Human Resources: Educating Employees on Self-Directed Investments

I recently had occasion to spend the afternoon with Putnam Investments in Boston and was impressed with their approach to helping employees make investment decisions. Putnam was pitching me on their new iBenefitCenter software but I was less interested in the technology than in the thinking behind the technology. Their approach is something we can all learn from.

What Employees Want, What Experts Give
What employees want is straightforward

They want to make good investment decisions

They want to feel comfortable that they''ve made good decisions

They want to feel in control

What investment experts usually give is, well, expert advice. This would seem the right thing to do. However Paul Dewey a Senior Vice President at Putnam points out you only have to look at the glazed eyes of the employees to see that much of the information is going right over their heads. At the end of a presentation on investment options employees often come up to the speaker and say, "Great presentation, but what do I do?"

The dilemma is that employees really want to be investment experts and for most, that goal is not achievable. So even after well-done presentations on investment strategies employees are still uncomfortable, still make bad decisions and still feel bad that they don''t know what they are doing.

What Employees Need
It''s tempting to think that employees simply need to be told how to invest their money. However, this undervalues the legitimate goal of wanting to be in control. These days people want to make their own choices.

The trick to meeting these needs is to reduce the range of options to a manageable level, package them in a way that is easy to understand, and use simple tools to help employees decide what makes sense for them

How Putnam Handles It
Putnam''s approach is to give employees a small range of pre-diversified options corresponding to key investment criteria. For example, employees can decide to choose an approach based on retirement date, an approach based on risk tolerance, or to do their own asset allocation.

The retirement date approach is the easiest one for an employee to understand. The employee simply sets their retirement target and selects the corresponding fund, for example Putnam RetirementReady 2025. The fund manager automatically handles the underlying asset allocation that becomes increasingly conservative as the retirement date nears.

The approach based on risk tolerance requires a little more involvement from the employee. They have to decide if they want conservative, moderate or aggressive funds. Of course, the employee has to make an intelligent assessment of their own risk tolerance. Traditionally, we tend to think that younger people should take a more aggressive approach and those nearing retirement ought to stick with conservative plans. However, Dewey points out that there are conservative twenty year olds and there are aggressive fifty year olds. So the solution is to give the employee a simple tool to help them assess their own risk tolerance. This kind of tool accomplishes HR''s goals of ensuring people make the right choices and feel in control of those choices.

The third option is for employees to do their own asset allocation. Clearly there are people who will want to do this, the key is making it available while providing the simpler options for less financially savvy participants.

Another idea from Putnam that you can use is the concept of re-balancing. Forty-five percent of client contribution participants never touch their allocation from the initial time that they choose it. Over time their investment mix can get out of line. For example, if you balanced your investments between bonds and equities in 1990, by 1995 the abnormally high returns on stocks would have skewed the desired ratio. Participants should review their allocations every few months. It''s a good idea that your investment plan have the option of automatically re-balancing.

A Role for Technology
I''ve focused on the rationale for communicating investment choices to employees. Web based tools can of course facilitate all of this. It''s convenient to step through the choices on-line and to fill in a risk tolerance assessment on screen instead of on paper.

However, it would be a mistake to focus on the technology per se. The key is having an approach that can deal with the key problem-helping employees make good decisions and feel in control in a complex area most will never be an expert in.

One Last Trick
There is one last feature of Putnam''s iBenefitCenter that deserves special mention. It''s easy to decide you should be putting aside 5% of your salary toward retirement. It''s much harder to actually find that 5%. With technology it''s easy to offer a plan whereby an employee''s contributions gradually increase over time. So for example, an employee may put aside 2% this year, 3% next year, and so on up to the goal of 5%.

This kind of feature is trivially simple but to my mind is one of the most helpful tools. It''s a tool that directly responds to a human frailty, our difficulty in managing our own money.

Conclusion
In dealing with investment experts and new software one might think that finance and technology are the key topics. True, sound expertise in these areas are an underpinning. However, the starting point needs to be an understanding of people, what they think they want, what they need, what they can understand, and what is useful to them.

It''s apparent to the honest observer that a lot of financial training just isn''t meeting the true needs of employees. Think hard about the true needs, and you are bound to do a much better job of helping your employees make smart decisions about their money and feel good about those decisions.