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What You Can Do to Get Employees to Buy Into the Company 401 (k)
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You’re doing more with less, like everyone else — reduced budgets that translate into decreased benefits, more work as layoffs happen, etc. The last thing you need is cynicism about your perpetually sunny 401(k) plan!
Is the 401(k) still the best deal in town?
Yep. Every financial advisor under the sun says the company 401(k) is the best deal in town. Sure, there’s a lot of savings and investing options available to individuals. But, even with the stock market dancing to disco, employees should always come out ahead with a 401(k). Remember, there’s:
While eTrade’s commercials are a lot more fun than most employee communication, no brokerage account offers free services plus free deposits just for participating. Nor can the local bank with a savings account, a money-market account or an IRA.
Employees are clear that you’re helping them save for their retirement. They see on their account statements, the bucket of money from you, and what they’ve contributed. But most don’t pay attention to the fine print. They expect their employers to act on their behalf. And, certainly, they expect that free means free.
Do they see the administrative costs anywhere? Do you pick them up? Are the prospectus pamphlets easily accessible to see the investment costs of each option in your plan? Do employees understand that they’re getting a good deal?
There’s a potential disconnect between matching contributions and investment or administrative fees — especially if you catch employees off guard. The money involved may be small to you but you can’t afford the mixed message.
Financially savvy employees at your company may be talking about the Supreme Court ruling on Jones v Harris Associates. What does it mean that there’s a different fee structure for a big pension fund versus a smaller mutual fund, they ask?
The unanimous Supreme Court [PDF] decision upheld existing law that says generally that the free market should decide what constitutes reasonable fees. If big clients negotiate for a price break on investment services, well, that’s just the free market at work. Said another way, educate yourself if you’re buying investment services.
In an era of populist cynicism against all financial institutions, now is the time to be sure employees know how much they pay in fees. It’s never a good idea to hide fee explanations in the SPD or assume the topic is adequately covered by fund prospectus. Here are a few tactics that the best employers are using:
By the way, think open enrollment is just a time to talk about health and welfare plans? We recommend you use that opportunity to remind employees about all your other benefits too — including that 401(k)!
A simple tactic is to add definitions to your SPDs and 401(k) Welcome Kit—defining administrative fees and investment fees. Modify this sample copy to suit your situation:
While not employee-friendly, your team will be able to see fees—investment and recordkeeping—in a consistent way. Starting in July 2011, vendors will have to conform the way they disclose their 401(k) fees [PDF] to you as a plan sponsor.
Armed with this fee information, you’ll be better equipped to confidently say you’re truly leveraging your buying power and getting the very best deal in town. Also, you may want to refer employees to the Department of Labor directly, a neutral source. A Look At 401(k) Plan Fees is a good place to start.