Sage advice: some employers are offering their employees investment advice to help them plan—and save—for a better retirement

HR Magazine, Nov, 2006 by Joanne Sammer

What if you held a retirement planning party and no one came?

When Tanner Health System, a Carrollton, Ga., health care organization, would hold meetings for employees on how to plan for retirement, the participants invariably were familiar faces. "Every year, we would hold retirement education sessions and the same employees would come," says Emily Talley, the company's benefits specialist. "It was not working the way we had hoped because people were not taking the initiative and [were] not focused on retirement planning."

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To boost workers' interest in preparing for retirement, Tanner began offering its 3,000 employees access to investment advice, including the option of having their 401(k) account managed by an independent adviser.

The organization also implemented an automatic enrollment feature with a default contribution equal to 2 percent of pay. The contribution increases annually until it reaches 5 percent, which is the level at which employees receive the maximum matching contribution. The overall goals for this effort were plan participation of 75 percent of employees, larger contributions so that employees could get the maximum matching contribution, and better employee management of their retirement funds.

Tanner Health System, like most employers, has reason to be concerned that employees are not preparing for retirement. Several studies show that U.S. workers are not saving enough for a financially secure retirement and they remain seemingly oblivious to that fact. According to the 16th annual Retirement Confidence Survey sponsored by the Employee Benefit Research Institute and Mathew Greenwald & Associates, 68 percent of workers expressed some level of confidence in their retirement prospects; the same number have accumulated less than $50,000 for retirement, including about half of surveyed workers ages 55 and older.

Many employers are recognizing the disparity between their employees' retirement expectations and reality and have begun to do something about it. According to the Society for Human Resource Management's 2006 Benefits Survey Report, 48 percent of employers that responded offer individual investment advice to employees, which is nearly double the number that did so in 2002. Similarly, a 2005/2006 401(k) Benchmarking Survey by Deloitte Consulting found that 40 percent of the 830 companies surveyed offer 401(k) plan participants individual financial counseling/investment advice and an additional 7 percent are considering it.

Law Limits Liability

Although many companies offer general investment information and education, some refrain from offering individual investment advice because of concern over potential fiduciary liability if employees lose money after acting on the advice they receive.

The good news is that the recently enacted Pension Protection Act of 2006 offers a measure of protection by providing guidance on who can give 401(k) investment advice, and how, for plan sponsors that want to offer individual investment advice. In general, the law requires that the chosen investment adviser either rely on an objective computer model to make investment recommendations or operate under a fee arrangement that is not affected by the investments selected for participants.

Many of the law's wide-ranging provisions address aspects of employers' funding of traditional, defined benefit pension plans, while other provisions pertain to defined contribution retirement plans such as IRAs and 401(k) arrangements. Specifically, the law is designed to foster automatic enrollment of employees in 401(k) plans, according to a White House statement, and ensure "that workers have more information about the performance of their accounts" as well as "greater control over how their accounts are invested." Another primary purpose of the new law, according to the statement, is to provide employees "greater access to professional advice about investing for retirement."

For many plan sponsors, guidance on how to provide individual investment advice is a welcome development as they struggle to help employees be more effective stewards of their retirement savings. "We're in the same position as most employers," says Chris McNeil, director of compensation and benefits at Jordan's Furniture in Taunton, Mass. "Participants in the 401(k) plan don't understand investing, and it can be overwhelming to the average employee to read a prospectus."

Demanding Full Disclosure

For some companies, deciding whether to offer investment advice is the easy part, says McNeil. The challenge is finding a provider that is prepared to give advice without trying to sell employees other products, such as insurance and other financial products unrelated to the 401(k) plan.

Unfortunately, McNeil discovered it was difficult not only to find this type of provider, but also to find a provider that was forthright about its business relationships. "One provider assured us that it would not push any products on employees, but we found out later that they had a relationship with a large financial services company to do just that," he says.