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This report was produced by the ERISA Advisory
Council’s Working Group on Financial Literacy of Plan Participants and the Role of the Employer. The
ERISA Advisory Council was created by ERISA to provide advice to the
Secretary of Labor. The contents of this report do not represent the
position of the Department of Labor (DOL). |
The 2007 ERISA Advisory Council
formed a Working Group on Financial Literacy of Plan Participants
(hereinafter referred to as the “Working Group”) to study numerous
issues in increasing the financial decision-making skills of plan
participants. The desired result of the Working Group was to discover and
present matters that would enhance the ability of plan participants to
manage assets throughout their financial life cycle.
Testimony to the Working Group was provided on July 10,
2007 and September 19, 2007 by 13 speakers, representing educators,
investment management, organizations that represented multi-stakeholders,
lawyers/consultants, and the federal government. After careful debate and
analysis of the issues and transcripts, the Working Group submits the
following recommendations to the Secretary of Labor for consideration:
Recommendation 1: Make Best practices Available to
Plan Sponsors - For plan sponsors who wish to craft their own program,
a best practices grid would point to the core literacy skills needed for a
successful retirement. The Working Group recommends that the Department of
Labor determine and publish best practices for the plan sponsor and
fiduciaries to consider for use in educating plan participants with a
focus toward increasing financial literacy.
Recommendation 2: Draw Attention to Publications
Already in Existence - For plan sponsors who wish to incorporate
generic material to accomplish literacy, heightened awareness of existing
material is needed. The Working Group recommends that the Department of
Labor publish and continue to publish information which provides
information regarding the unique needs and requirements for managing
finances in retirement.
Recommendation 3: Update, Expand, and Amend 96-1 - The
Working Group recommends that the Department of Labor expand the reach of
IB 96-1 by changing and updating it. As innovation continues in the
financial marketplace, educational initiatives will need to address items
heretofore not necessarily addressed in 96-1. 96-1 needs to address
information, education, and advice in the de-accumulation stage as well as
the accumulation phase. Further, as innovation continues in this area,
96-1 needs to be continually updated.
Recommendation 4: Coordinate and Bring Together
Government Agencies, Private Sector, and the Academic World - The
Working Group recommends that the Department of Labor initiate, engage and
facilitate interaction with regulatory agencies, self-regulatory
organizations, industry trade groups and academic institutions like
Financial Industry Regulatory Authority, Investment Company Institute,
National Association of Insurance Commissioners, IRS, SEC, Health and
Human Services Department, Department of Education for the purpose of
creating “partnerships” of common understanding, materials and
resources that employers, plan sponsors and fiduciaries can draw upon to
increase financial literacy of employees and plan participants.
Recommendation 5: Encourage and Allow the Use of
Income Replacement Formulas and Final Pay Multiples - The Working
Group recommends that the Department of Labor encourage, allow and
facilitate plan communications that use retirement income replacement
formulas and final pay multiples in employee benefit statements on a
personal participant basis. Plan communications should encourage
participants to have a numerical goal, whether as a result of a
sophisticated or elementary formula, and repeat that message. At the very
least, participants should be able to determine and have access to an
estimated plan account balance necessary for retirement.
Respectfully Submitted,
Richard Landsberg, Chair
Trisha Brambley, Vice-Chair
Robert Archer
Edward Schwartz
Dennis Simmons
Elizabeth Dill
Randy DeFrehn
Stephen McCaffrey
Willow Prall
Kathryn Kennedy
Christopher Rouse
Edward Mollahan
Richard Helmreich
James McCool, ex officio
William Scogland, ex officio
The Working Group on Financial Literacy of Plan
Participants undertook several issues for study. The balance of this
report will address the scope of the Working Group, the questions for
witnesses, dates of testimony and list of witnesses, current environment
for the issues of inquiry, consensus recommendations to the Secretary of
Labor and summary of testimony from the witnesses.
The working group is undertaking this topic to discern
standards and make recommendations that the Secretary of Labor can
deliberate upon and take action as the Secretary deems appropriate. The
study concerning financial literacy of participants and the role of the
employer (“financial literacy”) will focus upon initiatives, programs
and education that will develop skills for participants to make informed
decisions and take action to maintain and improve financial well-being in
retirement. The scope of the study will be to see how plan sponsors and
vendors may be able to assist plan participants with financial literacy in
all aspects of retirement asset management beyond accumulation and
management of self-directed accounts. The goal of the study is to assess
and recommend ideas, methods and programs to enhance financial literacy of
plan participants. The desired results of the study undertaken is a
Determination of whether:
-
New skills development for participants is
necessary to attain new competencies for effective personal financial
management
-
Advice and education can be provided/sponsored by
the employer that provides accurate, unbiased information for effective
participant decision making
-
Programs and methodologies can be implemented to
enhance financial literacy of plan participants without undue burden or
regulation accreting to the employer/plan sponsor.
-
Does the plan sponsor have any responsibility to
educate the participants about their decisions at retirement?
-
Are programs in place now adequate for sound
decision making? Why or why not?
-
Should the plan sponsor receive any incentives to
provide this education? What would be a sufficient incentive?
-
What specific message should participants receive at
retirement? What are the preferred ways to deliver the message?
-
In addition to management of retirement savings,
what are the three main financial issues facing retirees? Are there
regulatory hurdles? If so, what do you recommend to aid retirees without
undue cost and burden to the employer?
-
What potential disruptions to retirement income
stability exist for retirees?
-
Inherent within “advice” provided to
participants is the specter of fiduciary responsibility. Can
“education” be provided without fiduciary responsibility and still
deliver effective information for retirement decision-making regarding
personal finances and health care?
-
Should the prohibited transaction exemption provided
for investment advice contained within the Pension Protection Act of 2006
be expanded to allow for other forms of financial advice, e.g. insurance,
health care choices? If so, what safeguards would you recommend for
satisfactory regulatory oversight of such and expanded PTE?
The scope of inquiry for the Working Group and the
attendant questions were given to all of the witnesses in advance of
testimony. The witnesses were told that the questions were merely a
starting point to generate thought and discussion of the scope of the
Working Group. The questions were not intended to limit the parameters of
testimony.
The Working Group solicited testimony of witnesses from
a broad cross-section of the qualified retirement plan industry and
financial educators and vendors. The witnesses did not answer every
question and in many instances, there was not enough information presented
to form a consensus as to every inquiry by the Working Group. The
witnesses and the dates of their testimony were as follows:
July 10, 2007
-
Melissa Kahn, Metropolitan Life Insurance Company,
testifying on behalf of the American Benefits Council
-
Sharon Burns, Executive Director, Association for
Financial Counseling & Planning Education
-
Spencer Williams, Rollover Systems
-
Annamaria Lusardi, Dartmouth College
-
Ted Benna, Malvern Benefits, Malvern Pennsylvania
September 19, 2007
-
Robert Doyle, Department of Labor
-
James Danaher, Aon Consulting
-
Jane White, Retirement Solutions Foundation
-
Dallas Salisbury, Employee Benefit Research
Institute
-
Liz Davidson, Financial Finesse, Inc.
-
Mary Swanson, Life Insurance Marketing and Research
Association
-
Anna Rappaport, Rappaport Consulting
-
Dorann Cafaro, The Cafaro Group
The visibility of financial literacy as a major
national issue has increased significantly during the last decade.
Televisions and radio programs, as well as Web sites, books, magazines,
and newspaper columns are devoted to it. Financial literacy has been the
subject of extensive Congressional testimony, and has been mentioned in
both state and federal legislation. For example, financial literacy was
addressed in the Savings are Vital to Everyone’s Retirement (SAVER) Act
of 1997, which mandated a series of national summits on the topic, and the
No Child Left Behind Act of 2001, which formally recognized the importance
of financial education in schools. In addition, financial literacy is the
object of countless programs, meetings, projects, classes and seminars.
And yet, consider these facts:
-
In 2001, an AARP survey of older baby boomers (age
51-59) showed that nearly 40% were not confident about a secure retirement
-
The United States reportedly has the lowest
individual savings rate in the industrialized world
-
From 1990 to 2000, the rate of personal bankruptcy
in the United States rose by 69%. It appears that this trend will continue
supported by recent statistics showing a 19.2% increase between 2000 and
2001.
-
High school seniors taking part in a 2002 national
survey of financial knowledge sponsored by the Jump$tart Coalition for
Personal Finance scored an average of 50.2% - a failing grade. Scores have
been declining since the first survey was administered in 1997
Most important to this Working Group, and at the core
of its undertaking, are the fundamental changes in the economic system,
most notably in retirement funding. In just two decades, the norm has
shifted from defined benefit plans (pensions), provided and managed by
employers, to defined contribution plans – 401(k) and 403(b) accounts
– managed and funded primarily by individual employees. Individual
Retirement Accounts (IRAs) enable some Americans to independently set
aside money for retirement, tax free, every year and invest it as they see
fit within the terms of the law. The same freedoms and the same
responsibilities apply to other new retirement options. However, according
to the Retirement Confidence Surveys (“RCS”), Americans are not
handling the responsibility well. Survey results show an ongoing,
continuation of a trend in that fewer workers are planning and saving for
retirement than in the past. In addition, the number of people who said
they had calculated the amount of money they need to save for retirement
has steadily declined as well.
