But the extent to which employees are not investing at all because of fear of some outcome, this risk assessment process could help them begin to invest, even at a modest level. Employees may benefit from seeing this in terms of risk capacity versus risk tolerance. While they may be intolerant to taking risks, they may have the capacity to do so, based on various factors.
As we wrote about in our article “What’s New in Investment Monitoring and Risk Management?”, investment monitoring and risk management are similar concepts. We defined it there as “a kind of risk management for financial accounts and investment strategies. It blends traditional accounting oversight skills, like tax analysis, with other compliance skills, like risk assessment.” Just like risk management, investment monitoring seeks trends to prevent negative outcomes, rather than manage crises.
And risk is a major reason why younger employees aren’t investing in 401(k) plans. According to a new poll from Gallup, the percentage of adults younger than 35 with money in the stock market in 2017 and 2018 stands at 37%, down from 52% for people in that age range in the two years (2006-07) leading up to the crash. And overall, according to Forbes, “a different Gallup poll showed only 54% of Americans invest in the stock market, down from 62% in 2008.” In other words, many employees may find the stock market too risky. If risk is an issue, why not explain risk management using the same tools your company uses?
Your company probably analyzes risks and coordinates reduction in potential future adverse events through its risk management plan. In doing so, it sets up an audit of policies and processes of its own operations. It also looks to its industry as a whole, not only to benchmark, but to see trends effecting smaller and bigger companies. That risk management plan also looks to potential new regulations or legal battles, including changes in international regulations. The key in a risk management plan is to focus on your own company’s specific risks: there’s no need for a trucking company to get hyper granular about changes to state laws on jury awards for malpractice, just like there’s no need for a doctor’s office to get into the weeds on changes to NAFTA.
These same elements translate into ways employees might be able to understand risk. Just like companies can’t use cookie cutter risk assessments, neither can employees. Assessing risk tolerance based on age alone will miss essential elements of risk tolerance. Culture and economic trauma (living in a period of high economic stress for along period of time) can play a role as well.
If your current financial advisory team doesn’t provide information for employees to assess their own risk tolerance, you may find that providing links to an online tool for those employees to be helpful. The internet is full of examples of online risk assessment tools, so make sure your employees choose one that is robust enough.
Once your employees know their risk tolerance, they may be better able to move into risk assessments. Understanding how your own company determines potential risks can help employees determine their own known unknowns. Sharing the risk identification tools your company uses can also be helpful. This can include heat mapping and trend monitoring, among other topics. One method includes looking at past incidents, potential for reoccurrence, the potential solution or treatment, and costs for each risk. For example, employees who worry about a spouse losing their employment, this process can help the employee understand what amount they may need in savings versus retirement. For many, they may find this amount to be higher or lower than they anticipated. But the extent to which employees are not investing at all because they fear their spouse may lose their employment, this risk assessment process could help some begin to invest, even at a modest level. Employees may benefit from seeing this in terms of risk capacity versus risk tolerance. While they may be intolerant to taking risks, they may have the capacity to do so, based on income, savings or other factors.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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