AdvisorNews - October, 2011
Increasing demand for 401(k) advice
By Marli D. Riggs
July 1, 2011

Almost 80% of employers anticipate that there will be an increased demand for access to savings and investment advice about their 401(k) plans, according to a new survey from Bank of America Merrill Lynch.

Since the economic recession, nearly half of employers have seen an increase in interest among prospective employees about their retirement plans, the survey finds. As a result, plan sponsors feel increased responsibility for the financial well being of employees and are adapting their policies to meet the needs of today's multigenerational workforce.

The report finds that an overwhelming majority of plan sponsors (94%) believe it's important to retain older employees for a longer period of time in light of the talent and skills they possess.

In an effort to retain these workers, half of the employers surveyed offer flexible or customized work schedules; 33% are implementing education around retirement income and health care topics; 32% offer continuing education and development opportunities; 22% give employees the opportunity to work remotely; and 21% are offering extended benefits to older employees.

A full 98% of employers feel that attracting younger employees is important. In an effort to do so, 53% of the employees surveyed offer young workers the opportunity to continue their education and development, and 45% offer flexible or customized work schedules.

Almost three-quarters of employers say that health benefits are the top benefit in attracting and retaining talent, while retirement benefits come in second.

More than 60% of employers now offer access to advice and services that can help employees prepare for retirement. Almost half of employers offer research or literature to educate employees about investment decisions; 39% offer access to a one-on-one relationship with a financial adviser; 38% offer online tools to help manage banking and investment needs.

Research shows too many choices, inadequate education impairs participants' 401(k) decisions
By Ruthie Ackerman and Brian M. Kalish

August 1, 2011

When individuals are faced with too many options, they become paralyzed and don't make the best decisions - even when it comes to 401(k) options, according to a new study co-authored by Columbia Business School and University of Chicago Booth School of Business.

The study, released on June 30 by Columbia Business School Professor Sheena Iyengar and University of Chicago Associate Professor of Economics Emir Kamenica, examines this paradox of choice, which found that the more fund options an employee has to choose from, the more it deters a person from enrolling in a plan.

Too many options, the researchers found, can impair a person's ability to make reasoned choices.

In the first study, one group was asked to pick a gamble from the menu of 11 gambles, which included 10 risky options and one less lucrative, and less risky, gamble of $5. Another group was offered three gambles, which included the less lucrative gamble of $5. The researchers found that many more subjects chose the simple option from the set with 11 options than from the set with three.

In another study, this one related to 401(k) plans, the researchers tested whether the number of funds offered influences asset allocation. Using data from the Vanguard Center for Retirement Research, the researchers analyzed the investment decisions of over 500,000 employees in 638 firms. The study found that with every additional 10 funds in a plan, allocation to equity funds decreased by 3.28 percentage points. Meanwhile, for every ten additional funds, there was a 2.87 percentage point increase in the probability that participants will allocate nothing to equity funds.

"As revealed in the first two studies, the presence of complicated choices caused decision-makers to choose the simpler options, even if they were not as lucrative," the study reported.

"In addition, the data revealed that employees under 30 years of age are as likely as others to allocate no money at all to equity funds, and their participation in equities is just as sensitive to the number of funds as that of older employees," the study found. "The findings are of particular economic significance, as nonparticipation in the stock market, especially for younger employees, is likely to be detrimental to one's retirement income."

Et tu, benefits managers?

In addition to critiques from Iyengar and Kamenica on the number of fund options employers offer plan participants, benefit directors are criticizing their companies for not doing enough to help employees make critical decisions at the point of retirement, according to a recent survey.

In the survey of 401 benefit program decision-makers by Minneapolis-based Transamerica Retirement Management, nearly half of the survey respondents don't think their company sufficiently prepares employees to successfully manage resources during retirement. And 81% of decision-makers said they are concerned their employees don't have the resources to adequately provide for their retirement.
As a result, 47% of the benefits decisionmakers believe the lack of resources could increase the number of employees who delay retiring, according to Transamerica.

As self-service programs increase, Prest says that retirement planning is "not the right place to have self-service, to be completely on your own." -E.B.N.

Ackerman writes for Financial Planning, a SourceMedia publication.

Are employers enabling bad retirement habits?
Research from Aon Hewitt reveals that slightly more than three-quarters (75.8%) of eligible employees participated in their company's defined contribution retirement plan last year, up from 73.7% in 2009 and 67.2% in 2005.

Aon Hewitt says the increased participation rate is due in large part to increased employer adoption of automatic enrollment programs, as among employees who are auto-enrolled, 85.3% participated in the plan, about 18 percentage points higher than those not subject to automatic enrollment.

However, the firm also finds that while participation in plans is rising, employee contributions are not. In 2010, employee pretax contributions averaged 7.3% of pay, unchanged from 2009 and down from an average of 7.7% in 2007.

So, should employers be more focused on teaching employees to fish rather than giving fish, so to speak? Several experts in a report this month on participant inertia say no. Read why, in "'We need to spoon feed participants,'" on page 40.