The RCS also shows that younger Americans, between the
ages of 20 and 39 are more likely than older workers to believe private
savings and investments will provide the largest share of their retirement
income. Meanwhile adults between 40 and age 60 still largely expect to
rely heavily upon Social Security. Although the survey results bode well
for the standards of young American workers, they reinforce the need for
financial education to ensure wise investment and financial management
decisions.
The aging of America is also a major factor for
consideration in any discussion about financial literacy. With an increase
in life span comes a corresponding need for an extended income stream.
This, at a time when the traditional “three-legged stool” of pensions,
savings and Social Security is dangerously wobbly. The latest Wealth Span
Model shows that Americans now devote fewer years to accumulating wealth
and more years to spending it. The model compares the life-long spending
and saving patterns of Americans from 1930 to 2000. The model shows that
in 1930, Americans began accumulating wealth at about age 20 and continued
to do so into their 60s. In the last 10 years of the 20th century, wealth
accumulation began after the age of 25 and ceased before age 65. In the
1930 scenario, Americans generally spent a maximum of 20 years in
retirement; at the turn of the century, retirement was expected to last up
to 35 years.
As employers have shifted from offering employer-driven
defined benefit retirement plans to employee-directed defined contribution
plans, many individuals have of necessity assumed greater responsibility
for planning for their financial needs in retirement. Many employers have
instituted training seminars to help employees assess their needs and
evaluate their options for the future.
A study by Fannie Mae entitled Personal Finance and the
Rush to Competence found that employers most often initiated financial
education for reasons associated with their 401(k) programs – to
increase participation and contribution levels, to comply with related
regulations and to avoid potential liability for investment losses. The
study profiled programs on long-term financial and retirement planning at
Weyerhaeuser Company and United Parcel Service. Both programs are strongly
supported by management and offered at regular intervals. The programs
consist of one or two day workshops tailored to specific age groups.
Employees receive extensive resource materials, including workbooks that
incorporate explanations of the companies’ benefits in the context of
broader financial planning strategies. The Weyerhaeuser program takes a
‘holistic’ approach covering nonfinancial topics such as health and
quality of life in the workshops. The UPS program augments written
resource materials with a web-based service to help employees develop a
personal financial action plan and computer software to provide
information on such topics as budgeting, managing debt, saving, insurance
and wills.
Employee response to workplace financial education
programs and the results of studies of the influence of such training on
employee financial behavior have generally been favorable. One study found
that employees who attended training workshops subsequently increased
their participation in 401(k) plans (Kim, Kratzer and Leech, 2001).
Another study drew a similar conclusion, with more than half of those
participating in counseling sessions and workshops changing at least one
financial behavior (Kim and Horgarth, 2001). In a study evaluating the
effectiveness of financial education offered by a company, 75% of
employees reported deriving a sense of benefit from work-place sponsored
training; they believed that they had made better financial decisions
after attending the workshop and were overall more confident in making
investment decisions (Garman, Kim, Kratzer, Brunson, 1999). Other
researchers have conducted telephone surveys of a national sample of
individuals aged 30 to 48 to examine the effects of employer based
financial education on savings – both in general and for retirement.
Retirement accumulation, by all measures was found to be significantly
higher for respondents whose employers offered financial education. In
addition, rates of participation in 401(k) plans for both respondents and
spouses were higher in the presence of employer-sponsored financial
education. The study found a significant relationship between financial
education and the rate of total saving; however, there was essentially no
relationship between financial education and total wealth accumulation (Bernheim
and Garret, 2002).
Overall, evidence concerning the benefits of financial
training is consistent with conventional wisdom, i.e. financial education
can result in more-informed individuals who make better investment and
financial decisions. It is important to note, that when it comes to
specifics, many challenges remain in identifying the most effective and
most efficient means of providing relevant information to educate
individuals at appropriate points in their financial life cycle.
The challenges for policymakers, plan sponsors and
educators in designing, delivering and measuring financial literacy
assistance to meet the needs of all groups within the population are many.
However, the elements that must be considered can be defined by asking
“who, what, where, when and how.”
-
‘Who’ is the targeted audience?
-
“What’ does the audience need to know to assess
personal circumstances, identify future goals and implement behaviors
consistent with those goals?
-
‘Where’ should financial literacy be delivered
to reach the broadest audience with effect?
-
‘When’ is the appropriate time to expose
individual plan participants to both general and specific information
about financial issues and options?
-
‘How’ can financial education be delivered both
at specific points in time and over the long-term to assist plan
participants in adjusting their financial plan to suit their needs?
-
‘How’ can the effectiveness and impact of
financial literacy programs be measured?
Introduction
The Working Group posited a number of questions to
witnesses regarding how to improve financial decision making and increase
financial literacy of plan participants. Our consensus recommendations do
not ask for a change to any, or new statute, regulation, interpretive
bulletin, notice or opinion. Instead, the Working Group would like the
Department of Labor to create a publication to stress ‘best practices’
in the execution of providing financial literacy training to retirement
plan participants. In addition, the Working Group would like the
Department of Labor to continue to publish its educational
magazines/pamphlets addressing financial needs analysis and financial
decision making. Likewise, the Working Group believes that increased
competition, technology and general innovation of the financial
marketplace necessitates a constant vigilance regarding IB 96-1 and its
delineations between and among information, education and advice as new
products, strategies and techniques are developed requiring new choices
and decisions of plan participants. The Working Group believes that a
common platform of thought leadership regarding financial literacy as a
result of interaction between public and private regulators and trade
groups is necessary to the formulation, dissemination and acceptance of
financial literacy training. Finally, the Working Group recommends that
retirement income replacement measurements be allowed for use on a per
participant basis and as often in the different plan communication
disclosures.
The Working Group recognizes that the Department of
Labor has the ability to influence plan sponsors short of formally
changing the written law. The Working Group believes that plan sponsors
need more education relating to ‘best practices’ of assisting
employees/plan participants with obtaining and increasing financial
literacy. The Working Group has found that all the pieces of effective
regulation are already in place. The Working Group has also found that
what seems to be lacking is a commonality to approach and content.
The Working Group found that from the literature on the
subject and the testimony of its witnesses, the findings of studies of the
effectiveness of financial literacy training have been mixed. While the
Working Group found that some literacy education initiatives have discrete
objectives (like reduction of debt or increasing savings in
employer-sponsored benefit plans) and show limited success to those
objectives - improved financial behavior does not necessarily follow from
increased financial information.
The Working Group submits its recommendations on the
basis that financial literacy training is an undertaking in its infancy
and that it must be nurtured in order to flourish in the next century and
beyond.
Recommendation 1: Make Best Practices Available to
Plan Sponsors - Financial Literacy as a topic could encompass ‘all
things attendant to personal finance.’ The Working Group has attempted
to limit is recommendation to retirement plan economics, i.e. what
employees and plan participants should be educated on and about with
regard to properly managing investments and streams of income.
Necessarily, there some items that cannot be considered tangible
retirement finance. The Working Group would like to see those items
addressed in the publication on ‘best practices.’ The reason is that
those non-plan account balance issues are substantially important as to be
properly incident to retirement plans and retirement decision making.
From testimony and the literature the Working Group has
come to realize that financial literacy and improved financial decision
making can be delivered and is dependent upon three different variables
– timing, content and media. Accounting for all the variables associated
with financial literacy training, i.e. ‘when,’ ‘how,’ and
‘where’ it is delivered, ‘who’ is trained and ‘what’
information is presented poses the great issues and challenges to program
developers. For example, regarding medium of delivery all witnesses agreed
that face-to-face financial counseling works best. Some believe telephone
counseling is successful and some believe it isn’t and still others
believe telephone counseling with the same ‘telephone counselor’ each
time a plan participant calls is sufficient and successful. As to timing
of the message, all witnesses agree (and the literature as well) that
several meetings and several counseling sessions over a lifetime of works
best in terms of modifying behavior and learning financial topics.
The Working Group heard in a unanimous chorus from its
witnesses that financial literacy is predicated upon the financial basics
– time value of money, asset allocation, knowledge of taxation, risk
management. To this end, the Working Group believes that the following
matrix offered by Dr. Sharon Burns of the Association for Financial
Counseling Planning Education best addresses retirement plan ‘basics’
in decision making and can serve as the minimalist model for best
practices in terms of content for a financial literacy education and
training program. Knowledge, Decision Points and Skills Necessary are in
grid form appealing to the visual. For those plan sponsors who want to
craft their own program, the following grid represents needed conceptual
understanding and decision points that could be incorporated into a Best
practices retirement readiness/literacy program.
