The Newton, Mass.-based retirement plan adviser also found that, of those who did open and read their statements, almost three-fourths (72%) took less than three minutes to consume and process information that many individuals readily admit they do not understand.
More evidence of how clueless the average American investor may be is that one-third of 401(k) participants admit they do not know what percentage of their account is invested in U.S. stocks, foreign stocks, or fixed-income products, according to I-Penison's research.
"I think there is a lot of frustration, particularly with the down market," says Karl Kunkle, co-managing partner of Schneider Downs Wealth Management. "I hear a lot of people aren't even opening their statements because they don't want to see the bad news. With that said, people don't understand them. People aren't financially sophisticated."
And they freely admit it. Eighty-two percent of employees interviewed for I-Pension's study reported that they made investment decisions on their own, but the same percentage said they would be likely to request assistance if their employer provided access to investment advice.
Outsource advice to minimize liability
To compensate for employee ignorance, Kunkle recommends employers make supplemental reference avenues accessible to employees, rather than proffer advice themselves and risk compliance infractions. Experts recommend employers hire flat fee, independent advisers who accept fiduciary responsibility to handle employee education.
Michelle D. Roccia, senior vice president of corporate organizational development at Winter, Wyman Companies, a staffing firm headquartered in Waltham, Mass., adds that "from a company standpoint, our fiduciary responsibility is to make sure that the vendor is doing their job and hold them accountable. What are you going to do? How are you going to communicate with the employees if there is an issue? Get ahead of that. Be productive rather than reactive."
In addition, Phil Fragasso, president of I-Pension, recommends using telephonic help lines to answer employee questions.
"Most employers and 401(k) platforms provide participants with printed and online educational materials and leave it at that," Fragasso says. "It's akin to teaching people to read simply by giving them access to a library. It hasn't worked in the past and there is nothing to suggest it will work better in the future."
The telephone is a middle of the road option — more personable than a Web meeting, but not as intimate as a live one-on-one encounter. Not only do some participants find one-on-ones off putting, but also they are too expensive for the mass market, Kunkle says.
Winter, Wyman educates employees with on-site meetings, e-mails, worksite posters and paycheck stuffers. The firm also recommends employers casually broach the subject in business meetings.
Verizon Wireless has tapped Sarasota Springs, N.Y.-based Ayco to provide a series of employee seminars on 401(k) assets, how to develop an approach to investing and how to align that strategy with the company's offerings.
Over the summer, more than 12,000 of Verizon's 70,000 employees participated in the seminars, which encouraged the company to up the number of presentations. In January and February they offered approximately 120 sessions (100 of which were Web seminars) and continue to operate a call center and an annual benefit fair during open enrollment.
Don't let go of traditional statements
No matter what mode of communication a company decides to offer, it should be a supplement to the traditional statements mailed to the employee's home. This is one old-fashioned practice employers should stick with, says Kunkle.
He says it's important to send statements home because a spouse may be more interested in the report than the employee. Snail mail also provides an opportunity for employers to nest other company programs among the leaves of financial information.
Including a colorful pie chart or other graphic in the statement instead of a numerical table may help generate employee engagement.
On the front page of statements sent home on a quarterly basis by Schneider Downs Wealth Management is a roadmap that shows the initial status of a worker's 401(k), its gain or loss, and the long-term goal of the investment with as little data as possible. Winter, Wyman uses the front page to teach employees how to read their statements, while Verizon inserts a message informing participants of new investment opportunities.
Historically, statements have been a snapshot of a moment in time. Experts recommend reworking a fixed-time report in favor of a more results-oriented statement.
More than half (55%) of employees polled in the I-Pension report did not rebalance or change their investment options in 2008.
Often, advisers find a large percentage of assets in guarantee accounts — a product of fear on the part of the investor, according to some experts. Advisers also often find a majority of assets concentrated in a single fund or asset class, which indicates a need for immediate diversification.
Diversify to give employees plenty of options
To offset these trends, experts recommend that employers provide a wide array of options for employees with multiple offerings in each asset class.
Detailing how and why assets were allocated and employing a systematic rebalancing program are two ways employers can protect themselves and employees from common 401(k) selection and advising mistakes, Fragasso says.
"If you don't rebalance, your allocation will get very much out of whack," he says. "Studies have been done that show rebalancing substantially increases performance and return over time." He recommends reallocating based on market conditions rather than making adjustments based on a fixed period of time.
Many individuals have turned to target date or lifestyle funds, which haven't proven successful, according to some in the industry.
I-Pension CEO Jane Mancini quotes an Ibbotson Associates study in which 2010 target-date funds had a high return of -3.9% and a low return of -41%. These types of gyrations, she says, are not good for employees who tend to have little investment expertise.
"[Successful investing] requires hands on, individualized profiling and asset allocation and a vigilant march toward retirement," says Mancini.
Roccia agrees. She adds that employers should monitor their employees' investment elections in order to better design their offerings and educational tools around the consumer.
Whether from apathy or anxiety, investor awareness lacking
- 27% of 401(k) investors didn't open their 2008 fourth-quarter statements. Of those who did open and read them, 72% spent less than three minutes reading the results.
- One-third of investors had no idea what percentage of their account was invested in U.S. stocks, foreign stocks or fixed income.
- 64% say their fixed-income holdings represented 0-25% of their portfolio — suggesting an extremely aggressive approach to the market, despite the huge losses of 2008.
- 55% never rebalanced or changed their investment options in 2008, despite the fact that rebalancing is a key component of any successful investing strategy.
Source: I-Pension LLC
