Here’s a quote in today’s 401kWire from US Senator Herb Kohl of Wisconsin. I completely agree.

“As more Americans rely on defined contribution plans, the choices they have to make in order to achieve a secure retirement have grown more complex. Not only do they have to make the proactive decision to save, but then they must decide how much to save, where to invest their savings….We’re trying to make this process a little more user-friendly.”

When a registered rep begins to offer individual investment advice, they step over a big red line laid down by FINRA and the SEC. Before offering advice, s/he must provide each individual with considerable new account paperwork and disclosures, and document responses to key suitability questions.

If Sally Supervisor or Joe Assembly-Line Worker, have $20,000 401k account balances, and the advisor is earning a 25 basis point trail, s/he is taking on a lot of work and accountability for about $50 per year.

No wonder few participants get sufficient investment guidance?!

Most participants don’t want to be loaded down with confusing information, then left on their own to make investment decisions. These are critical life decisions that will impact their future and their family in countless ways. Participants need help with these tough decisions: “How much to contribute and how to allocate their investments?” They want this decision made for them by a competent professional or to be guided through a thoughtful, personalized decision-making process.

Individual retirement planning meetings are very effective but inefficient. The best scenario from the participant’s standpoint is to sit down with a qualified investment professional and review their options given their personal situation and preferences. But, this takes time and time is $.

In a typical retirement planning and enrollment process, participants are hosed down with education, then given a form and a booklet or sent to a website when they have time. “Good-bye and good luck. Hope you make good decisions with the tools we’ve given you” (which they often don’t!)

The vast majority of 401k plan participants get less than 1 hour of education each year about their plan and principles of investing, and are then expected to make thoughtful and informed decisions about how much to contribute and how best to allocate investments.

When and if individual participants ever spread that form and booklet out on the kitchen table or go to their provider’s website on a home computer, there is no one available to ask a question of; or worst yet, they ask their equally Ill-informed brother-in-law, friend or co-worker for advice. No wonder so many participants make bad decisions and are frustrated! There is a need for a new model here.

One-third of U.S. workers have little or no understanding of their employer-sponsored defined-contribution plan, according to survey results reported by The Hartford in September ‘09  Workforce MANAGEMENT. “Nearly three-quarters of workers say they have ‘less than a complete understanding’ of their employer’s retirement savings plan, … with most employees indicating that they have a better grasp of other benefits, such as health care coverage and life insurance”.  This is alarming!!!

How is this possible after years of participant education, and even though there is an investment advisor or plan consultant being paid on most plans?!

Shlomo Benartzi, Professor and Co-Chair of the Behavioral Decision-Making Group at UCLA, and industry thought leader, in analyzing “Heuristics and Biases in Retirement Savings Behavior”, concludes that:

“Saving for retirement is a difficult problem, and most employees have little training upon which to draw in making the relevant decisions.   Perhaps as a result, investors are relatively passive.  They are slow to join advantageous plans; they make infrequent changes; and they adopt naïve diversification strategies.  In short, they need all the help they can get.”

Despite all the effort and resources spent on education, website tools and printed materials, most participants still don’t save enough and far too many make poor decisions in allocating their investments. This process demands new approaches and innovative solutions.

I admit it.  I am a blogging virgin.  This is my first time, but I think I’m going to like it.

As an industry, we have done a horrible job of ensuring that 401k participants will have sufficient savings to generate the income they’ll need in retirement.

401k plans, when first conceived, were intended to supplement employee pension plans (otherwise known as DB plans – for dying breed).  In years past, where DB plans were frozen and replaced by 401k, employers offered a generous match.  But, faced with a tough economy and rising health insurance costs, many have now foregone or skinnied-down their match or profit-sharing contribution.

401k (and other DC) plan participants now bear much greater responsibility for ensuring they have sufficient retirement savings.  Too many are ill-informed and ill-equipped.  Plan sponsors and advisors bear fiduciary responsibility here.

My goal in this blog is to foster discussion of new approaches to improving retirement plans and plan participant results.   Please share your ideas and feedback.