Can We Save Enough to Retire? Participant Education in Defined Contribution Plans

April 1995
EBRI Issue Brief #160
Paperback, 24 pp.
PDF, 320 kb
Employee Benefit Research Institute, 1995

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Executive Summary

  • The growth in defined contribution plans has focused attention on issues such as whether workers can be educated to make wise decisions regarding their participation in such plans and what constitutes advice as opposed to education by an employer. This Issue Brief is the first of three that will explore these issues. It examines the public policy issues involved in participant education, discusses selected educational efforts and provides preliminary findings on their impact, and presents estimates of workers' relative preferences among various plan characteristics.
  • Many defined contribution plans require workers to make decisions regarding participation, contribution rates, and asset allocation across available options. In making such decisions, a worker would ideally be influenced by two temporal concepts: determination of appropriate time horizon and periodicity, which involves recognition of the stages of a worker's life and his or her priority of needs at each stage.
  • Several characteristics impact the participant's time horizon and periodicity. Work force diversity makes it difficult for a sponsor to satisfy the savings objectives of all participants simultaneously unless they provide asset allocation flexibility. However, some sponsors are concerned about potential liability for investment "losses" incurred by participants even though participants direct the asset allocations of at least some of their balances. Still, many plan sponsors have decided that the advantages of individual choice outweigh potential legal liabilities, and ERISA sec. 404(c) provides sponsors with guidance on plan design provisions that may minimize sponsor exposure.
  • Many companies are responding with innovative methods to enhance the strength of their participant education efforts. Three areas considered in participant education communication are the media used to transmit the message, the frequency of the message, and the content of the message.
  • In a recent survey by EBRI and Mathew Greenwald and Associates, 73 percent of 401(k) participants reported that their employer provided some type of educational material. Among those using the material, 33 percent reported that it led them to increase the amount of their contributions and 44 percent reported that the materials led them to change the allocation of their money.