Table 1 – Knowledge and Skill Competencies |
Topic |
Decision Points |
Knowledge |
Skills |
Retirement |
Can I afford to retire? |
Monthly and annual expenses
Realistic return on investments
Taxation rules for various income types (more detail later) |
Monthly budgeting
Prepare a net worth statement
Control spending
Eliminate debt
Pay off mortgage |
Social Security |
When should I begin to take Social Security?
What happens to my benefit at death of a spouse? |
Benefit levels at various ages
Estimate life expectancy
Benefits for surviving spouse |
Adjust spending or portfolio withdrawals |
Defined Benefit Plans |
Which distribution option to take? |
Estimate life expectancies of both spouses
Understand tax ramifications of distribution options |
Compare budgets with various options
Calculate risk to surviving spouse
Manage investment portfolio, if lump sum distribution is chosen |
Defined Contribution Plans |
Should I rollover account or leave with company?
When and how do I begin withdrawals?
How do I calculate the minimum withdrawal?
How can I minimize income taxes on withdrawal?
How do I transfer account to beneficiaries? |
Advantages and disadvantages to each option
Taxation issues if withdrawal is being considered
Required Beginning Date rules
Minimum Required Distribution rules
Taking the minimum distribution required will minimize taxes
Understand estate planning basics and beneficiary options |
Portfolio management
Accessing and completing forms
Calculate the Minimum Required Distribution
Determine personal marginal tax rate
Complete a beneficiary form |
Private Savings and Investments |
Where do I invest these funds?
When should I use these funds?
How can I minimize income taxes on withdrawal?
How do I transfer to beneficiaries? |
Basics of savings and investment vehicles including cash equivalents, stocks, bonds, mutual funds
Taxation of interest, dividends and capital gains.
Timing of investment sales and cash equivalent liquidation.
Understand estate planning basics and beneficiary options |
Portfolio allocation, diversification
Complete account applications
Interpret financial institution statements
Calculate capital gain and/or loss
Calculate taxes due upon sale of liquidation.
Complete a beneficiary or transfer-on-death form |
Work |
Should I work? |
Interaction with Social Security benefits |
Assess net income from working |
|
|
Table 2 – Type of Assistance and Delivery Channels
Based on Decision Points |
Topic |
Decision Points |
Assistance Type |
Delivery Channel |
Retirement |
Can I afford to retire? |
One-to-one
counseling |
On-site Telephone supplemented with email follow-up |
Social Security |
When should I begin to take Social
Security?
What happens to my benefit at death of a spouse? |
One-to-one counseling
Printed material |
On-site Telephone supplemented with email follow-up
Internet information |
Defined Benefit Plans |
Which distribution option to
take? |
One-to-one counseling and printed material |
On-site Telephone supplemented with email follow-up
Internet information |
Defined Contribution Plans |
Should I rollover account or
leave with company?
When and how do I begin withdrawals?
How do I calculate
the minimum withdrawal?
How can I minimize income taxes on withdrawal?
How
do I transfer account to beneficiaries? |
Printed materials or group
education
Printed materials or group education
Printed materials or group education
Printed materials or group education
One-to-one counseling or
group education |
On-site Internet
On-site Internet
On-site Internet
On-site Internet
On-site Telephone Internet |
Private Savings and Investments |
Where do I invest these
funds?
When should I use these funds?
How can I minimize income taxes on withdrawal?
How do I transfer to beneficiaries? |
One-to-one counseling or
group education
One-to-one counseling or group education
Printed materials
or group education
One-to-one counseling or group education |
On-site Telephone Internet
On-site Telephone Internet
On-site Internet
On-site Telephone Internet |
Work |
Should I work? |
One-to-one counseling or group
education |
On-site Telephone Internet |
|
Recommendation 2 – Draw Attention to Publications
Already in Existence - For plan sponsors who want to make more information
available, they need to know where to go to get information that already
exists. The DOL has provided publications that assist in identifying needs
and assisting in locating resources to gain additional information and
knowledge in addition to the publication itself. “Savings Fitness: A
Guide to Your Money and Financial Future”, “Taking The Mystery Out of
Retirement Planning” and “What You Should Know About Your
Retirement” are tools that were made available to the Council for
review. We find these tools to be able to meet their stated purpose. That
is to say, they serve as a framework for analysis and decision making by
participants.
The Working Group recommends that the publication of
these types of information tools continue and that Field Offices be
encouraged to disseminate this material to employers and plan sponsors.
This recommendation is relatively important for those employers that
don’t want to create their own literacy program described in
Recommendation #1 but want to at least point employees in the direction of
information on financial topics.
It is critical that the Department of Labor make bolder
attempts to reach larger audiences with its publications. The Working
Group in hearing testimony from its witnesses found that financial
literacy is a critical variable in explaining variations in participant
saving behavior and that ‘trust’ plays an essential role in financial
decision making. Employers and the federal government have a ‘trust’
factor with plan participants as it relates to these issues that don’t
exist with other financial institutions or professionals.
Likewise, the Working Group believes that these tools
are excellent starting points, in addition to plan information and DOL
studies, for engagement with other entities in the private-public
partnership described in Recommendation number 4.
Recommendation 3 – Update, Expand, and Amend 96-1
- The Working Group believes that retirement and
distribution options are effectively communicated to retiring and
withdrawing participants in terms of timing, media and content. However,
the Working Group heard from all witnesses that there is an “information
gap” that exists between the participants receiving qualified plan
distributions and plan sponsors. Specifically, the Working Group finds
plan participants are not afforded decision making tools that effectively
facilitate individual management of retirement plan assets. Finally, the
Working Group believes that the reason for the information gap is
primarily the confusion that exists at the plan sponsor level concerning
the applicability of fiduciary liability for tools or information provided
to assist plan participants on plan distributions.
The Working Group believes that neither the DOL nor
employers need provide any new brochures, worksheets, or pamphlets etc.
for participants. Instead, the Working Group suggests that regularly
scheduled, constant vigilance of marketplace innovation be reflected in
possible future regulatory relief and clarity being afforded in follow-up
pronouncements to Interpretive Bulletin 96-1 pertaining to retirement
income planning, keeping that Bulletin timely and relevant.
The Working Group heard in witness testimony that
numerous factors have led to a complex, specialized financial services
marketplace that requires plan participants to be actively engaged if they
are to manage their finances effectively. The forces of market technology
and market innovation, driven by increased competition, have resulted in a
sophisticated industry in which plan participants are offered a broad
spectrum of services by a wide array of vendors. Compelling regulatory
issues such as predatory marketing and suitability of products have also
added to a sense of urgency regarding financial literacy in a
‘participant-directed’ world.
The “safe harbors” of IB 96-1 are accumulation
tools. Safe harbor treatment applies regardless of who provides the
information, how often it is shared, the form in which it is provided
(e.g. writing, telephone, internet, software, video or in a group or
one-on-one) or whether an identified category of information and materials
is furnished alone or in combination with other identified categories of
information and materials.
In Interpretive Bulletin 96-1, the DOL pointed out that
information and materials described in the four graduated safe harbors
detailed within the bulletin merely represented examples of the type of
information and materials that may be furnished to participants without
such information and materials constituting “investment advice” for
purposes of the definition of “fiduciary” under ERISA Sec. 3(21)(A)(ii).
The first of the safe harbors under 96-1 states that
providing information and materials that inform a participant or
beneficiary about the benefits of plan participation, the benefits of
increasing plan contributions, the impact of pre-retirement withdrawals on
retirement income, the terms of the plan, or the operation of the plan
that are made without reference to the appropriateness of any individual
investment option for a participant or beneficiary will not be considered
the rendering of investment advice.
The second safe harbor of 96-1 states that general
financial and investment concepts such as risk and return,
diversification, dollar cost averaging, compounded return and tax deferred
investing, historical rates of return between asset classes based on
standard market indices, effects of inflation, estimating future
retirement needs, determining investment time horizons, risk tolerance,
provided that the information has no direct relationship to investment
alternatives available under the plan.
The third safe harbor of 96-1 allows asset allocation
information to be made available to all participants and beneficiaries -
providing participants with models of asset allocation portfolios of
hypothetical individuals with different time horizons and risk profiles.
These models must be based on accepted investment theories and all
material facts and assumptions on which the models are based must be
specified, and disclosures are mandated.
The fourth safe harbor of 96-1 allows interactive
investment materials such as questionnaires, worksheets, software and
similar materials that provide participants a means of estimating future
retirement income needs, provided that requirements similar to those for
asset allocation (above) are met.
