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Education Helps Employees Capitalize On Financial Plans

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Many employers go to great lengths to design benefits packages that include retirement plans, only to have employees fail to take full advantage. Often there is a gap between employees knowing about these benefits and taking the actions necessary to capitalize on them.

A recent survey by AIG VALIC’s Financial Planning & Education Center of one of the nation’s largest employer organizations found that 80% of employees who were taught critical elements in financial planning took immediate action. Of these employees, 54% made changes to their investment allocations, 38% increased their current contributions to a retirement savings plan, 32% started saving for financial goals, and 31% took action related to insurance benefits and policies.

Clearly there is a compelling need for better financial education in the workplace. Unfortunately, current education programs often fail to address the gap between knowing and doing. By providing a structured financial planning and education benefit to employees, employers and plan providers can play a powerful role in helping workers prepare for retirement.

The need for financial education

In the 21st century, retirement is a phase of life that can extend for decades, not just years. Yet studies indicate that workers are not preparing adequately for their financial future. In fact, many workers don’t know how much income they will need to live comfortably in retirement.

According to the 2004 Retirement Confidence Survey by Employee Benefit Research Institute (EBRI), 58% have not calculated how much money they should have saved by the time they retire. The same survey found that 54% of workers believe they will be eligible for full Social Security benefits earlier than the law permits.

This shows that better information is needed to help employees fully understand the challenges they face, and the actions they must personally take to meet them.

Benefits for employers

In many cases, AIG VALIC has found that employees simply don’t have the tools to apply the information available to them to their personal situation. While they may have information about their retirement plan, they don’t always know what to do to maximize its value.

When employers successfully bridge this gap by providing helpful tools to workers, they demonstrate their concern not just for the work performed, but for employees’ welfare beyond the workplace. Employers also show commitment to managing fiduciary responsibilities as defined in ERISA Section 404(c); they increase morale and productivity among employees who, when worried about financial matters, may become distracted and less productive; and they increase participation in retirement plans.

Elements of an effective education program

Employers and retirement plan providers can make a positive impact on workers’ retirement savings behavior. The critical elements of an education program include comprehensive and objective information and personalized application of that information to the employee’s unique situation, as well as a clear course of action.

Employees must first trust that the information provided to them is from a trustworthy and objective source. This means that the information provided must encompass more than the specifics of their company’s retirement plan.

The most effective financial education programs provide information on the following general topics: cash management and budgeting, risk management, investment strategies, tax planning, retirement planning and estate planning.

Budgeting practices clearly impact an employee’s ability to carve out savings and participate in a retirement plan. Understanding tax planning heightens an employee’s appreciation for pre-tax savings options. And understanding risk management typically results in better use of insurance benefits provided by the employer.

Next, employers should provide easily accessible tools so the employee can create a retirement or financial plan. Employees who are given the tools to craft their plan, either on their own or with the help of an advisor, are much more likely to act.

In fact, a 2005 study released by the Wharton School demonstrated that employers and plan providers with high communication plans–including financial education, personal projections and Web-based content–had participation rates 24% higher than low communication plans.

To be most effective, personalized financial reports and tools should cover budgeting and debt analysis, retirement planning, education funding, insurance analysis, asset allocation and estate planning.

Finally, an effective education program needs to provide a clear course of action for the employee–the action part of the equation. Optional programs should provide plan participants with independent third party advice on how exactly to invest, along with ongoing investment management.

Each of these elements should be provided through a range of tools that include onsite education programs with professional facilitation, written education material and strong Web-based curricula to appeal to a cross section of employees.

Stephen Hughes is vice president, Advisor Services, AIG VALIC in Houston, Texas.


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