Here’s why crowd sourcing works: I just heard a story from the editor of Entrepreneur magazine while attending a session at the New York Press Association’s annual conference. He cited an example of an enterprising entrepreneur who, after quite a few failed attempts, hit pay dirt.
What was his secret? He went to Amazon and read all the poor reviews. These complaints spelled out exactly what the market was looking for. So he made products that offered these features. Consumers benefited by getting why they wanted. As a result, he benefited by making lots of money.
The lesson here is you don’t need a sophisticated market research regime to discover hidden markets. You just need to listen to the war stories from the people on the front lines.
This is precisely what I did recently when I sought to uncover what was really happening in those employee 401(k) education meetings (see “401k Plan Sponsors Are Asking For These Employee Educational Topics,” FiduciaryNews.com, April 9, 2019).
Using this crowd-sourcing technique allowed me to quickly paint the picture of what was motivating plan sponsors on this subject.
It was all sunshine and lollipops until I asked myself a discomforting question: Why should plan sponsors be in the personal finance education business?
Certainly, plan sponsors have a duty to inform (and teach) employees about the nature and scope of the benefits they offer. This obviously includes the company retirement plan. The tried-and-true lesson plans that describe savings and investing basics form the basis for this. There’s nothing wrong with this.
But there may be something wrong with this: teaching financial literacy.
Whoa! I could hear several of you falling to the floor in disbelief. “How could Carosa speak of such heresy?!” you shout.
Well, now, before you go getting all judgmental and everything, consider the reasoning.
It starts with this philosophical axiom: “Give a man a fish and you feed him for day. Teach a man to fish and you feed him for life.”
Others before me have brought up the issue of paternalism in terms of the direction 401(k) plan design is heading. The best examples of this are the use of auto-enrollment and Qualified Default Investment Options. Both of these plan policy initiatives rose dramatically from the fertile incubator known as the Pension Protection Act of 2006.
Yes, these policies have increased enrollment, but they may have come with the unintended side effect of capping savings growth. By taking the enrollment decision out of the hands of the employee, you’ve removed the need for the employee to engage. In the short-term, this boosts participation rates. Longer term, however, we haven’t seen employees boosting their deferral rates. By giving them the fish, we’ve taught them they don’t need to fish.
Some suggest auto-escalation is the answer, but is it? Or does it simply kick the can down the road?
Ironically, placing the plan on “auto” pilot eliminates the urgency of the traditional 401(k) employee education syllabus. Why teach employees about saving when saving is done automatically for them? Why teach employees about investing when they don’t need to make a decision on where to invest?
But we still need to provide education to employees? What to do, what to do…
To fill this void, and perhaps to make up for the lack of such education in our secondary schools, plan sponsors seem excited to provide lessons in financial literacy. Formerly branded under the moniker “financial planning basics,” topics such as debt, budgeting, insurance, etc… now appear more frequently in 401(k) employee education meetings. You may recognize them by their new name: “Financial Wellness.”
It used to be plan sponsors focused on “retirement readiness.” That made sense. After all, what’s a retirement plan for if not about getting ready for retirement?
Somewhere along the line, “retirement readiness” morphed into “financial wellness.” It’s not clear if this is a good thing. It may be more about handing out the daily fish and less about teaching employees how to fish.
Again, I can see you jerk back when you read that last statement. Don’t think your computer screen blocks my view. (Do you really know where all the camera lenses are on your device?)
“But isn’t teaching financial literacy just like teaching someone how to fish?” you undoubtedly ask.
It may be. Or it may not be.
Consider the case where employees become too dependent on their employer to vet the financial wellness teachers. (This is precisely the kind of fiduciary role plan sponsors see themselves in.) What happens when those employees retire (or otherwise leave their employer)? Will they be prepared to fish for their own financial service provider? Will they have the confidence to do so?
Just like other areas of retirement, it’s best when employees have a chance to practice their independence before actually retiring. A solid education program, therefore, won’t lead the employee by the hand, but point the employee in a general direction. This way, employees can forge ahead for themselves, knowing they’re still in the company’s comfortable cocoon. This allows them a timely second opinion on any exploratory activities they engage in.
Should 401(k) plan sponsors be on the hook for teaching financial literacy? Probably not. But if they’re intent on doing so, the least they can do is to provide a rod and reel for every employee.