Further, in IB 96-1, the DOL stated that there may be
many other examples of information, materials and education services
which, if furnished to participants would not constitute the provision of
investment advice. Accordingly, the DOL advises no inferences should be
drawn from the four graduated safe harbors with respect to whether the
furnishing of information, materials or educational services not described
therein could constitute the provision of investment advice. The DOL
cautions that the determination as to whether the provision of any
information, materials or educational services not described in 96-1
constitutes the rendering of investment advice must be made by reference
to the criteria of Labor Reg. Sec. 2510.3-21(c)(1). That regulation
establishes the criteria for deeming the rendering of investment advice to
an employee benefit plan. Specifically, investment advice is rendered
where recommendations are provide as to the advisability of investing in
particular vehicles and whether the person has indirect or direct
discretion to implement such advice. The Working Group believes that as
the Baby Boom Generation moves on into the de-cumulation phase, i.e. asset
accumulation demographically shifting toward income planning – IB 96-1
will need to be amended, updated and expanded in order to stay relevant
within the regulatory construct viz a viz the innovative marketplace. By
way of example, while ‘retirement calculators’ are ‘educational’
under 96-1, it should be contemplated and communicated that regulatory
relief extend to advising plan participants concerning mandatory 20% tax
withholding, early withdrawal 10% tax, guaranteed income for life,
outliving income stream et. al.
The Working Group believes that the recommendations for
clarity and relief are applicable not only to single-employer plans, but
also to multiemployer plans.
Recommendation 4 – Coordinate and Bring Together
Government Agencies, Private Sector, and the Academic World - Department of Labor, Securities Exchange Commission,
Department of the Treasury, Administration on Aging, Federal Deposit
Insurance Corporation, Department of Education, Federal Reserve Board,
Federal Trade Commission are just a few of the federal agencies that deal
with retirement savings, living in retirement and retirement in
general…..The Securities Industry Association, American Bankers
Association, Investment Company Institute, American Council on Life
Insurance, Employee Benefit Research Institute, American Benefits Council,
American Society of Pension Professionals and Actuaries, LIMRA, and The
International Foundation of Employee Benefit Plans are all industry trade
organizations concerned with plan participant financial
literacy….Financial Institutions National Regulatory Association and the
National Association of Insurance Commissioners are self-regulatory
organizations that are concerned with plan participant financial literacy.
Major universities have whole curriculums devoted to financial planning
and education.
Efforts to improve the quality and increase the amount
of useful information provided to plan participants have been in place by
the above organizations for many years. What is new is the proliferation
of programs. From the literature, the providers of financial literacy
programs include the military, state cooperative extension services,
community colleges, faith-based groups and community based organizations
in addition to employers in private industry et. al.
Overall, from the literature and the testimony of
witnesses to the Working Group, evidence concerning the benefits of
financial literacy training is consistent with conventional wisdom –
education can result in more-informed plan participants who make better
financial decisions while mitigating the financial catastrophic decision.
In an ideal world, financial literacy could be
customized to each plan participant’s learning needs and desires.
However, such an interaction would be so time consuming, costly and
resource intensive as to border on impossible. Therefore, by bringing
together the above mentioned regulatory, trade and self-regulatory
organizations on a regular basis for workshops is a first-step toward a
‘commonality of platform’ to analyze plan participant needs more
effectively and deliver pertinent information more effectively. Trade
organizations and self-regulatory organizations have the pulse of the
marketplace. They are close to the day-to-day innovation that is taking
place within our dynamic economy. Who better to speak on banking products
and communicating advantages and disadvantages within regulatory
boundaries than the FDIC and the Federal Reserve? The American Bankers
Association could bring potential needs and problems to attention.
Likewise with the SEC, ICI and SIA. Ditto for the Department of Labor,
ASPPA and IFEBP. The NAIC and ACLI could frame the best methods for
communicating regarding insurance and annuities.
In summary, the Working Group heard testimony and
reviewed literature of disjointed groups. Given the resources now devoted
to financial literacy training, a formal ‘commonality of platform’
that brings together government, regulation and the marketplace provides
an opportune time to evaluate research, continue to identify best
practices and consider public policy options that would further the goal
of creating more financially savvy and literate plan participants.
The Working Group recommends that to the extent
possible, the Department of Labor should initiate dialogue with other
agencies to create formal meetings of experts for the purpose of producing
an ongoing, dialogue that provides a “common platform” for
dissemination of workable solutions in all areas of financial literacy for
eventual use by the public.
Recommendation 5 – Encourage and Allow the Use of
Income Replacement Formulas and Final Pay Multiples - Lack of plan knowledge and lack of financial knowledge
were put forth by all witnesses as the main contributor toward
non-participation in employer-sponsored retirement plans. Our academic
witnesses all theorized (with support for their positions) that as people
become better educated and gain more financial experience, they become
more sophisticated in their financial behaviors. Every witness asserted
that lower levels of financial literacy resulted in those participants
being less likely to engage in positive financial behaviors, i.e.
budgeting, using debt wisely, saving in and out of employer sponsored
plans.
From a ‘behavioral perspective’ witnesses that
chose to address this issue stated that choice overload (i.e. too many
fund choices) discouraged participation or enhanced procrastination.
Procrastination also manifests itself because individual participants are
predictably irrational when it comes to money matters.
The modern 401(k) plan is a participant active
experience. What the Working Group heard time and again from its witnesses
and it is confirmed in the literature as well - is that regardless of
whether someone is making elective deferrals to the maximum allowed by law
or whether someone is procrastinating from participation….both have
absolutely no idea how much money will be required to provide an income
stream at retirement without a significant change from their current
standard of living.
Consequently, the Working Group recommends that the
Department of Labor encourage, assist and facilitate the use of
‘retirement income replacement’ calculations and final pay multiples
on a per participant basis for inclusion in as many participant
disclosures as desired by a plan sponsor.
The Working Group recognizes with this recommendation
that the best strategy to tackle inertia from procrastination or to change
behavior is to sound the alarm to a plan participant that bad habits of
non-saving can be hazardous to that participant’s future.
There was a significant amount of testimony that was
presented to the Working Group that the following items are misunderstood
by participants and those planning for retirement: life expectancies,
investment returns and a host of other variables which must be taken into
consideration to arrive at the proper retirement income replacement
calculation. While these concepts are misunderstood by participants, they
are essential for proper retirement planning. From a minimalist
perspective, it is the view of the Working Group that a retirement age of
65 could be used, historical inflation rates could be used, historical 10
year rolling market averages could be used along with current contribution
rates to arrive at a plan accumulation number. Using IRS annuitization
rates, the replacement of final salary could be at least benchmarked.
It is further believed by the Working Group that this
number expressed in dollar amount and as a percentage of projected final
salary could be disclosed in participant disclosures such as the Summary
Annual Report, Summary Plan Description, Employee Benefit Statement, et
al.
The Working Group recognizes that under IB 96-1
retirement calculators are viewed generically and are viewed as
‘education’ and therefore not providing investment advice. The Working
Group recommends that ‘generic customization’ as described in the
preceding paragraphs still be viewed as educational in content.
Ms. Melissa Kahn, Vice President, Metropolitan Life
Insurance Company, New York, New York, testifying on behalf of the
American Benefits Council, Washington, D.C.
Ms. Kahn is a vice president at MetLife. She represents
the American Benefits Council as Chairperson of the Council’s Retirement
Income Task Force.
She opened her remarks by noting the strong trend from
defined benefit to defined contribution plans, which has made the issue of
financial literacy all the more important. She views financial literacy as
very broad in scope and all-encompassing as it relates to long-term
financial planning.
Any attempts to address the issue should start with
children. Basic fundamentals such as diversification and compound interest
should be taught at the elementary school level. This will require
coordination among different agencies as well as state and local
governments.
Most professional financial advisors estimate that 75%
or more of a worker’s current income will be needed annually in
retirement. However, a majority of workers indicate that they will need
less than 70% of income in retirement. Surveys indicate that most workers
underestimate how long they will live. Ms. Kahn finds much of the feedback
on employee surveys to be alarming and worrisome. She is surprised at
widespread ignorance, especially as it relates to survey questions about
longevity. Recent information generated and distributed by the Social
Security Administration has been helpful. She views such information flow
as a breakthrough, given the technological restraints of such government
entities.
She believes that employers should be protected against
fiduciary liability when providing financial literacy training, and that
professional advisors, even those affiliated with the plan administrator
or plan provider, should be allowed to provide financial education and
advice, as long as certain safeguards are in place to avoid conflict of
interest. Fiduciary liability protection for plan sponsors is critical;
otherwise, most plan sponsors will not take action to address the
financial literacy issue.
