Are you familiar with the EDGE method?

Chances are, if you are or were a Boy Scout leader of a certain age, you'll recognize this acronym. It represents "Explain, Demonstrate, Guide and Enable." The purpose of EDGE is to teach boys how to do things themselves without relying on an adult to help.

This is a model 401(k) plan sponsors should follow when asking the plan's financial advisers to develop an employee education program (see "5 Ways 401k Plan Sponsors Can Help Employees Nearing Retirement," FiduciaryNews.com, October 8, 2019).

The concept is similar to "Give a man a fish, feed him for a day; teach a man to fish, feed him for life" philosophy.

Most employees don't have the advanced skills of financial professionals. This makes them the equivalent of Boy Scouts among their adult leaders. So why not design 401(k) education programs the same way Boy Scout education programs are designed?

Here's how to do it (but pay attention because there's a trick at the end):

Fundamentally, the instructor (in this case, the financial professional) starts by explaining the skill being taught. This is traditionally how a lesson is taught. It usually involves PowerPoint presentations and other such devices.

Unfortunately, that's usually where the 401(k) education meeting ends. (After all, how much can you pack into the 45 minutes you have to present?)

EDGE goes well beyond "Explain." That's the challenge both the financial professional (who must design the program) and the 401(k) plan sponsor (who must allot the time needed for employees to learn) must deal with.

Let's assume we can get over those challenges. What happens next?

Here it's best to use a real-life topic. Let's pick an easy one. It's one many have used (and even gotten as far as the "D" in EDGE when using it). It's the power of compound interest.

We first "Explain" what it is.

The power of compound interest is not just that your money earns money; it's that the money your money earns also earns money. This is growth compounding upon growth. Over time, this compounding feeds on itself. You might even say it goes "viral." Stack together a long-enough string of years, and you're starting to talk real bucks, all thanks to the power of compound interest.

Next, we "Demonstrate" what it means.

Here's a popular way of demonstrating the power of compound interest. It comes from an old fable. It's good to throw an ancient story into the lesson. It keeps the audience captivated. Here's the story:

Legend has it that the Emperor of China was mesmerized by the game of chess. He sought the inventor of the game and offered him a wish, any wish he desired. The wish had no bounds, the Emperor promised.

The inventor shyly asked for a single grain of rice. He placed it on one of the corner squares of the chess board. He told the Emperor, "My wish is to give me all the grains of rice it takes to fill the chess board using the following formulae: one grain of rice for the first square, two grains of rice for the second square, four grains for the third, and on and on, double the grains of rice for each square on the board until all 64 squares are filled."

The Emperor agreed, although he claimed the inventor insulted him by asking for so little. He instructed his minister to go collect the necessary amount of rice and give it to the inventor.

A week passed and the minister had yet to complete his duty. The angry Emperor summoned him to account for his procrastination.

"But sire," said the minister, "we don't have that much rice."

It turns out the Emperor needed 18,446,744,073,709,600,000 grains of rice.

That's the power of compound interest.

Now, Guide.

Now that we've bankrupted the Emperor of China, let's "Guide" the employees to discovering what the power of compound interest means in each of their own individual situations.

This is where we veer off a bit from the Boy Scouts. They teach physical skills. We're teaching an intellectual concept. Still, by relying on real-world examples, we can ably guide the employee to the next step. We do this by moving from the metaphor of rice grains to the reality of dollars and cents.

Let's say the employee had a rich uncle who gave them $100,000 when they graduated from high school. The uncle had only one stipulation: The money had to be invested by a cousin until the beneficiary turned 70. The cousin is a bad investor. He only earns 7% a year, far below the 10-11% historical annual return rate of stocks.

After 10 years, the employee's pot of gold has grown to only $200,000. (At this point, you guide the employee through a spreadsheet that shows the year-by-year calculation of this growth.) After 20 years, the employee is still below half a million. (Again, you guide the employee through the year-by-year calculation.)

The employee is now so miffed at the cousin, they stop looking at their annual statement.

Here, you shift to the "Enable" phase.

While you do provide the employees with the necessary forms, you will enable them to calculate the remaining years by themselves. They should discover that at age 70, they'll have more than $3 million.

But wait! There's more. Now that you've piqued their "interest," give them another blank formatted sheet. This time, tell them "your cousin got a CFA and now he's an average investor. He earns 10.5% per year." Have them calculate their fund size after 10 years, 20 years, and 50 years. (In case you're wondering, the answers are (roughly) $300K, $800K, and – drum roll — please, $16 million.)

Now that's the power of compound interest.

Let's add one final Boy Scout twist to this program. The real success of EDGE comes when the adult leaders step aside and let the older boys use the method to teach the younger boys. The 401(k) education program can be designed to mimic this trait.

Simply have the first group of employees (taught by the financial professional) become the teachers of the second group of employees (with the financial professional remaining in the background just in case).

The best way to learn something is to teach it. Ultimately, this is what EDGE does. This is why 401(k) plan sponsors should incorporate it into their Education Policy Statement.

It'll help employees "be prepared" for retirement.

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Instant Insights /

401(k) education needs more hands-on learning – Carosa

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