Education for the working class

Over the past decade, education has become the order of the day in the United States-defined contribution (401-k) market with retirement responsibility swinging from employers to individual employees. As member choice starts taking off in Australia, Zilla Efrat looks at what can be learnt from the US experience.

Over the past decade, education has become the order of the day in the United States-defined contribution (401-k) market with retirement responsibility swinging from employers to individual employees. As member choice starts taking off in Australia, Zilla Efrat looks at what can be learnt from the US experience.

Earlier this year, members of a 401-k plan offered by an American ad-vertising agency received a postcard which read: "Your abs will al-ways be fab".

The postcard had been sent by fund manager Vanguard and it was one of five postcards members would receive as part of an education campaign to get them to save more.

The aim was to debunk myths, to show that without exercise, their abs would not be fab or, in other words, without regular payroll contri-butions, their retirement savings would not be in good shape.

Plum Financial Services education consultant Jennifer Greer says the message had been finetuned to appeal to a carefully researched target market of inadequate savers: younger employees in lower salary brack-ets who lived in high cost urban locations.

Research also had highlighted that these employees were feeling cyni-cal, undervalued and underpaid and that they were bombarded already with other literature trying to grab their attention.

In addition to a series of seminars, Vanguard's campaign included a personal savings statement showing how little an added contribution would hurt their take home pay and how much it could grow their sav-ings.

Vanguard's efforts paid off. The savings level in the plan jumped from a three per cent to 12 per cent over three months, and costs were contained because Vanguard piggybacked on the ad agency's infra-structure.

Vanguard's campaign demonstrates just how much the US 401-k industry relies on research, database mining and consumer marketing techniques to educate fund members.

Indeed, education for 401-k plans has grown so much that it is now estimated conservatively to be a US$750 million to US$1 billion a year industry.

This industry is also one that Australians can learn from as member investment choice gains momentum.

Perpetual Investments general manager of retail business Gerard Do-herty says education for super fund members is in its infancy in Aus-tralia, and is largely compliance driven.

Contributing to a 401-k plan may be the second largest investment many Americans make - after buying their homes. To help them take on this responsibility, asset managers have been offering communication and education packages to employers, usually for free, to "add value" to a profitable business: asset management.

"In the last three years, employee 'education and communication' has become one of the top three factors explaining an asset manager's success in winning 401-k mandates. It now ranks alongside investment performance and record keeping as key decision variables for employ-ers," Doherty says.

Sue Palmer, a director and global expansion manager at Principal, agrees. "One of the things that employers look for when deciding who should run their 401-k programs is who makes life as easy as possible for them. They don't want to have to spend a lot of time on things like answering employees questions," Palmer says.

As a result, companies such as Principal offer something like "a cor-porate master trust" to make things easy for employers - and to help them attract and keep quality staff.

Recently, General Motors asked its employees to rate the various benefits offered by the company. "The GM401-k plan came out tops, even beating the medical benefits, and GM attributes this to educa-tion," Doherty says.

US employers also view the education packages as a way of meeting their legal responsibilities and of avoiding potential liability for inadequate benefits.

Commenting on the lessons gained in the US, Plum's Greer says the trick is to understand the audience. Each employer, after all, will have a different culture and demographics - and will require a dif-ferent solution.

"The bottom line is that your message has to be reasonably targeted or your effectiveness will be reduced," Greer says.

Doherty says in the early days, 401-k education was largely print-based with some telephone support.

"It was compliance driven and, often, too technical and lengthy for employees. Today, however, asset managers could be accused of trying to 'out educate' each other. Their focus is on real learning to cre-ate responsible investors," he says.

At first, fund managers recycled their retail fund materials for the 401-k market, but, as they wanted to win more 401-k business, they began to produce generic material which had the companies' logo on it or employer input.

"These are now tailored beyond corporate identity. They are also heavily research-based, and may even be priced on achievement of specified measurable objectives for employee behaviour or plan dimen-sions," Doherty says.

Indeed, US asset managers now make use of an ever increasing volume and range of tools to get their message across.

Principal's education package, for example, includes an Internet site, toll-free IVR (interactive voice response) and a call centre staffed 13 hours a day.

Palmer says this is backed up by seminars, easy-to-read educational booklets and reports, and retirement projection software - and, these are provided in other languages for those who do not speak English.

Also, employees have access to financial planners based close by and to support from 51 sales offices across the US.

"In the early days, employees could expect to receive regulatory ma-terials about the plan, quarterly statements, perhaps a newsletter and, maybe, attend a workshop or group meeting," Doherty says.

"Now they experience direct marketing campaigns much like consumer goods adverts, but with more media, more pieces, more variety and contact - and not only at work, but also at home and 'anywhere, any-time, anyhow' with on-line services."

Doherty says workshops and seminars are used widely and seem to meet a real need for face-to-face communication. They are often highly scripted and choreographed events.

In contrast to Australian literature, 401-k literature comes in many more shapes and sizes for interest and friendliness, and it is often produced in clusters. For example, posters and brochures may be dis-tributed at the workplace while postcards are sent to the home, and they are all designed to work together and around a common theme.

Estimates of how much the education and communication packages in the US cost vary widely. Once upon a time that cost used to be about US$4 per employee per year, but now, according to Doherty, the rule of thumb is US$15-$20 in the year of enrolment and conversion and US$3.50-$5 a year per person thereafter with special campaigns cost-ing $60 or more.

Costs, however, depend on the size of the workforce. A large employer such as Walmart with 500,000 staff spends about US$2-$3 per employee each year.

"Increasingly, the education and communication service in this busi-ness uses consumer marketing techniques and treats the employers 401-k plan like a branded product. In doing this, however, asset managers are realising that in building the employers 401-k brands, they have-n't built their own," Doherty says.

The current operations in US education and communication can be summed up with, "We sell to institutions, but we service individu-als". In other words, 401-k education and communication is a hybrid business, drawing on the institutional and retail aspects of asset management.

Doherty says a key difference to the retail market is the way that its materials are focused on reaching the underlying audience and achieving objectives, tailored to the employer's culture and require-ments, and measured to quantify their impact on employee behaviour and plan performance.

The customer is also different. The typical retail customer, for ex-ample, is a 55-year-old, white male with a US$100,000-plus income and US$250,000 invested in