Educational programs should emphasize proper management
of financial assets, throughout all retirement years, and should not
merely focus on the accumulation phase. For too long, public policy has
been overly focused on the accumulation phase. Government should
specifically address topics such as long-term care, inflation risk and
longevity risk, in relation to the post-accumulation phase, as people draw
down their assets over their retirement years.
Government sources, like the DOL’s ERISA Advisory
Council, have performed meaningful work in this area, but more help is
needed. Government sources are viewed by the public as more objective than
private sector sources, Ms. Kahn believes. Coordination between public and
private sector sources is crucial, and such coordination must involve the
Department of Education and must address children at an early age.
Third party education via the internet is not being
widely used. People want one-on-one help from a person who they can trust.
Employees generally do not have the confidence to implement advice
provided to them via on-line tools.
Ms. Kahn’s colleague, Mr. Kent Mason, commented that
he sees no legal barriers that would prevent employers from addressing
financial literacy with their employees.
Dr. Sharon A. Burns, Executive Director, Association
for Financial Counseling & Planning Education, Columbus, Ohio
Dr. Burns is the Executive Director of the Association
for Financial Counseling & Planning Education, a national association
dedicated to assisting individuals and families achieve financial
stability.
Dr. Burns began her remarks by pointing out that a
large portion of the U.S. population is nearing retirement with inadequate
retirement plan funding. Dr. Burns offered her comments from the
perspective of a counselor advising a worker at or near retirement.
Dr. Burns testified on the information and skill needs
of retirees by providing the Advisory Council with a table displaying the
most popular questions her firm’s counselors hear from employees at the
point the employee encounters various retirement concerns (see Table 1
below). Dr. Burns pointed out that most of the decisions require a basic
understanding of the concepts of the time value of money and life
expectancy, skills that are easy to understand in principle but that
require an overwhelming level of math skills to arrive at a specific
answer. In this regard, Dr. Burns commented that she believed that a
standardized set of counseling and/or instructional materials would
benefit the retiring worker in making their decision.
Dr. Burns next provided a “wish list” of assistance
that would benefit the typical retiring worker. Her list included: (1) a
minimum of two one-to-one financial counseling sessions in the year prior
to and after the date of one’s retirement, with strong incentives for
participation by the retiree’s spouse; (2) mandatory one-to-one
counseling before: (i) taking a lump-sum withdrawal that will not be
rolled over, or (ii) electing a single-life annuity purchase from a plan;
(3) one set of standardized forms to simplify the process for taking
benefits from all plan types; (4) one standardized Frequently Asked
Questions document to answer most general questions; and (5) a list of
acceptable calculators meeting certain actuarial criteria set by the
Society of Actuaries (or similar organizations) to help retirees make
choices.
Dr. Burns next provided a list of important messages
that should be imparted to employees in the five years prior to and just
after retirement, including: (1) pay off your mortgage; (2) do not use
credit cards during retirement; (3) jump into retirement slowly; and (4)
maintain a diversified and balanced portfolio.
In terms of delivery of pre-retirement assistance, Dr.
Burns noted that to be successful, pre-retirement counseling must be
delivered “just-in-time,” when the employee needs to make a decision.
Various delivery methods should be considered and in this regard, Dr.
Burns supplied a chart that includes suggestions for delivery channels
that would be appropriate for various decision points (see Table 2 below).
Dr. Burns also recommended that employers should consider using
third-party experts who specialize in educational and counseling services.
Dr. Burns next shared her views on the roles and
responsibilities of the following entities:
-
Government – should lead the efforts to develop a
system for delivering retirement assistance to all, including publicizing
the availability of retirement assistance.
-
Employers – should recognize that they are
primarily responsible for helping employees transition successfully from
work to retirement. Specifically, employers would be responsible for
delivering information specific to internal retirement processes and
providing third-party resources for two optional one-hour, one-to-one
counseling sessions.
-
Independent professional associations – should be
appointed or requested by the government to set informational and
counseling standards.
-
Plan administrators and financial institutions –
should provide information and/or counseling through a set of standardized
retirement transaction forms.
-
Employees – should understand that they need to
take responsibility, including being responsible for obtaining one-to-one
counseling prior to: (i) taking a lump-sum withdrawal that will not be
rolled over, or (ii) choosing a single-life annuity.
Lastly, Dr. Burns concluded her testimony by noting
that because cost will inhibit the provision of some services, creative
solutions will be needed. In this regard, Dr. Burns identified the
following as potential solutions: (1) developing a counseling force of
retired professionals who can deliver assistance in a manner modeled after
the S.C.O.R.E. Program for small business owners; (2) assessing a small
“tax” on plan administrators and employers to support combining
financial programming materials into one standardized set; and (3)
employing one web site to house combined retirement resources.
Table 1 – Knowledge and Skill Competencies |
Topic |
Decision Points |
Knowledge |
Skills |
Retirement |
Can I afford to retire? |
Monthly and annual
expenses
Realistic return on investments
Taxation rules for various income types (more detail later) |
Monthly budgeting
Prepare a net worth statement
Control spending
Eliminate debt
Pay off mortgage |
Social Security |
When should I begin to take Social
Security?
What happens to my benefit at death of a spouse? |
Benefit levels
at various ages
Estimate life expectancy
Benefits for surviving spouse |
Adjust spending or portfolio withdrawals |
Defined Benefit Plans |
Which distribution option to
take? |
Estimate life expectancies of both
spouses
Understand tax
ramifications of distribution options |
Compare budgets with various
options
Calculate risk to surviving spouse
Manage investment portfolio, if
lump sum distribution is chosen |
Defined Contribution Plans |
Should I rollover account or
leave with company?
When and how do I begin withdrawals?
How do I calculate
the minimum withdrawal?
How can I minimize income taxes on withdrawal?
How
do I transfer account to beneficiaries? |
Advantages and disadvantages to
each option
Taxation issues if withdrawal is being considered
Required
Beginning Date rules
Minimum Required Distribution rules
Taking the minimum
distribution required will minimize taxes
Understand estate planning basics
and beneficiary options |
Portfolio management
Accessing and completing forms
Calculate the Minimum Required Distribution
Determine personal
marginal tax rate
Complete a beneficiary form |
Private Savings and Investments |
Where do I invest these
funds?
When should I use these funds?
How can I minimize income taxes on withdrawal?
How do I transfer to beneficiaries? |
Basics of savings and
investment vehicles including cash equivalents, stocks, bonds, mutual
funds
Taxation of interest, dividends and capital gains.
Timing of
investment sales and cash equivalent liquidation.
Understand estate
planning basics and beneficiary options |
Portfolio allocation,
diversification
Complete account applications
Interpret financial
institution statements
Calculate capital gain and/or loss
Calculate taxes
due upon sale of liquidation.
Complete a beneficiary or transfer-on-death
form |
Work |
Should I work? |
Interaction with Social Security
benefits |
Assess net income from working |
|
|
Table 2 – Type of Assistance and Delivery Channels
Based on Decision Points |
Topic |
Decision Points |
Assistance Type |
Delivery Channel |
Retirement |
Can I afford to retire? |
One-to-one
counseling |
On-site
Telephone supplemented with email follow-up |
Social Security |
When should I begin to take Social
Security?
What happens to my benefit at death of a spouse? |
One-to-one counseling
Printed material |
On-site
Telephone supplemented with email follow-up
Internet information |
Defined Benefit Plans |
Which distribution option to
take? |
One-to-one counseling and printed material |
On-site
Telephone
supplemented with email follow-up
Internet information |
Defined Contribution Plans |
Should I rollover account or
leave with company?
When and how do I begin withdrawals?
How do I calculate
the minimum withdrawal?
How can I minimize income taxes on withdrawal?
How
do I transfer account to beneficiaries? |
Printed materials or group
education
Printed materials or group education
Printed materials or group education
Printed materials or group education
One-to-one counseling or
group education |
On-site
Internet
On-site
Internet
On-site
Internet
On-site
Internet
On-site
Telephone
Internet |
Private Savings and Investments |
Where do I invest these
funds?
When should I use these funds?
How can I minimize income taxes on withdrawal?
How do I transfer to beneficiaries? |
One-to-one counseling or
group education
One-to-one counseling or group education
Printed materials
or group education
One-to-one counseling or group education |
On-site Telephone Internet
On-site Telephone Internet
On-site
Internet
On-site Telephone Internet |
Work |
Should I work? |
One-to-one counseling or group
education |
On-site Telephone Internet |
|
Mr. Spencer Williams, President, Rollover Systems,
Charlotte, North Carolina
Rollover Systems , Inc. has been in the business of
supporting plan sponsor and plan participants for several years. Its
stated business mission is “ To preserve Retirement Savings.” Rollover
Systems executes its business model by working with Plan Advisors and
Sponsors to design unique programs that meet the need of servicing
terminated participants. Rollover Systems handles numerous money movements
from qualified plans including roll-ins, rollovers to IRA’S and
cash-outs. The business relies on multi-media to communicate with
participants including call center, direct marketing, and the Web. While
they focus on all 401-k plans, the most common client is terminated
deferred participants.
