This paper examines two critical problems affecting a company's defined contribution retirement plan: low employee participation (over 70% not contributing) and excessive allocation to money market funds. The paper evaluates whether switching to a defined benefit plan would be advisable, ultimately recommending improved employee communication instead. It proposes a structured investment education initiative covering the importance of retirement planning, how defined contribution plans work, and basic investment principles. The paper also considers the role of financial planning resources in overcoming employee risk aversion, and argues that a well-communicated, well-utilized retirement plan can serve as an effective recruitment and retention tool.
The current plan is a defined contribution plan, but employees are not using it effectively. Many are heavily weighted in money market funds, and over 70% of employees are not making any contributions at all. Both of these problems need to be addressed.
The first question that should be raised with senior management is whether to offer a defined benefit plan rather than a defined contribution plan. Part of the reason many employees do not use the plan is that they probably do not truly understand it. A defined benefit plan is much easier to understand because it provides employees with a guaranteed set benefit (DOL, 2012). The risk in a defined benefit plan, however, falls on the company, whereas with a defined contribution plan the risk falls to the employees. From the company's perspective, it is therefore probably better to retain the current plan. What may be needed is simply better communication of its benefits to employees in order to gain greater buy-in.
Risk is another area of concern. Most likely because employees do not understand investing, they are highly risk averse. As a result, the plan is grossly over-allocated in money market funds. To alleviate these concerns, it is recommended that the company initiate investment training for employees. This would help them become more comfortable with the plan and develop a better appreciation of the value of retirement planning. It may have been unreasonable to expect employees to understand these concepts without such training.
If the company is to provide meaningful training, employees need to understand several key things. The first is why retirement planning is important. Without this foundation, they will lack the motivation to engage with the rest of the material — and more importantly, they will not be motivated to contribute to the plan. The next thing employees need to understand is what the current plan entails: specifically, what a defined contribution plan is and how it works.
"Sequenced training content covering planning and investing"
"Better plan usage supports hiring and retention goals"
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