They don't always come. What
you can do to draw participants to your online education
and advice tools
» The Inertia of 401(k) Participants
» Six Things You Can Do
You may well have a bunch of spiffy online tools for
your 401(k) participants, but the reality is that few
participants use them. That is the conclusion of a study by
Greenwich Associates, which found that only 35% of defined
contribution plan participants use 401(k) online
information tools at all. The percentage taking full
advantage of the tools is probably in the single digits,
says Chris McNickle, a managing director at the Greenwich,
Connecticut-based research and consulting company focused
on financial services. The study, released in February,
also found that the number of companies offering
Internet-based investment advice dropped to 43% in 2003
from 55% a year earlier. The results were based on
interviews with senior officials at 928 mid-size US
corporations.
Encouragement from plan sponsors to use the tools helps,
McNickle says, "but, ultimately, it is going to come down
to the motivation of the individual saving for retirement.
Companies and 401(k) service providers have spent many
millions of dollars on providing education and advice to
participants. Yet, even with everything they have done, the
solutions are not sufficient to help a large number of
people."
Greenwich Associates' conclusions are not an anomaly.
"In general, our observation is that the level of
sophistication of the plan participant sites is orders of
magnitude greater than the sophistication of the
participants themselves," says Lou Harvey, president of
DALBAR, Inc., a financial services research company in
Boston. "Yes, they offer some tremendous features. However,
the level of interest and sophistication is so far away
from that, and the needs are so much simpler than that,
that they are virtually useless."
"While they may have great tools in the educational
areas of their Web sites, typically they do not get a lot
of traffic," says Derek Evans, a New York-based senior
consultant at kasina LLC, a management consulting firm
focused on the asset management industry. "People are
checking their balances and performing simple transactions,
and not taking advantage of other areas of the Web site."
For those who remember the early intense hype about online
tools, the emerging reality is startling. Says Warren
Cormier, Boston-based managing director of SPARK Research
Group LLC, "The Internet will not change the way that
people manage their 401(k)s."
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The Inertia of 401(k) Participants
Plan sponsors rely so much on online tools largely
because of concerns about fiduciary responsibility, Harvey
says. "The standards for fiduciaries today are open-ended:
There is no specific thing you have to do, and no
limitations to the punishment applied to you if you fail,"
he says. "The larger picture imposed on this whole issue
is, 'I have to double, triple, and quadruple cover my
exposure.' That is coming at the expense of participants,
in the form of excessive disclosure or steps they have to
go through to increase their understanding. They throw
everything but the kitchen sink at people."
Cormier agrees that fiduciary worries play a big part.
"Plan sponsors are solving a different problem than the
participants are," he says, "and that is why this thing is
out of whack."
As widespread use of the Internet began in the 1990s,
there was lots of excitement in the industry about the
ability to offer online tools, says Lori Lucas, director of
participant research at Hewitt Associates LLC in
Lincolnshire, Illinois. "However, what very few people
realized, is the inertia of most 401(k) participants."
"[Many participants] are just not comfortable yet using
the Internet tools," says Julie Leclere, director of
retirement and investor services at The Principal Financial
Group in Des Moines, Iowa. "They want someone to walk
them through it. The vast majority of people want to call
someone and say, 'What does that mean? What should I do
now?'"
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Six Things You Can Do
Given that reality, what should sponsors do? Here are
six things sources suggest:
Simplify, simplify, simplify. Many participant Web sites
are not user-friendly, Evans says. "They tend to have
text-heavy pages, obscure concepts, and complex concepts.
In some cases, firms use it as a repository," he says.
Almost inevitably, users want something simpler. For
instance, that might mean encouraging participants to
utilize a less-complex alternative to advice tools, Lucas
says. "It might be something very simple such as guidance
they can fill out in a few minutes, and it will tell them,
'You should be X% in large-cap and X% in small-cap,'" she
says. "It is giving them a basic asset allocation."
Less is more. Participants get too much information,
some sources say. "We are trying to do one-size-fits-all,
and it simply does not work," Harvey says. "Often [new
401(k) participants] are given an enrollment kit that
covers soup-to-nuts. It gives you tools to calculate your
needs for retirement, for example. If I am 23 years old and
just starting out in a job, why do I need to figure that
out?" he says. Sponsors need to take into account "that
there are stages where different levels of knowledge are
needed."
So, give employees only two or three main things to
focus on, Leclere says, depending on their age range.
Education for people age 20 to 35 might center on
participating, increasing deferrals, and other financial
needs like saving for a home, for instance. "We really try
to narrow it down depending on where they are in their
lives," she says. "Otherwise, they are overwhelmed by
massive amounts of information."
Stop segregating tools. "The problem with online tools
is that they have not been at the point of decision. They
have been relegated to the tools and calculators section,"
Lucas says. "Where the tools are most effective is at the
point of need." Adds Evans, "There needs to be much more
integration in the sites. Right now, account information is
separate from the education information, and they need to
be integrated."
Walk them through it. Advice tools work really well when
someone on a provider's support staff actually inputs the
information while talking to a participant, Harvey says.
"[Some participants] want to be fed the answers, rather
than going out to find them," he says. In the past year,
Principal has developed a paper-based retirement needs
calculation tool for people who are about a decade away
from the transition. Participants can call Principal's
client contact center to get someone to walk them through
it. Says Leclere, "We are finding that people really like
to use that." The down side of the personalized approach:
the cost.
Put it on auto-pilot. "What plan sponsors are thinking
about more is even automating the plan to a certain
extent," Lucas says. That may mean automatic rebalancing of
participants' portfolios, as well as contribution
escalation, she says. The latter approach lets participants
have their contributions automatically increased on an
annual basis by a certain percentage, up to a target
percentage. So, for instance, an employee might want to
increase contributions 1% annually until he or she reached
a 10% contribution. "If they can go on a program where they
get to that rate over time, it can be more palatable," she
says. An automated solution lets participants "put their
plans on auto-pilot."
Let them delegate. A similar philosophy applies to
lifestyle funds. A Hewitt survey found that 55% of plans
had lifestyle funds in 2003, a big jump from 35% in 2001.
"It really is viewed as an alternative to advice and
guidance for certain participants," Lucas says. Managed
accounts also are gaining ground for similar reasons, Lucas
says, appealing to "somebody who just wants to delegate."
They can be more tailored to individuals than lifestyle
funds, she says, but also more expensive.
Either may help solve the education and advice dilemma,
though. "All you have to do is answer a few questions about
who you are, and they will put you in a fund," Cormier
says. "Managed accounts and lifestyle funds are a blended
defined benefit/defined contribution approach, which is
'Just tell us what you want, and we will take it from
there.'"
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