Mr. Williams’s testimony was somewhat unique in that
he presented a case study to walk the committee through the issues he
encounters in his daily business. He provided an Employer Profile,
Employer Issues, Terminated Employee Profile, Terminated Employee Actions
and the Cost and Impact of leakage a participant faces. Mr. Williams took
special care to work through the example, the problems it presents to
Employers and Terminated Employees. Please note that in his remarks Mr.
Williams took great care to identify that many of these employees were
young and moving to new positions at different employers. Highly
reflective of today’s workforce.
In his Summary of the case study Mr. Williams
emphasized the challenges and complexity facing Plan Sponsors. He
distinctly stated that he did not believe that the burden of Financial
Literacy should be placed solely on the Plan Sponsor and felt that if it
were, it would not produce a higher level of retirement readiness by
participants. His case study pointed out the following key drivers for
this conclusion: Velocity of participants changing jobs for their own well
being, infinite variation in plan design, highly variable “ good “
plan sponsors, implementation and compliance and the disincentive that and
additional burdens would place on plan sponsors.
In Mr. Williams' concluding remark he shared additional
views regarding the complexity of Financial Literacy. He concluded the
Issue of Financial Literacy is large varied and complex. It does not lend
itself to a “one size fits all solution “
His personal experience is that for Financial
Literacy/Participant education to be effective two conditions must be
present: a fully engaged participant and the value of the participants
account is material to them. In his final comments he suggested that he
would like to see everything simplified , plug the leakage and if
necessary not permit roll-outs and have every employer offer payroll
deduction.
Dr. Annamaria Lusardi, Professor of Economics,
Dartmouth College
Conclusions:
-
Financial Illiteracy is widespread across
demographic groups among workers, severe among sub-groups such as
minorities, those with low education, and older workers. People lack basic
understanding of financial concepts
-
Evaluation of Employer Programs is difficult-there
is a lack of information and no published data.
-
Financial Literacy is a dynamic model that must be
measured at a point in time because as participants learn more, the
standard for financial literacy continues to evolve.
-
Financial Communications must be simple to be most
valuable without addressing figures rates or probability. Communication
must be made in manner in which people are very comfortable. One on One
communication is the most effective but can not be the exclusive method.
-
Financial Literacy is for the Public Good and must
be addressed by Employers, Educational Institutions and the Federal, State
and Local Governments for the benefit of all workers.
Summary of Testimony:
Professor Lusardi commenced her testimony by providing
a general overview of the concept of financial literacy relative to
workers. She testified that much of the work she and her colleagues have
performed highlights the fact that there is substantial illiteracy in the
US workforce. Furthermore illiteracy is widespread yet it varies across
many demographic groups particularly those with low education, older
workers and minority women. She stated that knowing the reasons for this
illiteracy is important because it will enable the preparation of
financial education programs to address the illiteracy issues. She
indicated that there is relatively little data on this subject relative to
financial concepts in general not just in the area of employee benefits.
Because of this lack of data the surveyors looked at any surveys they
could locate discussing financial concepts i.e., surveys regarding the
concepts of comprehension of mortgages or the concept of compounding of
interest. It appears that the limited data they can review may indicate a
lack of interest on part of the survey participants to learn about
financial investments. Their surveys have found that participants do not
even know what kind of pensions they have nor on a broader basis do they
understand the terms of financial contracts they have executed. She
indicated that their survey gave them pretty strong indication that
financial illiteracy exists and is pervasive in the workforce. Utilizing
these findings they realized that they would need to review employer
financial education programs. Their conclusion resulted in additional
findings that there is very little available data on the makeup of the
employer financial education programs because they are never examined or
published. They further found that the programs are rarely ever evaluated
as to success of the employer presentation or the knowledge which is
gained. Their survey found that very often an employer presentation is a
one size fits all program offered for about an hour on some financial
topic She testified that such a program does very little to encourage
savings or financial security for workers especially when the worker lacks
the basic understanding of finance and economics. She further stated that
there is a disconnect between the employer programs and the employee’s
basic knowledge regarding financial concepts.
Professor Lusardi continued her testimony stating that
she is more knowledgeable when it comes to the barriers facing employees
making savings and investment decisions. She indicated that employees also
do not believe they have the requisite knowledge and determine that they
are unsophisticated investors with little knowledge of financial
instruments. This belief makes a savings decision difficult for employees.
The decision is exacerbated when an individual must make an actual
investment decision with respect to these savings because these people
lack the financial knowledge they need to make such decision. This lack of
knowledge and the difficulty in the decision creates inertia and may
result, even when an employer makes them available, in an employee’s
failure to participate in those education programs. This combination of
the lack of knowledge and employees’ lack of attention and engagement
may result in people close to retirement failing to change their behavior
even when necessary. Consequently, because people lack the understanding
of basic economics, i.e. the power of interest compounding, the workings
of inflation and the basics of investment diversification, the people fail
to appreciate the importance of saving early or having a well diversified
portfolio.
Professor Lusardi addressed that their finding have
both a negative and positive side. The negative being that with the shift
to defined contribution plans, it will be expensive and difficult to
educate older workers age 50 and above because the workers do not perceive
the need or do not want to be educated especially when they dislike making
financial decisions. On the other hand, the findings present an
opportunity to design simple communications to stimulate and properly
educate people. She stated that we need to ensure that the programs
devised and the programs in place are very simple for workers to
understand. For example at Dartmouth, they devised a simple one page form
which took a long time to design to achieve the desired results yet had a
significant effect on the subsequent group of workers who used the form.
The participants who received the form actually went online and subscribed
to a supplemental pension account. Thus, because the findings evidence the
fact that workers are financially illiterate, employers and the government
must design education programs with simple communication messages.
Professor Lusardi next addressed the preferred ways to
deliver the message. She indicated that the current marketing of annuities
is a good example of improper education Current ads discourages people
from annuitizing there wealth which she believes is the best way to ensure
that people will have enough resources until they die. The current message
emphasizes that retirees are losing big sums of money with the promise of
getting resources until they die. The ads should present the gain or
advantage of having amounts for the future rather that emphasizing somehow
we will get you there for your life.
She believes that the proper method of communicating
the message is through a multi-channel communication approach. This
approach considers that many people are different which impacts the
patterns of savings behavior and their financial literacy. For example,
people with high literacy and high education will consider and review
documents regarding annuities while moist other employees wouldn’t read
it. She advocates a multi-channel approach to education. The
communications must be tailored to the specific people receiving the
message and deliver a message to which they will understand and respond.
Some groups will read the message, other want to listen to it, some want
to hear testimonials and others want it delivered through one on one
communications before they will trust or believe it. Thus, a website will
not offer the same benefit that a one on one telephone conversation can,
for a specific or detailed question, especially when dealing with older
people. Older people generally have lower cognitive ability and desire a
more hands on approach. Clearly, the one on one approach is the most
expensive but also the most effective because it allows the interaction
that people often desire.
Professor Lusardi in response to questions concerning
studies relative to group meeting approaches versus individual sessions
stated that there is not really any data supporting the value of one
format over the other. However, from an education standpoint she indicated
that there is nothing wrong with offering group meetings because the
information to be given is going to be repeated over and over. It is her
contention that group meetings are okay but must be targeted based on
demographics to be more effective. By offering education for women only;
education for older workers vs. younger workers, group meetings could be
effective because they address different needs and different worries. She
believes that offering generic programs cause workers to lose interest
because they are not focused on specific issues relative to that specific
group’s concerns.
Professor Lusardi next focused on the philosophical
concept of financial literacy or illiteracy and its measurement. She
identified that part of the problem is that the term financial literacy is
not well defined. She further stated that if you reviewed the work of
different economists that you would probably get different definitions of
what is meant by financial literacy. She indicated that the initial
question they asked in creating their surveys was; what is it that the
workers have to know to make savings and investment decisions? She also
stated that the definition is dynamic because what a worker needs to know
now is different than required, five or ten years ago, or which will be
required five years from now. They were unsure what questions needed to be
asked to identify a level of financial sophistication of a worker; for
example, the differences between stocks and bonds, or how do you price a
bond or do you understand economics? She believes that the surveys and
standards for financial literacy are still evolving and are not yet at the
level that they should be.
She further stated that the results of their studies
conclude at this point that financial literacy in the U.S. is better than
the rest of the world. She believes that the US is more financial literate
because people have more experience in financial transactions. She also
stated that while in the past people didn’t need to have the knowledge
regarding benefits because they were not earning much, had an employer
provided pension or workers were completely dependent on receiving only
Social Security benefits; however she believes that in today’s
environment, financial literacy will be extremely important and will play
a major role in the lives of workers in the future.
