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Education aids employees' decisions on investments

Posted online

by Patrick J. Walsh

for the Business Journal

As a business owner offering a 401(k) plan with a selection of investment options, you may frequently hear this request from your plan participants: "Just tell me where to put my money."

While you may sympathize with your employees' plea, many employers are cautious about providing direct investment advice, preferring instead to provide employees with investment education. Educating employees so they can make informed investment decisions tailored for their needs can be accomplished through a comprehensive financial planning-based educational program.

Emphasize financial planning. Any investment education program that you provide for your employees should emphasize the importance of financial planning in meeting long-term financial goals. If employees can learn how to pinpoint their financial objectives and address their saving needs, they will have the knowledge and tools necessary to manage their investments.

Merrill Lynch research has shown that financial planning makes a real difference. In annual surveys conducted with employees and retirees, we have found that people who have a financial plan particularly those who have professionally prepared plans have better saving habits, demonstrate better debt management abilities and are more confident about their future than those who do not have financial plans.

In the Ninth Annual Merrill Lynch Retirement and Financial Planning Survey, 83 percent of employees said having an actual financial plan based on their individual needs was the most effective method of receiving retirement planning and financial information.

In fact, the survey showed that employed people who have a financial plan tend to save more for retirement than those without a plan almost half of people with professional plans (47 percent) put money into savings first, before paying bills, while only 14 percent of people without plans put saving first.

As an employer, you can offer a range of tools to meet your employees' need for financial planning. Employees with few assets to manage might need no more than a plan that is shaped by a questionnaire covering the basics of financial security, including college and retirement saving, home ownership, credit, investments and insurance.

For employees with more substantial assets, a more individualized personal financial plan can be prepared with the assistance of a financial advisor. In addition, employees with substantial assets often prefer individual advice from an investment professional. They also tend to prefer a full range of investment options, including discretionary managed accounts, a need that can be accommodated in a comprehensive 401(k) plan.

A range of planning tools. Once you establish a base of financial planning tools for your educational program, you can begin to consider your employees' need for assistance in making investment decisions. In our surveys, we have found that, as more investment options have become available in employer-sponsored retirement plans, employees' confusion about making investment decisions has increased.

In the same survey cited earlier, employees admitted to feeling apprehension about their retirement decisions only 16 percent of employees considered themselves "very well prepared" for retirement. And, in a corresponding survey of employers, Planning Employee Benefits: Meeting the Challenge of Different Expectations, employers believed only about 50 percent of employees were prepared to make investment decisions.

Yet providing investment education isn't a one-size-fits-all undertaking. Just as individuals have unique financial needs, your work force does not have a single outlook toward investing.

For example, you might have young employees who are unsophisticated about investing and have few assets, but who have shown a real interest in teaming basic concepts and strategies. Other employees might have substantial assets, but with more at stake, they may express a desire to have investment decisions made for them.

Because your employees will have varying comfort levels with investing and retirement planning, you should consider an investment education program that offers a customized continuum of education, and planning tools and services to suit the needs of each individual.

You might begin with simple tools that allow 401(k) plan participants to manage their own investment program. This could include paper-based, or better still, online or software planning tools that help employees project retirement savings, estimate retirement income needs and determine asset allocation models to meet those goals.

The ability to access account information and make transactions online or through a toll-free number also appeals to the self-directed employee.

Because asset allocation is such an important investing strategy studies have shown that most of an investor's total return is determined by how assets are allocated, rather than what individual securities are held offering services that help employees make asset allocation determinations can be a valuable addition to your 401(k) plan.

Providing asset allocation direction can mean offering a worksheet or software that guides employees through a profiling process to the mix of stock, bond and cash investments that are appropriate for them based on their risk tolerance and investment goals.

Combined with materials that describe investment choices in your plan and how they match up with the basic investment goals (such as capital preservation, current income or long-term growth), asset selection tools can take some of the mystery out of asset category allocation

and out of making specific investment choices.

Some employees, however, may want more hand-holding to make asset allocation decisions.

More valuable for these employees may be pre-mixed asset allocation portfolios, which increasingly are being offered by firms such as Merrill Lynch. Employees choose from among the portfolios based on their risk tolerance and time frame until retirement.

The funds are periodically rebalanced to retain the original target asset allocation mix and risk/return profile. Automatic rebalancing is convenient for employees and has been shown to reduce portfolio volatility and risk, as well as increase risk-adjusted returns.

Boost your employees' confidence. By providing a spectrum of educational materials and investment services to your 401(k) plan participants, you can help your employees move away from the desire to be told what to do.

Instead, through a comprehensive planning-based educational program, you can help your employees make their own investment decisions with a higher level of confidence.

(Patrick J. Walsh is senior vice president and director, group employee services, for Merrill Lynch.)

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