How Employees Really Learn and Your Retirement Plan

There is seemingly constant discussion, and much consternation, about the difference between how well people understand and prepare for their financial future (or their retirement) and how well they should understand and prepare. Most studies and reports indicate that many people aren’t saving enough, many others aren’t planning, and many others make mistakes.  How realistic is it for an employer to provide a good communication program for their employees and help them become better prepared for their future?

Certainly, there are employers who have done a better job than most of engaging their employees and providing meaningful guidance.  They have accomplished this with their own commitment to employee education or by using service providers that offer a thorough, innovative or persistent approach to engagement.  Typically, the most effective program is not a top down corporate communication plan but a bottom up approach that focuses more on the needs  of each employee.

Whether intentional or not, many successful programs include the components of what is known as Adult Learning.  This is the notion that working age adults learn differently than school age children and young adults.  When we are young, most of us are forced to learn in a school-like setting using conventional classroom methods.  However, when we are out on our own, this approach is less feasible, or less effective, for most adults.

The following concepts of adult learning impact how people learn about finances, saving, and planning:

  • People’s personal life experiences shape their attitudes about learning.   If someone inherits $10,000,000 they may not be interested in learning too much.  On the other hand, someone facing bankruptcy or difficult financial circumstances may be more interested in budgeting, for example.
  • People learn better when they participate in the process.  Adults like to have some control over how and what they learn.  
  • People want to know the implications of what they are learning – how does this affect me now?  This is critical. Most adults are not interested in theory – they are more interested in how financial matters impact their life.
  • People learn better incrementally.  Providing too much information in one setting can overwhelm employees and is counterproductive.
  • People want control over where they get their information and education.  The full range of available information options can work against employers trying to offer a workplace education program.
  • Using videos and visuals to explain financial concepts can be an effective alternative to traditional written materials.
  • Learning about the retirement plan should be voluntary – adults learn when they are ready.  Another critical aspect.  Many adults are frequently preoccupied with other life issues and need to be in a position to devote the time and energy necessary to be engaged in the process.

Be realistic about the effectiveness of your campaign.   Even the best programs will be limited by the general apathy of your employees.  But approaching employee education with an understanding of how your employees learn and process information will help you design a more effective, and typically less costly, campaign!  What has been your experience with an employee education program? Is there anything that you have seen that worked well for you personally or your organization?  How was the effectiveness of the campaign measured?

PlanVision’s Predictions and Outlook for 2015

Based upon the events of the last year, our research and monitoring of worldwide political and market events, and reviews of the available economic and financial information, we have a forecast for the upcoming year:

We have no idea what will happen!

We anticipate that our forecast will be 100% accurate.

Retirement Plan Investment Committee Quarterly Meetings – No Way!

Working at a smaller company has many benefits and many challenges.  One of the biggest challenges is that there is a lot of work to be done and few people to do it.  So creating unnecessary work for employees that are already burdened with plenty to do is not smart.

One way a small employer can improve their efficiency is to simplify the management of their employer based retirement plan.  Administering a retirement plan is serious business and comes with fiduciary obligations and liability as well. Not to mention that it is good to try and do the right thing for your fellow employees.  

It is considered to be a good practice for smaller employers to have an Investment Committee and an Investment Policy Statement (IPS).  Employers use these to assist them in successfully running the plan.  Congratulations to any smaller employer that has a Committee and IPS – you are further along than many other small companies.  

One piece of advice we have for small companies is to set-up your plan so your committee only needs to meet once a year. Using a short, concise IPS and primarily index funds are two ways you can simplify your plan and reduce your need to meet on a more regular basis.  If larger firms want to meet semi-annually or quarterly, that is up to them. But smaller employers don’t have the staff or time to set aside for meetings that can be avoided.        

Of course, you may still need to have unscheduled meetings periodically, though hopefully infrequently, based upon organizational changes or industry issues.   But scheduling just one Investment Committee meeting a year should keep your plan current, save you time and money, and help you focus on the day to day stuff that comes with your job.

Algorithms vs Nothing

Robo Advisors are the most recent development in investment management for individual consumers.  Robo Advisors provide on-line investment management services as an alternative to a personal investment advisor or firm.  They promote the use of sophisticated modeling techniques and algorithms in portfolio construction.  Initially I didn’t pay much attention to their introduction to the marketplace.

In the last year or so, as it has become obvious to me that investment management is essentially a commodity, I have become more intrigued in their role in helping consumers (investors) receive low-cost guidance.  The addition of the robo advisor is an excellent step in the evolution of the asset management market.  They assist consumers by reducing expenses, in many cases dramatically, and also by introducing more discipline into the process.

What I am not certain about though is whether or not using algorithms in ongoing management will provide any additional value over simply using an option like a Vanguard Target Date Fund or Lifestrategy Fund.  Or even using something like the No Brainer 4 fund portfolio recommended by Dr Bill Bernstein.

The models are designed to provide superior allocation by identifying predictive behavior among asset classes.  The argument is that by using engineering and math better, more efficient portfolios can be constructed in the short run, leading to better results in the long run.

I wonder how predictive this behavior is in reality.  Are the trends or behaviors used to model the portfolios really helpful in short term reallocation decisions? Are the efficient portfolios going to end up producing better returns than a well-diversified portfolio of low-cost index funds? I am not sure I am buying what they are selling.

By and large, I like what the robo-advisors are doing to help consumers receive investment management at a much lower cost, but if I had to bet, I would put my money with the No Brainer portfolio.  Adding complexity to money management for most people may not produce a better outcome.