In response to a question from Chairman McCool,
Professor Lusardi stated that things have changed and will continue to
change quickly and workers and employers have not yet caught up to this
change. High School children are now being confronted with financial
decisions regarding college loans. Today, and in the future, there will be
so many more incentives to have a greater financial education.
She testified that the financial education is for the
Public Good. Having an educated population benefits everybody, including
taxpayers with the result that the education initiative can not be left
strictly to the individual or a single employer. She believes that a
national campaign about financial education is in the best interest of
everybody. The government should support the initiative because in the
long run a national financial education program must be in a place where
it can reach the most people. Professor Lusardi testified that her
preferred way is to get education out through the high school or earlier
because it is very important to give financial education to people before
they engage in financial contracts. She stated that currently, employers
are the only available means to educate today’s workforce but the
government, federal, state and local should be involved She stated that
the current auto enrollment and default program in pensions are a means to
financial literacy and a good start, but, when there are other financial
transactions in our lives where there are not defaults, i.e. mortgages,
credit cards, college loans, etc, you need financial skills to make these
decisions A mistake in another financial decision could impact their
ability to address pension needs.
Dr. Lusardi concluded her testimony stating that there
are a lot advantages for an employer to have a financial education
program. Additionally, she stated that there is now a great deal of
responsibility on the employees yet most employees are not fully aware of
those responsibilities or choose not to take action because of lack of
confidence or inertia. Consequently, until something else occurs to
achieve an employee’s financial literacy, it falls back on the employers
to accept the challenge to motivate them though an effective education
program.
Mr. Ted Benna, Malvern Benefits, Malvern, Pennsylvania
Ted Benna, President of the 401(k) Association of
America and CEO, Malvern Benefits Corporation appeared before the Council
Working Group on July 10, 2007. Mr. Benna is known to many as the
“Father of the 401(k)” for having created and being the first to gain
IRS approval of the first 401(k) savings plan. He is a nationally
recognized expert on retirement issues, the author of four books and the
recipient of numerous awards for his contributions to the field.
Mr. Benna addressed the group from the perspective of
his experience working within his third party administration business, as
a consultant to several large corporations and his work with an internet
based advisory service. Based on that experience, he stated that in his
opinion, participant education has a limited impact on changing employee
behavior. Instead, he opined that the best way to change behavior is
through purposeful design and intent.
Consistent with that position, Mr. Benna applauded the
recent actions by Congress in adopting the automatic enrollment provisions
of the Pension Protection Act of 2006 (PPA) as one means of influencing
participant behavior, but expressed his continued concerns over investment
management and leakage as areas which continue to drain savings from
participants retirement savings. Mr. Benna also noted that the evolution
of 401(k) plans has “grossly over complicated” the system by
introducing an ever-expanding array of investment options, making it more
and more complex for the average employee to comprehend and manage.
He suggested that one approach to making the system
more manageable was through the use of “Target Maturity Funds”. These
funds will simplify participants’ investment decisions, provide for
automatic rebalancing of their asset allocations and help reduce risk,
especially as they approach the point where resources would be withdrawn.
He described a situation where the plan he was working with was completely
restructured to require all investments to be moved to such funds. He said
that by doing so, participants could reduce costs, improve performance,
simplify the plan for participants and employers and reduce employers’
liability exposure.
With respect to the question of leakage, he noted that
in his opinion, a legislative solution (perhaps in the form of guidance
for employers to assist employees in the rollover process) may be
necessary in order to stem the pattern of employees cashing out rather
than rolling over account balances when changing jobs.
In response to a questions from Mr. Rouse, Mr. Benna
noted that he believed that participants could realize between one and two
percent greater returns by moving to a target maturity fund because that
was the difference between actual performance and the performance achieved
by the target funds over the past few years. In responding to a follow-up
question from Mr. Rouse, he also commented that, based on his experience
with well qualified professionals who have tried to influence behavior
through education, an investment of one to two percent in education would
not have produced similar results.
Mr. Benna responded to a question by Ms. Brambley that,
in his opinion, employers have not done enough to encourage employees to
roll over their account balances and cited examples of instances where his
firm had issued substantial checks to individuals that remained uncashed
for many months because of a sense that these decisions are overwhelming
for many individuals.
He continued to reinforce his earlier point about the
need to change the default decisions as the best way to modify behavior in
his response to a question from Mr. Swartz who inquired as to whether
better informed participants would still have cash allocations in the
twenty-five percent range (as cited in an example by Mr. Benna). Mr. Benna
cited examples of when the results remained much the same, even when
providers have invested substantial effort in education. He also expressed
skepticism as to the success of the investment advice provisions of the
PPA and repeated that he believed the movement to target maturity funds
will become much more significant than investment advice as time goes on,
estimating that as much as seventy-five percent of all plan assets may end
up in these vehicles over the next five years.
In response to a question from Mr. Simmons regarding
the matter of leakage, Mr. Benna noted the employers’ requirements to
provide terminated participants with the same kinds of information
required to be provided to active employees and the costs associated with
these requirements as a possible incentive for employers to become more
active in the process of helping former employees move their assets.
Mr. Benna observed that when employees have only
defined benefit plans, it will become increasingly more important for them
to preserve the “multiple pockets” of money accumulated along the way,
even if that required a legislative solution to blocking their ability to
cash out small sums. In response to a question from Mr. DeFrehn he noted
that he believed that such a prohibition would not result in fewer of
these new entrants from electing to participate in the first place,
especially when an employer match is involved.
Mr. McCool observed that many of the issues Mr. Benna
had mentioned could be described as mere consequences of not having a
financially literate society and asked what could be promoted to change
that circumstance. Mr. Benna once again revisited from an historical
context the manner in which education was originally conducted; that is,
focusing more on the need to save for retirement than on the vehicles for
savings. He noted that this involves a much broader discussion of
financial literacy than simply retirement savings, including reduction of
credit card debt, improving one’s credit rating and a host of other
financial considerations.
Mr. McCool also asked Mr. Benna to comment on what we
as a society can do to assist the fifty percent of people who do not
participate in a pension or 401(k) plan of any kind, improve their
financial literacy. Mr. Benna replied that he believed that the population
who comprise that segment may contain individuals with less of a need for
retirement savings and that perhaps this group may be overemphasized.
These may include working students, those who are already retired but
continue working in some other capacity, spouses working as second income
earners and small business owners whose retirements are being funded in
other ways.
In closing, Mr. Benna responded to Mr. McCool’s final
question regarding whether employers are willing to continue financial
education for employees after retirement. He noted that this is a big
problem for employees and for employers; especially for large employers
whose retiree rolls and the human resources required to service them have
grown significantly in recent years.
Ms. Jane White, Founder and President, Retirement
Solutions Foundation, Madison, New Jersey
Jane White is the founder and President of the Retirement Solutions Foundation located in New Jersey. The goals of the foundation are to increase savings rates among 401(k) participants, increase coverage among small employers and help retirees protect their retirement assets.
Ms. White addressed two primary Questions presented to witnesses on Financial Literacy. Her comments focused entirely on these two questions and raised several critical points related to each.
The first question she addressed was whether new skills development is required among 401-K participants and whether such items are necessary to attain new competencies. Ms White indicated “a seismic shift that’s occurred in America’s pension system over the last 30 years.” She was placing significant emphasis on the shift from traditional defined benefit to defined contribution pension plans. No minimum contribution rate is associated with a defined contribution plan and as such many Americans will be facing an “empty nest egg” due to this shift and the realities of core differences between DB and DC plans. She stressed the point by offering an actuarial perspective on each. In a traditional DB plan actuaries estimate as a rule of thumb 10-12 times annual salary just prior to retirement (final pay). Defined Contribution participants on the other hand receive no information related to what they need to save now in order to achieve their goal.
Surveys, including data from a Vanguard study, show clearly that the account balance and the median salary for 401k participants are well short of providing any realistic retirement security. Some have other savings to supplement retirement such as personal IRA and traditional DB components in addition to Social Security. While 401k balances are light they may have enough. The critical point is the prospect of no Social Security in addition to DB plans – now only covering 17 percent of Americans – and it will spell financial uncertainty for many Americans. Her point was to stress that participants need additional Financial Literacy (Financial Literacy 101) to understand the impact of saving on a realistic retirement balance.
Ms. White then focused on whether such programs exist to provide the necessary skills. Online tools, while widely available, are both flawed and not available to all participants beyond the largest Fortune 500 firms. Vanguard's study reflected that as many as 50 of all participants never contact Vanguard. More deeply disturbing information from Vanguard suggests that education features are only accessed for 7 percent of the total web page hits.
