401(k) asset allocation: Educating employees about choosing the right stocks in 2023

The possibility of a stock market crash can scare employees away from investing in the stock market. Everyone has heard of the Crash of 1929, but the stock market crashed in 1987 and again in 1989. The Dot.Com bubble burst in 2000. The most recent crash took place in 2020 when the Coronavirus problems became apparent. The mere possibility of a stock market crash will have some employees saying, “I will never invest in the stock market.”  Maybe a little employee education would be a good thing.

Encouraging employees to get into the stock market seems like something that isn’t part of the traditional employer/employee relationship. They might say: “You have no business telling me what to do with my money!”  There is another way to approach this subject. Employees may feel it has traditionally been the company’s job to provide for their retirement. Their parents or grandparents might have had defined benefit pension plans. Today, the landscape has changed. Defined contribution plans mean employees bear the primary responsibility for their own retirement. But would they appreciate advice on how to help their money to grow?

A Bank of America study shows 84% of employees feel financial wellness tools offered by the company helps reduce employee attrition. The study shows 97% of employers feel a sense of responsibility for employee financial wellness compared to 41% in 2013. The study also shows 56% of employees feel good about achieving their retirement goals. Sounds good, right?  In February 2022, that number was up at 69%. Helping educate employees about financial wellness can focus on helping them plan for retirement.

Who is going to deliver the message to our employees?

Giving advice comes with an implied sense of responsibility. Employees need to make their own decisions. That is what “self-directed” means in retirement plan language. Here are three ways you can share best practices and encourage employees to take a serious look at including stock market investing in their retirement planning.

1. Showcase respected employees sharing best practices. This is also known as the Bell Cow approach. Most companies have several employees who have done well in their careers, earned the respect of their colleagues and follow the firm’s strategy. Find some who have taken ownership of their own retirement planning. Ask them to explain their reasons and how the firm has helped.
2. Bring in a professor. When senior management speaks, some employees might think they are “giving the party line.” They might think: “What’s in it for them?” They might not identify with the speaker because there is a huge wealth gap. Academics are usually respected. Contact the local college. Hire an economics professor to talk about historical rates of return for different asset classes and the importance of long-term time horizons when investing.
3. The return of the successful retiree. We consider 401(k) plans an everyday element of company benefit packages. According to the Bureau of Labor Statistics, 67% of US private sector employees have access to a company retirement plan and 64% had 401(k) plans. The 401(k) plan was introduced in 1978. Since it’s been around 45 years, the company should have plenty of retired employees who included the 401(k) in their retirement savings plan. Bring a couple back to tell the story of how they prepared for retirement and the importance of making good choices in your plan.

What should the speakers talk about?

Your chosen speakers should have a compelling story to tell. If you provide simple guidance like the importance of taking advantage of the 401(k) plan on offer and having a long-term time horizon, they will probably come up with a great story without additional help. Your legal department will want to edit and pass judgment. You will determine the delivery channels. It might be videos, podcasts, print or live presentations.

Related: Ramping up retirement: 5 ways to increase employee participation and contributions

When talking about investing for the long term, the stock market is usually part of the story. It might be the main attraction. Your professor might use an Ibbotson chart showing the returns of different asset classes over decades. Here are several highlights they should hit.

1. The stock market isn’t the only option. Some employees might think investing in the stock market means going “all in.” Every dollar in their retirement account is invested in stocks! Generally speaking, investors split their money among stocks, bonds and cash. This is called asset allocation.
2. Risk tolerance is different depending on who you are. The stock market isn’t for everyone. Some employees are scared of losing money. They do not want to take any risks. Other employees are thrilled with online casino gambling. They take risks. There are usually several asset allocation models comprised of stock, bonds and cash. There should be one that matches the employee’s temperament.
3. You don’t need to pick your own stocks. The employee who is afraid of the stock market might feel that way because they think picking individual stocks is very confusing. The New York Stock Exchange had 2,578 listed companies in 2022. NASDAQ has 3,788. How can an ordinary person know which ones to pick? Fortunately, company retirement plans tend to make this easy. Let us assume the appropriate asset allocation model aligned to your risk tolerance says 40% of your money should be in the stock market. You can choose a fund that tracks a major stock market index, like the S&P 500. These are called tracker funds or index funds. Generally speaking, the performance of the index over time is the performance you get too.
4. You don’t need to obsess about when to buy and sell. What if the stock market isn’t doing well? The employee might be happy riding it up, but not want to ride it down. You can sell investments within your retirement account, based on the rules your firm has with the benefits provider that operates the retirement account program. Another alternative is to outsource the buy and sell decisions within a fund to a money manager. Many of the funds your firm offers as investment choices are in a mutual fund format. The fund owns lots of stock, but professional managers at fund HQ are making the decisions about what to sell and what to buy on a regular basis. Suppose you don’t want to be bothered with thinking about it?  One of those fund managers likely is organized as an entire portfolio. Some money is in cash, other money is in bonds and the third part is in stocks. They look after all three segments.
5. Get good advice. A defined contribution plan puts the employee in charge of planning for their own retirement, but they are not necessarily alone. The benefits plan provider and the firm should have educational material they can access. There should be a toll-free number they can call to speak with a live person. This can help, but as an employee builds wealth, they should also find a qualified financial advisor who can help them manage it. Financial advisors at major firms get to know their client by asking questions and gathering data. Advisors operate under many rules including to Know Your Client (KYC). This involves many aspects of the relationship including a client’s tolerance for risk. No one wants to lose money, but putting your money in your mattress because you don’t want to take any risk also delivers the lowest return. Money in your mattress earns no interest and its purchasing power declines over time because of inflation. Advisors can help clients get comfortable with investing and focus on the long term.

Getting the right respected people in front of your employees can help win them over in both taking advantage of company retirement plans and getting into the stock market.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.