Source: Survey conducted by New York Life and the Gallup Organization.
1991-1992.

The survey on which Table 1 is based also found that younger employees tend to be more conservative investors than their older counterparts. This is exactly the opposite of what should be. Younger employees should invest more aggressively because time is on their side.

Another survey (conducted by The Gallup Organization for John Hancock) raises an interesting question. The survey found that employees consider themselves to be more familiar with money market funds than any other type of fund except company stock. However, 48% of those employees thought that money market funds include stocks and 46% thought that money market funds hold bonds. Conventional wisdom says that employees are not investing in stocks because they are too afraid of the stock market. The survey, however, indicates that many employees who are investing in money market funds believe they are investing in stocks. The question, then, is: Are employees avoiding stocks intentionally or unintentionally? Regardless of the answer, it is obvious that many employees do not know enough about investing to make rational decisions regarding retirement planning.

A quality educational program benefits employees by helping them achieve a more financially secure retirement. But what are the benefits to the employer? A good educational program can boost participation and contribution levels and increase morale. If employees don’t understand the 401(k) plan, they aren’t likely to appreciate it or even use it. Educated employees, however, will understand and appreciate their 401(k) plan. As a result, they will view the plan as an excellent investment

opportunity and a key component of their compensation package. In other words, a well structured 401(k) plan which includes a quality educational program can help attract, retain, and motivate employees.

SEC Commissioner J. Carter Beese has pointed out what may be the most important benefit of an educational program to employers. He and many others warn that current 401(k) savings trends will lead to inadequate account balances for many retirees. Beese warns that "[in the future] if millions of retirees are having trouble making ends meet, you can bet that plaintiff’s lawyers across the country will be looking for someone to sue." Most likely, that "someone" will be the plan sponsor. A meaningful educational program can be used as evidence that the plan sponsor has acted in the best interest of the employee.

Many educational programs are less successful than they could be simply because they lack direction. At the outset, realistic goals must be defined. The program can then be designed to fulfill these goals. Setting realistic goals is especially important in the face of budget constraints, which limit a plan sponsor’s capabilities. A good educational program does not have to cost a small fortune. In many cases, existing programs can be greatly improved relatively inexpensively by having a consultant or human resource staff coordinate the program and supplement the materials provided by investment product vendors and recordkeepers.

The plan sponsor must realize that, even without budget constraints, no plan can reach every employee. Some employees will reject the 401(k) plan no matter what the plan sponsor does. A small number of employees may be incapable of grasping investment basics. On the other hand, some employees will participate enthusiastically even if their is no educational program. Educational efforts should be directed at the rest of the employees. These are the ones who are most likely to be persuaded to participate or contribute more.

It is important to realize the difference between education and communication. Clear communication is a necessary ingredient of a good educational program. However, even the clearest communication does not guarantee quality education. Clear communication conveys ideas or facts. Good education provides empowerment. It imparts an understanding of the investment process. Armed with such an understanding, participants can overcome their irrational fears and make better investment decisions.

For example, Figure 2 is typical of charts used extensively to "educate" employees about the risks and rewards of various asset classes. Such charts are supposed to show that risk and reward go hand-in-hand. These charts, however, address only one type of risk (volatility). Moreover, they don’t explain the role of time in reducing volatility. For example, stocks can be very volatile from year to year. In the long-term, however, this volatility is reduced, and stocks tend to be the best performing asset class.

All too often, investment product vendors or recordkeepers hold an enrollment meeting (explaining in an hour or less how to participate, the plan options, and how to invest) and call it an educational program. Unfortunately, participants cannot be educated about investing in a single session. Furthermore, psychologists have concluded that most people retain very little of what they hear in seminars. People are more likely to remember the quality of the speaker and the visual aids than the substance of the seminar. At best, they will remember one or two concepts. No one will remember the details, and it’s the details which count.

This is not to say that meetings and seminars cannot play an important role in an educational program. They can, especially for marketing the plan to the employees and for focusing their attention on a concept. Most importantly, seminars provide an opportunity for employees to ask questions.

The first step in the educational process is to get employees to participate. Employees will be much more likely to participate if they realize that they are responsible for their own retirement security. Well designed payroll stuffers, for example, can be a cost effective means of communicating this responsibility.

