New rules highlight 401(k) education lapses

education (Photo credit: Sean MacEntee)

Education is the foundation of all successful endeavours. When plan participants understand the what and the why they will save more and remain disciplined to a strategy. Plan participants do not have to know everything about investing, they just need to know the right things.

Maintaining effective plans with a strong education component isn’t just the right thing to do; it’s the foundation of a retirement plan that complies with federal rules. If plans are not delivering participant-driven education programs, they’re not equipping their participants to make informed decisions about their investments. Therefore, these plans are not compliant with federal rules and thus, they set up sponsorsfor potential lawsuits.This summer, when service providers supply plan sponsors with the required list of services they’re providing for their current compensation, companies should take note of whether education programs are included in their services. In many cases, they won’t be.

This shortcoming, along with various others showing how little many plans are receiving for the fees they’re paying, will prompt many sponsors to seek more reasonable fees. The best way to do this is to:

  • Issue a request for proposal (RFP).
  • Compare the scope of services to those offered by other providers for the fees being charged, with emphasis on individual employee assessment and education.

If effective, deeper financial education can empower employees to assess the required basic disclosures through the lens of fundamental financial knowledge. Only then can 401(k) plans ultimately achieve their true purpose: to assure retirement security.

Without proper education and coaching your company sponsored retirement plan adds little or no value to your employee benefit package.

Please comment or call to discuss how this affects your company benefit package.

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The 4 Critical Elements of a Successful 401k Plan Education Program

Without proper knowledge everyone will make emotional and usually imprudent decisions with their money. Investing for retirement requires participants to acquire the right information to develop a prudent strategy. Investors don’t have to know everything about investing but they do need to know the right things.
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  • Consistent and Regular – This means the terminology used in all plan literature is consistent with the terminology used in the education program. If the plan’s education program talks about goals in terms of the modern investment objectives, then the plan’s web-site cannot continue to refer to the traditional investment objectives. (If you’re unfamiliar with the difference between the two, read “401k Plan Sponsors: Is Your Investment Policy Statement Still Using Outdated Language?, May 17, 2011.) Similarly, an education program should be a regularly event and scheduled at a convenient time for employees.
  • Tied to Investment Policy Statement – An IPS that can’t be understandably articulated to employees through education is not worth its salt. Likewise, a well-drafted IPS that isn’t understandably articulated to employees through education is not worth its salt. The IPS drives the investment philosophy of the plan and should also provide a handy blueprint for a successful education program. (For those interested in learning more, read “How Should a 401k Plan Sponsor Construct an Appropriate Investment Policy Statement?, June 7, 2011.)
  • Covers both Administration and InvestmentsSure, the quarterback gets to do all the commercials, but he wouldn’t be where he is if it weren’t for his linemen. Similarly, everyone always wants to talk about investments, but the problems 401k plan participants face aren’t due to a lack of good long-term investments, they’re mainly due to inadequate savings. The mechanics of savings begins with understanding the administrative functions of the plan and carries through how participants determine their broad investment strategy.
  • Customized to the Plan’s EmployeesMany investment professionals once thought the need to understand plan demographics disappeared as we migrated from pension and traditional profit sharing plans to participant directed 401k plans. That can’t be farther from the truth. Not only do we need an array of investment options geared to people of different ages and different economic backgrounds, but the plan’s education program needs to address the different learning styles of the different generations.

Retirement plan education may be the key element to a successful plan. When employees are engaged and informed they will be more comfortable with saving and investing. It may be more of a matter of coaching. Providing the right principles and remaining disciplined to a scientific designed strategy.

Please comment or call to discuss how your plan can be improved through a proper education program.

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