Responses from those offering plans indicate that the biggest problem is in educating participants in the ways 401ks work and what they can do to make them work better. Some companies sponsoring plans have gone so far as to hire some of the most influential (and costly) investment speakers and consultants to come in and try and solve the problem with little or no success.
Then, I spoke with participants. I conducted several dozen one-on-one interviews and eight focus groups. During one of the early one-on-one interviews I was having a conversation with a 40-year old very-well-educated marketing director. He was giving me his explanation of how he thought his 401k worked when he stopped, looked up and said, "You know, I don´t think I´m really all that sure what a mutual fund is." Silence. Instinctively I responded, "well, do you know what a Growth Fund is?" He shot back, "I think so but I don´t know. Let´s put it this way, I wouldn´t bet the ranch on what I think it is!" Well, for many Americans, the 401k is the proverbial retirement ranch. The epiphany provided the guidance for the rest of the study. I would focus on the confidence level that the average 401k participant has in his or her own knowledge of the vocabulary of investing.
What I learned from this point on, I believe, explains everything. The reason so many are having such a hard time educating 401k participants is because most of them simply don´t know really understand the language. No, it´s worse. They think they know but when faced with having to actually deal with the terms as a part of their real life they suddenly realize they don´t know! Think about it. All of our lives we´ve been surrounded by the words of Wall Street. Mutual funds, The Dow, S&P 500, commodities and on and on the list goes. They were on TV, in the newspapers and on the radio constantly.
The analogy I like to give is the weather. We all grew up watching and listening to the weather. We´ve heard the words of weather all our lives. But, if all of a sudden, your financial security depended on the confidence you have in your own definition of words like barometric pressure, isobars and relative humidity you would be in deep doo-doo. What does relative humidity REALLY mean?
Fact is, most Americans don´t know the difference between a small cap and a hubcap. Slightly more than three hundred 401k participants (so far) have participated in the surveys, interviews and focus groups. Of these, only 24% have enough confidence in their own idea of what a mutual fund is to make a serious investment decision. Even fewer (21%) have enough confidence in their own idea of what a growth fund is. 38% think President Bush will veto the Kerry-McKeene 401k Protection Act even though no such act exists.
We get a job. We sign up for a 401k. We´re called participants. The money we put in is called a contribution. Why does a participant need to be educated about how contributions are used? I had the opportunity, during these sessions, to explain to some of these participants in good old-fashioned lunch bucket English what these things meant. I told them, you´re not a participant you´re an investor and it´s not a contribution, it´s an investment. Once they got over the embarrassment of not knowing what a mutual fund, growth funds, money markets and so on they were ready to do whatever they needed to do to tend to their 401ks.
Thanks to Enron, WorldCom and others, 401k plan sponsors are now required to educate the participants in no uncertain terms. If that´s a challenge you currently face I suggest you begin by not using uncertain terms. Don´t assume they understand what you (or your expert) is saying simply because they are nodding their heads. When the weatherman comes on and says, "barometric pressure" I nod my head and, like everyone else, pretend to know exactly what he means. Don´t expect people to volunteer their ignorance. Very few adults will stand up and say, "Excuse me, but exactly what is a mutual fund?" They assume they should know. After all, it´s a word they´ve been hearing since the age of eight.
The plan may come from Wall Street but the people who depend on it live and work on Main Street. They´re schoolteachers, city workers, and shopkeepers and sign painters. Once they are confident in their own understanding of the language describing all the pieces and parts of their plan, they´ll do just fine.