Communicating investment education to defined contribution plan participants has become even more important following the Enron Corp. debacle and a sustained down market.
"The treasury department has moved education up to the top five issues," said Bill Pomeroy, president of The EDSA Group, a Baton Rouge, La.-based education provider.
Education is among the four major issues surfacing in plan sponsors' requests for proposals, said William Shaw, senior vice president of marketing and participant education with MFS Retirement Services, Boston. (The other three: limiting company stock to 20% of assets in a participant's account; regulating blackout periods; and allowing sale of employer securities after 90 days.)
"We need to refresh the ideas of diversification and that employees should not overreact but keep the long-term perspective," said Curt Morgan, principal, Unifi Network, a Mellon Financial unit in Fort Lee, N.J.
Diversification, long a buzzword in investment education, has taken on a new meaning to 401(k) participants who have been bombarded with media stories about Enron employees losing most of their 401(k) nest eggs because they were too heavily invested in company stock.
Rusty Field, vice president at American Express Retirement Services, Minneapolis, said he's optimistic that participants can understand key investment concepts like diversification and risk. "That's the silver lining," he said. "That alone may produce an overall shift out of company stock and into a more diversified mix of funds.
"Our financial education efforts are as focused on diversification as ever, and our clients are focused on it as well."
Some service providers are trying more personalized communication. In the past, the primary education and communication method was to throw information at participants, said Deanna Miller, vice president of communication at CIGNA Retirement & Investment Services, Hartford, Conn.
CIGNA is using adult-learning strategies on a trial basis with eight 401(k) clients. The idea is to send information to participants that would affect behavior change, and then send more information to reinforce behavior, Ms. Miller said.
After a couple of decades of focusing primarily on servicing the plan sponsor, MassMutual Retirement Services, Springfield, Mass, is trying to develop a relationship with the participants, said Tom Johnson, senior vice president. MassMutual has convinced some 80% of its plan sponsor clients to allow the firm to approach their participants with other products like 529 education plans and individual retirement accounts.
Fidelity Investments, Boston, is trying to provide more effective delivery of participant communication, whether it is online or face to face, said Kathryn Hopkins, executive vice president.
One of the newer methods is an online, self-paced tutorial. "We expect 10% of meetings (this year) to be delivered by online tutorials," Ms. Hopkins said, allowing participants to learn about the plan and such topics as asset allocation at their own pace. Client companies using the so-called e-learning channels of communication are e-focused already, she added.
Fidelity also has been customizing messages sent to participants. "We started the personalization over the last six months," she said. Although the numbers aren't all in, "we've seen nice results as far as deferrals already.
"We identify the population based on demographics and push the most relevant information to them first. So someone who is in the younger demographic may hear about 529 (education savings) plans and an older participant may hear about distribution options," Ms. Hopkins explained.
Participants prefer communication with a personal touch, Mr. Johnson said. "Merrill Lynch and Smith Barney are winning IRA rollovers. Why? People want to talk to people," Mr. Johnson said. Merrill and Smith Barney advertise in the popular press and have brokers easily available for people to talk with.
Right now, MassMutual retains 58% of its defined contribution business in rollovers, but it should be 95%, Mr. Johnson said. And, the high-tech education and communication tools are cool, but they are not getting the job done, he said.
"You have to come through the prism of the plan sponsor, but you have to focus on what the participants' needs are," Mr. Johnson said. "Plan sponsors don't want us to go in and sell their participants."
Meanwhile, "use of advice has gone up dramatically over the last year," said MFS' Mr. Shaw.
MFS provides advice and guidance through Morningstar Associates LLC, Chicago. This service is free to participants. Although many participants still don't partake of the service, use of advice and guidance among MFS clients' employees has more than doubled, he said.
Although most of the post-Enron focus has been on corporate defined contribution plans, participants in public-sector plans also have concerns, said Mary E. Willett, director of supplemental retirement plans for the State of Wisconsin, Madison, and president of the National Association of Government Defined Contribution Administrators.
Employees worry about how much Enron stock is in the mutual funds in their defined contribution and deferred compensation plans, Ms. Willett said.
"The only thing that may come out of this is the need to further diversify," she said. "More plans are looking at advice. That is becoming a component that government plan sponsors are looking at now."
Some of the biggest providers in the public arena offer investment advice now. In January, Nationwide Financial Services, Columbus, Ohio, announced an alliance with Morningstar to provide its guidance and advice product. The guidance will be offered for free to participants in the 457 and 401(a) plans it services, said Karen Eisenbach, senior vice president of marketing and education at Nationwide.
The target is to get 20% participant usage in the first year, said John Rekenthaler, president, online advice, Morningstar Associates LLC, Chicago.
"It (usage) depends on the link and how actively the service is promoted," Mr. Rekenthaler said. "I know it will not be 100% or 80% over time. There's a segment (of the participant population) that will not go online or overcome their inertia to take the step."
Right now, most participants with access to Morningstar's advice platform tend to get to step three of Morningstar's five-step education and advice continuum. Step three gives the participant an asset mix and a retirement income goal, Mr. Rekenthaler said.
Step four provides the participant's risk tolerance and step five is the specific fund advice.
"Most stay until the end but if they are going to leave, they will leave after step three," he said.
Last year, City of Arlington, Texas, added face-to-face financial planning through American Express, record keeper of Arlington's 401(k) plan, said Brian Dickerson, Arlington's human resources manager. Advice is free, but participants pay for financial planning, he said.
Once the financial planning was in place, city officials became worried that the service was really sales in disguise, Mr. Dickerson explained. The officials ultimately were persuaded the city had a fiduciary responsibility to assist defined contribution participants by providing them information they need to make informed choices about the options available to them, he said. Since Arlington's 401(k) and 457 plans include brokerage windows, city leaders were persuaded investment advice would help participants deal with a "dramatically more complicated investment horizon," Mr. Dickerson said.
Complicated and emotional
In the corporate world, the issue of company stock is complicated and emotional.
Many participants have benefited financially from having employer stock in their 401(k) plans, EDSA's Mr. Pomeroy said.
"It's a tough issue, particularly when people work for Exxon and Royal Dutch that have performed magnificently," Mr. Pomeroy said. "Tearing them away from employer stock is like asking a child to leave the house."
In EDSA's education program, it recommends participants hold a maximum of 10% in any one stock, including employer securities, Mr. Pomeroy explained.
Some plan sponsors and record keepers have started with pre-emptive strikes that explain what the Enron situation means to their particular plan.
Strong Capital Management Inc., Menomonee Falls, Wis., last month sent participants a two-page memo on the company stock holdings bills before Congress and the effect of the Enron situation. The memo also stressed diversification and staying the course.
Executives at Fidelity Investments are working on a report on company stock, said Ms. Hopkins. "Right now plan sponsors are asking questions. They're asking us to explain the different bills and whether we have a point of view on company stock. We're trying to separate fact from fiction."
Fifty-six percent of Fidelity client plans match employee contributions in cash. Of the 44% that match in stock, two-thirds have no restrictions on diversification out of company stock, Ms. Hopkins said.
Participants seem to be getting the diversification message. Fewer contributions were deposited in company stock in January, the latest data available, than had been directed most of last year, according to Hewitt Associates LLC's 401(k) Index.