Guest Article

(Reprinted from The 401(k) Handbook, published by Thompson Publishing Group, Inc.)

Educate, Don't Legislate: 401(k) Participants Need More Knowledge, not More Limits

by Martha Priddy Patterson, Contributing Editor

Congress has reacted with alarm to the loss of value in employer stock held by many 401(k) plans. By mid-February, nearly a dozen bills had been introduced that place restrictions on employer stock in 401(k) plans, as well as other restrictions to defined contribution plans. As Mark Ugoretz, president of the ERISA Industry Committee, said, "Congress is getting ready to do to 401(k) plans what it has done to defined benefit plans," meaning that they may impose such extensive regulation on them that the plans become increasingly unattractive for employers to sponsor and increasingly viewed by employees as undesirable.

But what is really needed is more attention paid to existing law and policies and much more financial education for plan participants. Indeed, plan sponsors may need to launch a new communications campaign just to maintain existing participation and contributions in light of the bashing that 401(k) plans are taking in the media.

What's Being Proposed

Much of the legislation being proposed reflects the haste and lack of deliberation in framing these bills. Technical issues and enforcement feasibility have been ignored in many provisions. One such hastily drafted new measure would require vesting of employee contributions after three years of service. The author apparently was unaware that under current law, the employee always owns employee contributions.

Unfortunately, both Congress and the media have virtually ignored the root cause of the loss of value in 401(k) accounts experienced by several plans. Most plan participants who lost substantial value in their accounts have paid a very high price for their lack of investment education and their failure to appreciate that the investment risk of 401(k) plans falls on the plan participant, for which both employers and employees share the blame. Certainly, the proposals that seek to encourage additional employee financial education, while not flawless, are a step in the right direction.

Most employers do an excellent job choosing investments for the 401(k) plan and giving employees a wide variety of investment options. Deloitte & Touche's 2001 Annual 401(k) Benchmarking Survey shows most plans offer an average of 13 investment options. But employers have not been willing to stress to plan participants that the risk of investment for the participant's 401(k) retirement plan is borne entirely by the participant. The size and value of the individual's 401(k) plan account, and consequently that individual's retirement security, will depend basically on the employee's financial and investment knowledge. This is not the kind of "feel good" story the employer wants to deliver. (Of course, if the employer also offers a defined benefit plan, this message is not required, because the defined benefit plan does bear the investment risk.)

In addition, employers generally don't want to provide the investment education, not to mention financial advice, needed to help the plan participant develop the financial education to bear that 401(k) plan investment risk. Only two-thirds of plan sponsors reported having a generic communication program designed to inform the participant about plan features and only 41 percent of plan sponsors reported having a targeted communications program on the plan. Only 40 percent of plan sponsors offered individual financial counseling to "some or all" participants. These data come from more than 500 employers, with a median number of employees in excess of 2,000. Employers with smaller workforces are likely to offer even less information.

Why Employers Resist Offering Financial Advice or Education

Employers have a number of legitimate reasons why they don't want to offer financial education or investment advice. First, even employers that currently offer in-depth information about the 401(k) plan or offer financial advice complain that getting employees to use the information - or even attend the educational sessions - is an uphill battle. Ironically, the last 10 years of steadily rising stock prices and low inflation have made it easy for employers and employees to ignore the need for financial education.

Employers also correctly argue that a financial adviser cannot give accurate advice on 401(k) investments or any investment without a complete picture of the individual's financial status. Many, if not most, employees are reluctant to provide such a complete picture to an adviser they view as "working" for their employer.

Good financial advice is not cheap. Employers, particularly in today's uncertain economy, are not eager to take on new expenses. Finally, the most frequently cited reason for employers' failure to offer financial advice is the risk of employer fiduciary liability for any advice the financial adviser offers.

All of these are understandable, although not insurmountable concerns. Perhaps the one good thing that may arise from the ashes of the destroyed 401(k) accounts may be the employees' willingness to listen to basic financial information and the employer's communications about the plan and its investment options, including the need for diversity in investing in those options.

Maybe it's time for employers to begin a new round of basic retirement savings education which will be needed in part just to maintain employees' trust and enthusiasm for the 401(k) plan concept. Now that the hazards of badly managed 401(k) plans have been widely publicized, it is time to remind employees - and Congress - of the benefits of these plans that have helped millions of employees enhance their own retirement. Today, as the workforce ages and record numbers of individuals near retirement, any diminution of the popular 401(k) plans, which enable employees to influence the level of their own retirement security, will have profound and long term detrimental effects on both the individuals and the economy of the nation.

Martha Priddy Patterson is the director of employee benefits policy analysis with Deloitte & Touche LLP's Human Capital Advisory Services in Washington, D.C. Patterson is the contributing editor of The 401(k) Handbook.

Reprinted with permission from the March 2002 supplement to The 401(k) Handbook, ©Thompson Publishing Group, Inc., 2002. All rights reserved.

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