The PPA attempt to address the retirement savings crisis through auto enrollment, however, is flawed in that it does not provide specific savings requirements and at a rate of 3 percent fails the vast majority of Americans who postpone saving for retirement. She also cited a second disadvantage with PPA Auto Enrollment, in that it fails the majority of people who change jobs with some frequency, constantly resetting a default rate for employees at 3 percent regardless of age.
The conclusion offered was the best way to tackle the problem was to sound the alarm bell, drive the message home at each and every opportunity and reinforce investment facts that show examples of how much individuals need to save and the hazard of not saving. Define the nest egg and the necessary contribution rate.
Ms. Mary Swanson, Client Manager, Retirement Research,
Life Insurance Marketing Research Association (“LIMRA”) International,
Windsor, Connecticut
Mary Swanson is responsible for delivery of member
benefits to LIMRA member companies in the retirement business. In this
role, she ensures the proper dissemination of LIMRA research, market
information, current trends and practices, and products and services to
these member companies and oversees strategic marketing consultation
provided to them.
Ms. Swanson started off by stating that employers are
often used as a source of education for retirement planning purposes. In
particular, decisions involving retirement benefits – such as
distributions from 401(k) plans – would seem to necessarily involve
discussions with employers, if only for informational or administrative
purposes.
She then went on to say that LIMRA’s research
indicates that in terms of general retirement planning, other LIMRA
research studies support the notion that employers are an important
source. Sixty-four percent of retirees indicate that they rely on
employers as advisors to help plan their retirements. We have also found
that employer materials, such as booklets, worksheets, and guides, are
widely used for retirement planning purposes. For example, 62 percent of
retirees used booklets provided by their employers that described their
retirement benefits. She concluded by stating that LIMRA did not have
direct evidence to suggest that retirees believe their employers to have
an obligation to educate them regarding retirement decisions. However, 73
percent of retirees expressed interest in having a financial professional
conduct seminars at their former employer’s worksite to help them plan
for the retirement phase of their life.
Ms. Swanson spent time focusing on ‘how’ education
and advice is delivered. She maintains that ideally, people entering
retirement will receive these messages from a variety of sources. Research
shows that people have preferences for receiving retirement planning
advice, including from their employer either in one-on-one meetings or in
group settings. Of those that express a preference for one specific
source, less wealthy retirees and pre-retirees report a preference for
advice and planning assistance from their employer. Some retirees will
need to consult with trained financial professionals for specific
questions and guidance. Multiple modalities should be used to account for
individual learning styles. For example, written materials, seminars, and
web sites can all serve to reinforce the messages.
Ms. Swanson provided that in delivering effective
information about retirement decision-making fiduciary responsibility need
not be incurred by the plan sponsor. In order for education to be
effective, it needs to be repeated and reinforced. One brochure, one
seminar, one conversation may not provide learning. To be effective, the
education needs to be comprehensive.
Swanson maintains that when pre-retirees and retirees
undertake a number of different retirement planning activities they are
more likely to report that they are confident that their financial
resources will meet their needs. Specifically, pre-retirees who have done
retirement planning are almost three times as likely to say that they are
very confident their resources will meet their needs as those who have
done little or no planning activities. So education and planning
activities – without “advice” - appear to make a difference.
Ms. Anna Rappaport, Anna Rappaport Consulting, Chicago,
Illinois
Anna Rappaport, in addition to consulting with large
organizations, has served as President of the Society of Actuaries in
1997-98, is a member of the Board for WISER, the Pension Research Council
and the National Academy of Social Insurance. She is also a Senior Fellow
on Pensions and Retirement for The Conference Board.
Ms. Rappaport structured her to focus on how financial
literacy in the post-employment period.
With respect to how individuals think about retirement,
Ms. Rappaport’s key observation was that there is a continued focus on
investments rather than risk transfer. The ideal approach balances both.
Most individuals consider a relatively short time horizon and take an
intuitive approach to planning. There is a widespread lack of
understanding regarding longevity. As a result, products that are
available to transfer longevity risk and annuitize accounts have a poor
image. Most people try to address the risk of longevity by spending less.
When individuals do seek assistance, they are more likely to hire
investment advisors vs. broad based planners. There are many risks facing
Americans in old age. Pool-able / transferable risks include longevity,
cost of disability, cost of acute health care, economic loss due to death
of a spouse, and investment / interest rate risk. The other risks, which
can not be transferred, include inability to find a job, premature
retirement risk, family member in need of care and some inflation risks.
Next, Ms. Rappaport reviewed the types of planning
software available to assist people seeking to make decisions about the
post-retirement period. She reported that based upon a joint study
produced by the SOA, LIMRA, and INFRE, that much of the available software
did not handle the post-employment period well. There were major results
gaps among the various software available, and lack of quality control.
The tools were better for accumulation of assets prior to retirement. The
study will be repeated in 2008.
Ms. Rappaport went on to talk about custom and
structure in current employer sponsored plans. While DB plans typically
pay annuities form the plan, with no annuity purchase required, DC plans
typically pay lump sums. There are currently complexities for DC plan
sponsors who wish to offer annuities, and employees rarely take them.
Looking forward, new distribution options that focus on phased retirement
and risk management would best benefit participants, but will require
changes to the current law.
Ms. Rappaport then discussed the role of the employer.
From a design standpoint, employers can provide benefits automatically
(e.g. automatic enrollment) and provide better default options in plans.
The employer can act as a purchasing agent, enabling employees to obtain
risk transfer options at group rates. Finally, the employer can provide
information, advice and education and facilitate retiree networks. When
employees retire, Ms. Rappaport testified that there a several important
messages that should be provided – importance of planning horizon,
impact of earlier vs. later retirement, potential lifespan, how to
translate lump-sums into regular income and how to effect that conversion,
survivor issues, long-term care and the pros/cons of risk pooling. The
employer, specifically, can support this by providing information about
its plans, in addition to the basic information described above. Finally,
employers can help employees by providing information regarding the
considerations when choosing planning software / advisors.
Finally, Ms. Rappaport had some overall recommendations
–
-
The DOL might partner with not-for-profits / other
agencies to put forth information to inform plan sponsors / retirees about
the issues of the post-employment period
-
Continued support of Social Security, as a safety
net for America’s retirees
-
Continue research to advance our knowledge of
behavioral economics and the realities of retirement
-
Continued development of risk protection products
-
Development of software to council employees
regarding the post-retirement period, covering off the gaps that had been
identified in earlier research.
Ms. Dorann Cafaro, The Cafaro Group, Little Silver, New
Jersey
Ms. Cafaro is president of the The Cafaro Group LLC, an
organization providing retirement plan consulting services to plan
sponsors. She answered questions from the Working Group on Financial
Literacy regarding the role of employers in enhancing the financial
well-being of participants in retirement.
In responding to whether plan sponsors have
responsibility to educate participants about their decisions at
retirement, Ms. Cafaro focused on education at the time of retirement. She
noted that defined benefit plan sponsors presently take responsibility to
educate participants about decisions at retirement because defined benefit
plans generally maintain control of participant money at the time of
retirement. In contrast, defined contribution plan sponsors generally do
not take the same responsibility for education at the time of retirement
because the participant generally controls his or her account balance.
Defined contribution plan sponsors focus instead on education regarding
retirement decisions at times prior to retirement. Regarding defined
contribution plans, Ms. Cafaro stated that adequate programs for sound
decision making at the time of retirement are generally lacking, and that
such programs would be impractical in the defined contribution plan
setting where account portability and limitation of plan sponsor liability
are key components of plan design and prevalent in the marketplace.
Focusing on the time of retirement, Ms. Cafaro asserted
that plan sponsors should not receive incentives to provide education to
participants at retirement. Instead, Ms. Cafaro offered that retirement
and financial services vendors may be in the best position to offer “at
retirement” programs to participants – potentially an umbrella-type
program for participants, available for the consolidation of employee
assets from multiple prior employer plans and the removal of terminated
employee accounts from individual employer-sponsored plans to a pooled
status to achieve savings in administrative fees and time.
Ms. Cafaro recommended that the specific message that
participants receive at retirement should be the personal impact of
retirement savings, and suggested that the message should include a
participant acknowledgment section where participants state that they
understand their income options at retirement and the consequences of
spending such income before retirement. Ms. Cafaro sees the main financial
issues facing retirees as being increased fixed costs and debt burdens, as
well as use of retirement income without understanding the long-term
effects of such expenditures.
In addition, Ms. Cafaro testified that she did not
believe financial education could be provided without incurring fiduciary
responsibility and offered that participants should receive an annual
financial health report showing current retirement income replacement and
showing the impact of debt in retirement. Lastly, Ms. Cafaro stated that
the prohibited transaction exemption for investment advice (as added by
the Pension Protection Act of 2006) should not be expanded to include
other forms of financial advice such as health care choices and insurance.
Instead, she offered that health care and insurance vendors should take on
an expanded role in educating the public regarding decisions at
retirement.
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