A New Source for Retirement Advice: Your Employer

If you’re in a position to start saving for your future, then you need to understand some common financial terms like money market funds, debt securities, target-date funds, and 401(k)’s. But if these words are a bit unfamiliar, it can be challenging to start the savings process.

The good news is that your employer might be able to help because a rule change by the U.S. Department of Labor (DOL) will soon let companies give workers advice about how to invest in employer-sponsored retirement plans.

How Employers Help You Save for Retirement

Before we get too far into what this new rule means, let’s discuss how your employer might be able to help you save for retirement.

Depending on the company, some employers offer 401(k)’s or other employer-sponsored retirement plans as a tool to help employees save for their futures. Workers specify an amount of their salary to be withheld each pay period. Those funds are then directed to an investment account managed by a third party with the goal of growing in value over time.

There are two major benefits to participating in a 401(k) plan. First, employees aren’t taxed on earnings directed toward their account until the money is used in retirement. Workers can begin withdrawing money from their plans after reaching the age of 59 1/2 years. Second, some employers match a portion of the money employees allocate to their plans, thereby boosting an individual’s savings even further.

Why the Rule Change?

To make sure employees take full advantage of these benefits, the DOL is letting employers take a more active role in their employees’ retirement planning. According to the new ruling, companies that offer 401(k)s or other employer-sponsored retirement plans can start giving their employees advice about how to invest their money for transactions occurring on or after December 27, 2011.

Previously, employers could only inform workers about their plan options. They couldn’t suggest specific funds or investment types. Employees had to go to a third-party investment advisor for questions of that nature.

Under the new rule, employers can help workers manage their individual retirement assets based on their particular situation and goals. This change should help demystify retirement plans, ensuring that employees can access the information they need to make better decisions about their money. Without such advice, the act of picking which funds to invest in may be no different than throwing darts at a dartboard.

So what sort of advice can you expect to receive? The DOL says the advice “must be given through the use of a computer model that is certified as unbiased by an independent expert or through an adviser compensated on a ‘level-fee’ basis, meaning that the fees do not vary based on investments selected.”

This ensures that the company can’t push investment types that would benefit it, but not you, and that it must tell you what fees it pays to the adviser hired to guide you.

Will Employees Take Advantage?

Despite the rule change, early indications suggest that even when offered advice, workers don’t always seek it. A recent Wall Street Journal article reported, “Only about a quarter of the people who have access to advice through their retirement plans actually take advantage of it ... And most of those who do use advisory services neglect to provide the personal details that would make the advice more valuable.”

This suggests that even with the new DOL ruling, working Americans may not get any closer to better preparing for their futures.

The bottom line is this. If your employer offers counseling sessions and qualified, unbiased advice about its retirement plan options, invest the time to learn about it. Explore all possible options to start saving, especially if your employer is willing to contribute toward your savings too. 

Before your meeting, do a little homework on your own. The DOL’s online report, “Taking the Mystery Out of Retirement Planning,” provides good background.

If your employer doesn’t offer a 401(k) plan, stop in at your local bank to learn about options that may be available to you. The important thing is that you start planning for your future, today.

Retirement may not be in your immediate future, but by the time it nears, you’ll be glad you planned for it now. 

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