WASHINGTON, DC -- Many employers are making efforts to educate workers about the importance of contributing to 401(k) plans and choosing wisely among available investment options, according to a new report released by the Employee Benefit Research Institute (EBRI). The report analyzes and quantifies the provision of educational material to workers within the participant-directed plan universe, focusing on the types of educational services provided to workers, the subject matter covered, and the impact of the material on workers' pension plan decisions.
"Employers are adopting a variety of teaching tools designed to help employees make informed decisions concerning their retirement investment strategies, including asset allocation and the amount of salary to contribute," said EBRI President Dallas Salisbury. "This report gives employers and policymakers important information on the availability and effectiveness of these teaching tools," he added.
The report indicates that participants' contribution rate and asset allocation decisions are associated with the information they receive. For example, 39 percent of all surveyed workers who used employer-provided materials or attended seminars reported that the information led them to increase the amount of their retirement plan contributions.
The three investment topics on which defined contribution plan participants most frequently are offered information are asset allocation (received by 95 percent of all defined contributions plans from their service provider), estimating the income needed for retirement (received by 90 percent of plans), and the attributes of plan investment options (received by 80 percent of plans). In contrast, the two topics least often communicated to participants are the benefits of dollar cost averaging and the impact of preretirement withdrawals on retirement income.
The likelihood of participants receiving information on the three most frequently offered topics did not vary with the number of participants in the plan, with those in large plans and those in small plans equally likely to receive the information. However, participants in larger plans were more likely to receive educational information about the impact of preretirement withdrawals than participants in medium and small plans -- 97 percent of plans with 10,000 or more participants received this type of information from their plan service provider, compared with 41 percent of plans with 500-999 participants.
The proportion of employees who choose to participate in a retirement plan is associated with the communication method the plan sponsor uses for investment education. According to survey results, the highest average participation rates in defined contribution retirement plans were seen among those plans using sales literature (83 percent) and computer programs (82 percent). The report also found that large plans may be more likely to use communication methods that have higher administrative costs, while small plans are more likely to use methods that rely on less expensive options such as sales literature and individual counseling or meetings conducted by an investment manager.
The communication method used by a plan sponsor is associated with participants' asset allocation decisions, according to the report. The highest level of assets in equity were seen among plan participants in plans where computer programs were used for education (44 percent of assets in equity) and individual counseling and sales literature (both 43 percent).
The report indicates that, while most participants want to make their own retirement saving and investment decisions, it appears that many do not act with a specific goal in mind. Only 35 percent of current workers who have started saving for retirement reported that they have tried to determine how much money they will need to have saved by the time they retire to live comfortably. Among those reporting that they had tried to make the calculation, one-half (51 percent) could not give a specific amount. "Clearly, plan sponsors must emphasize this critical information and deliver it in a way that is accessible to the participant," commented Salisbury. "Employers should also carefully review the recently released Department of Labor Draft Interpretative Bulletin Relating to Participant Education in order to better understand where government policy is headed," he concluded.
The report is based on recent surveys of pension plan sponsors and service providers and includes findings from participant-level surveys previously conducted by EBRI as part of its Defined Contribution Project.
Members of the news media may request copies of EBRI Issue Brief no. 169, "Participant Education: Actions and Outcomes," from Carolyn Pemberton, (202) 775-6341. Others may order copies of the report for $25 prepaid. Write to EBRI-ERF Publications, P.O. Box 4866, Hampden Station, Baltimore, MD 21222, or call (410) 516-6946.
EBRI is a private, nonprofit, nonpartisan, nonadvocacy public policy research organization based in Washington, DC.
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