Ten Keys To Successful 401k communications
Reprinted with permission of TRI-AD Actuaries, Inc. TRI-AD provides human resources consulting and administration services through its Health & Welfare, Retirement, Compensation, Human Resources Effectiveness and Organization Effectiveness Practices. Each of the practice areas offers consulting services in the areas of Strategic Planning, Project Management, Financial Analysis, Benefit Design and Pricing, and Ongoing Plan Management and Administration.
Define your objectives.
What are you trying to communicate? Define your objectives before you start.
Know your audience.
Your group's demographics will help you determine how to communicate best. Consider educational levels, language and literacy barriers, and the target audience when designing your communications.
Develop trust in the plan's concept.
Employees must understand that the plan is for their benefit. Explaining the plan's separation from the company goes a long way toward setting the right stage.
Show the real pre-tax advantage.
For the average participant, the concept of tax savings is generally not that powerful. It tends to appeal to the highly compensated employees, who typically don't need any coaxing to participate. The real "pre-tax" advantage is that employees' take-home pay actually goes down less than their contribution to the plan.
Address the "hill of beans" problem.
Many people feel they just can't save enough to make a difference. When explaining compound interest and charting the potential future value of a 401k account, use low monthly amounts adjusted for inflation (we recommend starting with $20 per month). Using examples with high monthly contributions discourages potential participants, many of whom have literally never saved a dollar in their entire lives.
If you have a match, play it up!
Show how your match makes a difference in the value of the participant's account right away, with immediate return on investment.
Use the "spend it now or spend it later" concept.
Choosing not to participate is really just a matter of choosing to spend money later rather than now. What the employee needs to understand is that it means spending a lot of money later, rather than a little now. Using compound interest tables, show employees the value over time of the dollar they defer today.
Focus on general investment concepts, not on individual fund performance.
Effectively explain the trade-off between stocks and fixed income investments. The stock/fixed income decision will determine over 90% of the investment return. Participants who understand this tradeoff are more likely to invest with confidence in good and bad market environments.
Provide model portfolios.
Many plan sponsors believe that providing any sort of investment advice increases their liability. The fact is, however, that sponsors really do not have much choice in the matter. Working with a registered investment advisor to design model portfolios can increase your employees' confidence in their ability to make investment decisions that are appropriate for them. Increased confidence leads to increased participation.
Explain the market movements.
Novice investors have a tendency to buy when things are good and sell when things are bad—which is just the opposite of what a seasoned investor will do. Educating participants about the market's ups and downs and about dollar-cost averaging can help to reduce this tendency.
Copyright 2001 by TRI-AD Actuaries, Inc.
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