Effective Retirement Plan Communications

My blog post entitled "Simplifying Retirement Planning Communications" resonated with readers. It's no surprise that there are still discussions about how best to improve the information provided to participants. Given the amount of litigation alleging lack of transparency, sponsors are wise to offer understandable documents that can be used by employees and retirees to make financial decisions. According to "Improved Retirement Plan Communication Can Boost Confidence" (Plan Sponsor, December 15, 2016), it's not just content but the delivery format as well. Companies are adding more retirement readiness tools to their websites, even if participants are sometimes slow to take advantage.

Financial literacy is another issue that challenges employers and participants alike. Even when adequate information is available, the recipient may be unable to digest product descriptions or performance reports. In his write-up entitled "401(k) Communication Challenges," Dr. Richard Glass bemoans the low rate of financial literacy and its negative impact on saving. His take is that defined contribution plan sponsors "have not recognized that the participants' sense of distrust and their lack of knowledge can easily create a mindset that is conducive to inaction." He uses target date fund disclosures to exemplify his view that more should be done to put participants at ease and thereby motivate them to better prepare for life after work. His suggestions include the following:

  • Don't sugar coat the issue of risk but instead make it known that no product is free of uncertainty;
  • Emphasize that calculations are based on assumptions;
  • Hold "educational sessions that explain to participants why arriving at the assumptions involves a lot of crystal ball gazing and why, in spite of that fact, assumptions still have to be made" for purposes of forecasting; and
  • Supply "gap analyses that show participants how many years they can expect to receive their targeted inflation-adjusted incomes at their current contribution rates."

I agree that strengthening financial literacy is essential although I am not particularly sanguine about getting everyone quickly up to speed on concepts such as diversification and risk measurement. That's not to say that employers should look the other way. To the contrary, they should act even though some organizations will have to do more work then others. As I explain in another blog post, grade 12 proficiency in reading and math is abysmally low in the United States. Anyone who gets hired with a poor grasp of such basics may struggle with learning even elementary investing ideas. See "Employers Worry About Skills Gap That Impacts Bottom Line" (January 7, 2017).

Despite the fact that companies spent nearly $71 billion in 2015 on training, chances are those expenses will increase. Realistically, shareholders and taxpayers may have little choice but to foot the bill for further education of anyone not yet able to understand what it means to save now for later on. The Aegon Retirement Readiness Survey 2016 finds that "[A]round the world, many workers are heavily reliant on government benefits and are not saving enough to adequately fund their retirement income needs." Obviously there is no time like the present to prioritize thrift and prudent investing.

Cat Food or Cruises For Retirement

When I taught personal finance and investment management courses as a finance professor in the 1990's, I talked at length about the need to save early and save big. We went through sensitivity analyses that were based on input from the students. What always struck me was the lack of realism in terms of how long it would take to accumulate sufficient funds to stop working and begin the "golden years" phase. I would point out that bad planning could result in having to eat low-cost cat food instead of being able to book a long-desired cruise around the world or doing something similarly fun. This hypothetical got a few laughs until students looked at the numbers and realized for themselves that it's just math. Save too little and your choices will be limited.

The reality is that inadequate retirement planning on the part of some individuals will cost everyone. It is a perfect example of the free rider dilemma that makes it hard to motivate those who are not thinking about their future. Essentially, with any safety net system, anyone earning an income is going to be taxed to pay for government-provided benefits. This means that a national retirement deficit will take something out of the wallets of all. By extension, this means that everyone (in the U.S. and elsewhere) has a stake in improving financial literacy. (The issue of poverty and the adverse impact on being able to plan for retirement is not addressed herein but certainly cannot be ignored either.)

Financial education is hugely important and can't start soon enough in my opinion. Organizations that promote how to plan ahead should be commended. One such group, the International Foundation of Employee Benefit Plans ("IFEBP"), has gone a step further by creating the National Employee Benefits Day. Set for April 2 this year, the goal is to remind individuals to be pro-active, "take control of your future" and "get to know your retirement plan." Besides an educational section on their website, the IFEBP includes a worksheet entitled "Your Retirement Picture." Links are provided to retirement calculators such as the Smart Money Retirement Calculator. Of course, not every company offers retirement benefits. Even when an employee does have access to company-sponsored benefits, individual savings should not be ignored, however small.

The Jump$tart Coalition for Personal Financial Literacy is another organization that seeks to make economic empowerment a top priority. A non-profit organization, its stated mission is to promote "quality and effectiveness in financial education." Yet another notable organization is Junior Achievement which seeks to "foster work-readiness, entrepreneurship and financial literacy skills." I am proud to say that I once served as a Junior Achievement volunteer in two different schools and found the experience highly rewarding. I was told that the students and host teachers likewise found the classroom interaction to be productive and enlightening.

Courtesy of U.S. taxpayers, MyMoney.Gov is a helpful resource about topics such as borrowing, saving and consumer precautions against adverse circumstances. "This website is a product of the Congressionally chartered Federal Financial Literacy and Education Commission..." Click to read a flyer about "Financial Literacy and Education Commission Research and Data Clearinghouse."

Thomas Jefferson is quoted as saying that "It is neither wealth nor splendor; but tranquility and occupation which give you happiness." In Jerry Maguire, Cuba Gooding's character made "show me the money" a mantra for countless moviegoers. Practically speaking, currency is important. If you don't have it, your choices are limited. That is why financial advisors talk address saving and goal-setting in the same conversation.

While cat food is important for felines, humans will likely opt for something different. Let's hope your future includes the freedom to choose what you want.