In today's 401(k) marketplace, words like "information," "guidance" and "advice" are tossed around like Frisbees at a company picnic. Plan providers tout their ability to offer all three in a retirement plan, but most participants -- and indeed many plan sponsors -- would be hard-pressed to describe the differences between these concepts.
The industry doesn't make it easy. What one provider calls guidance another may call advice. Without understanding the differences, or even being told there are differences, most participants simply consider them all part of one amorphous concept. Some providers consider this a semantics problem with no practical bearing on a participant.
This view is shortsighted. While these concepts overlap, important differences exist, and they need to be clearly articulated. Leaving participants in a cloud may undermine their chances of meeting their retirement goals and does little to strengthen morale.
Research confirms this. According to a study by E.T. Garman of the Center for Organizational and Technological Advancement, Virginia Polytechnic and State University, Blacksburg, Va., plan participants who receive education about their plans are more likely to be more productive and loyal.
American Express' own participant survey reveals that the more informed participants are, the more confident they are in their investment decisions. Highly confident participants also are more likely to be satisfied with investment performance and their retirement plans overall.
This means it's important for providers to cut through the noise and agree on common definitions of "information," "guidance" and "advice." The following definitions are a good starting point:
* Information and education: an introduction to investment principles and ideas. Common vehicles include enrollment meetings, brochures, fact sheets, a video, a slide presentation or online materials. Through these vehicles employees gain confidence that they understand the plan and can determine their future financial needs.
* Guidance: an interactive exchange to help determine an appropriate investment framework based on the individual's risk tolerance, years to goal and current financial situation. Vehicles include worksheets, telephone exchanges with plan representatives or an interactive exchange using tools on the provider's website. Regardless of the medium, questions are asked to determine the individual's current financial picture and risk tolerance. Based on responses, the employee will be guided to asset classes and allocations examples.
* Advice: a recommended course of action specific to an individual's financial situation and goals. Employees may be advised to pick particular mutual funds. This advice should be comprehensive, unbiased and reflect the individual's real situation (not what he or she may want it to be), and it should change as the individual's situation changes. The Employee Retirement Income Security Act currently requires that a party other than the plan provider or investment manager provide advice.
By understanding these services, employees make more informed decisions about their financial wellness as they pass through major life events and changing financial goals. The defined contribution industry should adopt specific definitions, and plan sponsors should challenge providers to be clear about what they mean by these services, what they cost and how they will be made available to participants. In this way, participants know what to expect, can successfully access the service they need and will feel more confident in their retirement decisions.
Ward Armstrong is president of American Express Retirement Services, Minneapolis.