Employees must also be made aware of the consequences of being investment illiterates. Many programs fail to impress upon employees that they are on the way to an uncomfortable retirement. Employees, however, can’t be motivated to fix a problem unless they know the problem exists. Table 3 shows a chart which can be used to help impress upon employees how important it is for them to start participating or contributing more today.

*Assumed growth rate: 9%

Plan sponsors are forever complaining that their employees won’t read anything they pass out. Given that the employees’ often feel powerless, it’s little wonder they ignore company materials. The problem is compounded by the fact that, in many cases, employees are inundated with company literature on other subjects.

The first part of the educational program, then, is a sort of advertising campaign. No matter how high the quality of the education is, it will be ineffective if the employees don’t participate. After all, you can’t make a horse drink until you get it to water.

Once employees have been sufficiently motivated to participate in the program, education can begin. Remember, up to this point the program has been an attempt to market the 401(k) plan. Now the program must become educational.

What is often forgotten is that education is an ongoing process, not a one shot deal. Unfortunately, there is no turn-key, quick-fix answer to the problem of employee education. Each program must be tailored to meet the knowledge level of the participants. For example, a program designed to educate employees of an accounting firm probably would not be effective for coal miners (and vice-versa). In fact, companies employing a diverse group of people might design several programs for different segments of their employee population. For example, a manufacturing firm might want to use one program for blue collar workers, a program for white collar hourly staff, and possibly a third for management.

The design of an educational program must also consider what media will be most effective for a particular group of employees. Clear communication requires that the participant be comfortable with the media being used. Computer software provides an excellent example. Software should only be considered in offices where employees use computers regularly. People who don’t use computers tend to be overwhelmed by them. The anxiety many non-computer users feel when forced to use a computer often causes them to completely ignore what the program is telling them. Computers can be a great tool for educating plan participants, but only certain plan participants.

In most cases, more than one media should be used. For example, videos can be a highly effective means of focusing the employees’ attention. However, employees aren’t likely to remember many details of the video. Thus, written reference material must be used to reinforce the video. An advantage of written material is that employees can take it home and refer to it for years after they have forgotten what they’ve heard in seminars or saw on videos. Another advantage of written material is that it allows employees to study in a relaxed atmosphere and at their own pace.

Using several types of media provides reinforcement. Reinforcement is a psychological term for learning the same thing in several ways. Studies of human learning have concluded that reinforcement aids understanding tremendously and helps employees retain more of what they have learned.⁴

Another important point is that a quality educational program must not only teach basic investment concepts, but it must also show employees how to use the knowledge. Too many participants are inundated with facts and figures but are never taught how to apply the information to their own situations.

An example of such empowerment is helping employees determine their own risk tolerances. This should be done at the end of the program. Too many 401(k) providers pass out questionnaires at enrollment meetings and expect employees to determine their risk tolerance right away. The problem is that most employees define risk according to misconceptions and unwarranted fears. How can someone who doesn’t understand the different types of risk determine his or her risk tolerance?

• What’s the goal? To educate the employees or just to provide tools and let the employees educate themselves?
  
  
• Should the program be mandatory or voluntary? Or a combination?
  
  
• Should the program provide standalone investment education or should it be integrated with overall financial planning education?
  
  
• What should be done by in-house personnel? What can realistically be expected from product vendors and recordkeepers? What role should a third-party consultant play? How do these efforts get coordinated?
  
  
• Who should bear the costs; the employer, the employees, or both? Perhaps education would help employees increase their returns sufficiently to justify reducing the employer contribution to pay for the program.
  
  
• What portion of the program should be conducted on company time? What should employees be expected to do on their own time?

These are but a few of the many issues which must be addressed in developing an educational program. The answers to these questions are not set in stone. Each plan sponsor and each group of employees is unique. For this reason, it is often beneficial to involve a consultant with the expertise to customize and coordinate the program.

Lastly, always remember to start with the issues and then develop a solution which addresses them. All too often, product vendors and recordkeepers have prepackaged communication and education programs which are suppose to fit all situations. The ineffectiveness of this approach has already been discussed (Table 1).