Win-win: educating employees about investments.

• Author: Knapp, Richard J.
• Position: Management Strategy

Win-win: educating employees about investments

How much of your company's pension assets do you place in fixed-income investments?

Compare this with how much of their 401(k) money your employees invest in fixed-income funds.

If your company is like most, this comparison spotlights a significant difference in the way you invest pension plan money and the way employees invest retirement money when given a choice.

That's too bad. It's quite likely employees are not making the best decisions for themselves. That's likely to bite them - and you - sooner or later.

It's clear that employees are making decisions about investment options in their 401(k) and other defined contribution plans without adequate information. In the last 10 years, more and more employers have introduced these types of plans and placed greater responsibility in employee's hands. According to a report issued by the Employee Benefit Research Institute in October 1989, nearly all major U.S. employers offer 401(k) plans, and nearly 40 percent of all full-time employees in the U.S. are eligible to participate. A 1990 Foster Higgins survey indicated that nine of 10 plan sponsors let employees choose how to invest at least some money in the plan. And we're talking about big money: assets in 401 (k) plans will exceed $300 billion this year.

Undirected power

But few plan sponsors have helped employees exercise their new-found responsibility wisely. Indeed, only 18 percent of plan sponsors surveyed by Foster Higgins early this year said they're satisfied with their ability to communicate information to their employees about personal investment strategy. In essence, companies have put employees in a powerful rocket ship with no instructions or training on how to fly it. And the advent of daily transfers means the rocket ship is moving ever faster.

Recent events speak to the importance of the issue:

* Our survey showed that, when given a choice, employees put more money into GICs than any other defined contribution investment. But, with Executive Life, then Mutual Benefit Life, and now others, encountering financial problems, the safety of GICs is in question. Some plans are seeing a "run on the bank" as employees either transfer money out of GICs or leave the 401 (k) plan altogether. To maintain the plan's integrity - and management's credibility - one employer pledged to insulate participants from the Executive Life problems by making up any loss out of company assets. This gesture was an expensive one. Potential liability: at least $13 million. * The federal government has weighed in. The Department of...