with the right experts. "Education has to be a daily activity," says Curt Morgan, principal at PricewaterhouseCoopers, Kwasha HR Solutions in Fort Lee, New Jersey. "The educational initiatives must be supported by every level of the organization."

Those levels include internal or external administrators and record keepers of the plan, technology specialists who manage the computer database with pension information, investment professionals and the company CFO or controller. Each of these parties, Morgan says, can speak to the broad range of questions that most employees have. By assembling the right team of experts, HR can ensure that employers are fulfilling their legal obligations and that employees are getting the information they need.

Talk dollars and sense.

By most measures, employees increasingly are participating in 401 (k) plans. But once they've determined what percentage of their salary they want to contribute, they come to a screeching halt. Very few really understand the risks and rewards of the available funds in which they can invest their contributions. HR's role is not to give advice, but to provide the tools and professional experts to help employees select how to allocate their assets to yield the best investments. …

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