words Be Prepared plus compass, icons This is a model 401(k) plan sponsorsshould follow when asking the plan's financial advisers todevelop an employee education program. (Photo:Shutterstock)

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Are you familiar with the EDGE method?

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

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

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

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

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

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Fundamentally, the instructor (in this case, the financialprofessional) starts by explaining the skill being taught. This istraditionally how a lesson is taught. It usually involvesPowerPoint presentations and other such devices.

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

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

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

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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 EDGEwhen using it). It's the power of compound interest.

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We first "Explain" what it is.

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

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Next, we "Demonstrate" what it means.

Here's a popular way of demonstrating the power of compoundinterest. It comes from an old fable. It's good to throw an ancientstory into the lesson. It keeps the audience captivated. Here's thestory:

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

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The inventor shyly asked for a single grain of rice. He placedit on one of the corner squares of the chess board. He told theEmperor, "My wish is to give me all the grains of rice it takes tofill the chess board using the following formulae: one grain ofrice for the first square, two grains of rice for the secondsquare, four grains for the third, and on and on, double the grainsof rice for each square on the board until all 64 squares arefilled."

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The Emperor agreed, although he claimed the inventor insultedhim by asking for so little. He instructed his minister to gocollect the necessary amount of rice and give it to theinventor.

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

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

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

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That's the power of compound interest.

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Now, Guide.

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

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

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

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

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

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Here, you shift to the "Enable" phase.

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

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But wait! There's more. Now that you've piqued their "interest,"give them another blank formatted sheet. This time, tell them "yourcousin 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, 20years, and 50 years. (In case you're wondering, theanswers are (roughly) $300K, $800K, and – drum roll —please, $16 million.)

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Now that's the power of compound interest.

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

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

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

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

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).