Legislation in 2009 made it easier for employers with 401(k) plans to begin automatically enrolling their employees in the plans, thus dramatically raising the level of participation in said plans, nationwide. But while the level of participation may have increased, the level of service and advice available for many employees often remains woefully inadequate.
Many employers take little or no initiative to make their workers understand what they are investing in, or the long-term benefits of participation in the plan. Indeed, many office managers and human resources personnel who handle 401(k) plan administration have virtually no formal training of any kind in retirement planning. This article explores the common shortcomings of employer plan administration and how they can be remedied. (For a complete guide, check out our 401(k) Plan Tutorial.)
Although most business owners and human resources personnel are experienced in dealing with such matters as conflict resolution, hiring, disciplinary and termination policies, as well as payroll and record keeping, few of them have had thorough (or even adequate) training in employee retirement planning. This shortcoming can perhaps be the most damaging during the plan selection process, when critical issues such as costs and fees, investment choices and risk tolerance must be considered.
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Although virtually all 401(k) providers will send a representative to make a formal presentation to the company explaining the plan, there is often little or no ongoing support for employees beyond a website or toll-free number that they can call with questions after the plan has been implemented. This tends to be truer of smaller employers with fewer resources from which to draw, such as those with 50 employees or less. In some cases, a small business has no human resources department of any kind, and the owner or office manager is the only one who can answer questions about the plan for employees. Unfortunately, this person usually has no idea about the paperwork that must be filed, no concept of ERISA regulations and requirements and no training of any kind in plan administration.
Of course, most plan providers will go over the plan with the corporate plan administrators in more detail than they show to employees, but often this training only extends to the specific features of the plan itself, such as a breakdown of the investment choices inside the plan, the matching provisions, current contribution limits and loan privileges. However, the contact person for the plan at the company seldom (if ever) receives any real training in general financial or retirement planning, which is necessary to provide meaningful advice to employees. Although educational materials that provide basic information on each of the investment choices within the plan are usually distributed to each employee, most will still need professional help to take maximum advantage of their plans. (For more read Voluntary 401(k) Contributions: A Thing Of The Past?)
Possible Solutions for Employers
The most obvious solution for most employers would be to hire a broker or financial planner to provide ongoing service and advice to employees. Many employers do have an ongoing relationship with a planner or provider that fills this role; in some cases, the adviser is the one who set up the plan originally, and in others, it is an independent party. But in either case, relying completely on outside help limits the employer's ability to effectively service its own plan. Brokers and planners are often unavailable to answer questions until after the markets are closed, and face-to-face contact with employees is minimal or even nonexistent in many cases.
Many of these advisers are compensated solely with commissions or fees, and are therefore motivated to recommend the plan options that pay them the most, irrelevant of the needs of the employee. Automatic employee enrollment may only exacerbate this problem, as it effectively reduces or eliminates the need for brokers to make constant sales pitches to new employees to join the plan.
It would be a good idea for employers to proactively providing a more comprehensive level of training to their employees, especially those who will handle plan administration. With so many contributors, many employers would be wise to hire an adviser to work with employees on an in-house basis. Although many large employers do this already, a great number of smaller firms with less than 1,000 employees should give this idea serious consideration as well. Even a part-time financial advisor would be able to provide employees with personalized advice about their plans and how they fit into their specific situation. But employers themselves should be thoroughly familiar with all of the basic aspects of their plans, such as whether it has a back-end surrender charge schedule, is housed inside an annuity contract and the level of fees that employees must pay compared to other plans. Employers who are considering offering a plan to their employees should shop carefully, taking the specific demographic needs of their workers into account before choosing a plan. (This plan has become one of the most popular retirement options. Find out why in The 4-1-1 On 401(k)s.)
Solutions for Employees
Employees who are receiving little or no help with their retirement plans should not hesitate to find their own adviser to provide them with advice and analysis. Any experienced stockbroker or financial planner is capable of this, and a fee-based advisor may be the best candidate for this service, as there is no possibility of commissions being paid, since the employee's assets must remain in the plan. Contacting the plan administrator directly can also resolve simple questions and issues regarding distributions, loans, contribution limits and other straightforward matters.
Many employers fail to train their human resources personnel adequately when it comes to 401(k) plans. Minimum standards of competence or education for corporate plan administrators, and smaller employers in particular, may provide better in-house support for their plans. Employees who need help managing and participating in their plans are encouraged to seek individual assistance from an outside adviser or planner. For more information on 401(k) plans, visit the IRS website at http://www.irs.gov/ or consult your financial adviser.