Lessons About 401(k) Education

There's a good chance you've occasionally received emails or other communications at work encouraging you to log on to a company website or attend a meeting hosted by HR people concerning your company 401(k) plan.

And there's just as good a chance that you've ignored these communications. Despite this, if you're over the age of 40, you probably sometimes wonder whether you're doing enough to plan your retirement. If you don't wonder about it, you should.

These two behaviors couldn't be more contradictory. If you're going to have a sufficient retirement nest egg, you have to make the right choices in the management of assets in your 401(k) plan. And to make the right choices, you need investment information and basic financial information to understand it. This is a two-way street: Your employer's obligation, under federal rules, is to provide this education. Your obligation to yourself — and your family — is to take advantage of it.

If you work for a large company, it's a safe bet that your employer has a fairly robust 401(k) plan with a well-developed education program. Smaller companies don't tend to do as well as a rule, but some are fairly attentive to these matters. Regardless, education on plans and the investments in them is essential if you're to manage your plan account optimally.

Large or small, your employer is nonetheless responsible for educating employees participating in their 401(k) plan about choosing and managing assets available under the plan so they can get the best outcomes. Companies may do this themselves, using HR people as educators, or outsource this function to professional advisors.

Regardless of which route your company takes, it should have a written policy for plan education that spells out how information will be communicated — whether through group meetings, individual sessions with a plan advisor, written materials, dedicated plan websites, webinars or what-have-you.

The policy should also spell out the information that these sessions or media should communicate, including:

• Characteristics of the investment options under the plan.
  Regarding mutual funds, this should involve the basics: what a mutual fund is, how it works, categories of companies (small-cap, mid-cap, large-cap, etc.), and the importance of reducing market risk by diversification of assets among companies of different sizes and in different industries.

• Tax advantages.
  The contributions you make to your 401(k) plan come out of your gross pay, so they lower your taxable income. You don't pay taxes on it until you take money out after retiring.

• Employer matching money.
  Many companies match employee contributions up to a given percentage and a given maximum. This is free money. The more you're contributing to your plan account for retirement, the more your company will contribute, within limits.

• The impact of fees.
  The impact of fees on your net investment returns, which can make a huge difference in the long run. The federal government has recently adopted sweeping new regulations requiring employers sponsoring 401(k) plans to become aware of all fees affecting plan accounts, long a matter of benign neglect, oversight or unconcern. Employers are required to assure you receive fee disclosures and that fees are reasonable, which means eliminating investments with companies that charge too much. Your job as a consumer is to make sure this is being done.

• Age-related considerations.
  The older you are, the more you're probably thinking — or should be thinking — about your retirement, but the less time you have to build up your nest egg. If you're 25 years old, your approach to investing for retirement is a lot different than it would be if you were 55. These younger investors can take more risk because they have more time for their portfolios to recover from losses.

• The importance of risk tolerance.
  Risk tolerance doesn't just vary with age; it also varies among individuals of the same age. This can be a tricky area. Some individuals are much less risk-averse regarding their investments than they initially believe. By talking to your plan advisor, you can get a better sense of your true risk tolerance. Then, you should apply this to your plan investment portfolio. If you find you're highly risk averse, perhaps you should sell some of your shares in that highly aggressive international small-cap fund you bought when you signed up with the plan. If your risk tolerance is truly moderate, perhaps the ultra-conservative portfolio you put together under the plan isn't aggressive enough.

• Information on what types of advisors serve the plan — if any.
  The new federal rules require employers to determine whether their plan advisors have potential conflicts, based on disclosures these advisors are now required to make. For example, plan education is often offered by brokers, yet brokers are expressly forbidden to make recommendations concerning the suitability of specific investments. So, at these companies, the broker that hosts your group seminar can't really advise you specifically on your portfolio in any depth. For that, you need a fiduciary advisor — one who, because of federal regulations and greater potential legal liability, must avoid all conflicts of interest.

• The critical issue of funding.
  No matter how well your plan investments perform, if you don't contribute enough to your plan within allowable limits you will likely come up short when it comes to having enough money to pay retirement expenses. There is a developing retirement crisis in America: Too few people are contributing enough to their plans — plans they're relying on exclusively to pay for their retirement. If you don't contribute enough, it doesn't matter how well you're managing your plan investments. The sad truth is that far too many people are contributing too little too late.

• Is it covered?
  Does the education program at your company cover these items? If not, why not? This is a good question to ask your HR department.

Of course, these questions assume that you know what's going on regarding the 401(k) plan at your company. If you're ignoring those emails or have never visited the dedicated plan website or have failed to attend the bag-lunch seminars that your company routinely hosts, then maybe it's not your company that's behind — it's you.