Administration April 7, 2016

Pushing the Needle on Financial Literacy

Financial literacy naturally increases with age, but retirement plan sponsors can help increase the learning process.
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Financial literacy increases with age, a survey by State Street Global Advisors (SSGA) suggests.

For example, 91% of Generation X ages 45 to 50 answered this question correctly: If you invested $100 in a savings account with a 2% interest rate, how much would you have after five years? In comparison, 71% of Millennials answered correctly.

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Similarly, when asked whether it was true or false that “buying a single company stock usually provides a safer return than a stock mutual fund,” 55% of Millennials ages 22 to 32 incorrectly said “true,” but only 23% of Gen Xers ages 45 to 50 incorrectly said “true.”

Fredrik Axsater, SSGA’s head of global defined contribution (DC) in San Francisco, speculates that as people get more hands-on financial experience as they age, financial literacy and decisionmaking improves. He says studies show financial literacy increases over time.

“I think that across age cohorts there are relatively few people who have knowledge, interest and time to increase financial literacy. We need to make it easier for this silent majority that is looking for help and simplicity in getting started and doing the right thing,” he tells PLANSPONSOR.

NEXT: Making education more effective

Axsater suggests that one great financial experience is being part of a retirement plan at a young age, and he sees five ways to make education more effective.

Financial literacy should focus on rules of thumb. For example, he says, just as there are nutritional guidelines, there need to be some retirement guidelines, such as saving up to 15% including employer contributions. In SSGA’s survey, 60% of Gen X and Millennials indicated they use rules of thumb in making financial decisions. Education needs to be clear about what the rules of thumb are.

Education should meet employees where they are, Axsater says. It should use simple language, not industry jargon and complex lingo. “Eighty-eight percent of Millennials say it’s important to start saving early,” he says. “They want to make this work, and education should help them ‘get it.’”

Plan sponsors should define inflection points—times when most participants are open to financial literacy and education. For example, when starting a job, buying a house or having children.

Plan sponsors should simplify entry points in their retirement plans. The industry has made great strides in automation, Axsater says, but entry points should be reoccurring. Even if a participant is automatically enrolled, he should receive messages every year or so, encouraging him to increase savings or revisit investments, for example.

Finally, Axsater says plan sponsors should offer financial education tools as part of their defined contribution plan offering.

Compliance April 7, 2016

What Plan Sponsors Should Know About the Final Fiduciary Rule

The final rule from the DOL scaled back on some requirements, but left others in place.
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When the Department of Labor’s (DOL) fiduciary rule proposal came out last year, there was some concern that it would affect plan sponsors by requiring Best Interest Contracts (BICs) from advisers, even with one-time projects, such as defined benefit (DB) plan annuity purchases, that it would affect retirement education for participants, and even affect advice relating to health savings accounts (HSAs).

The final rule released this week, made some important changes in response to these concerns.

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In a statement, Rich McHugh, vice president of Washington Affairs for the Plan Sponsor Council or America (PSCA), said, “Based on an initial review, it appears that the DOL has made some changes in the rule that should be helpful with respect to providing needed investment education to retirement plan participants, reforming the best interest contract exemption and making the rule more helpful to small employers.”

In discussing the final rule, Labor Secretary Thomas Perez said, “[F]or firms that have millions of existing customers that would require a BIC under the final rule, there are also changes. Unlike in the proposed version, firms can now simply send a notice that tells these clients that the firm has taken on new obligations for them as a result of the new fiduciary standard. An email or letter will suffice when it comes to alerting existing customers of the change.”

Robyn Credico, North America leader of defined contribution consulting at Willis Towers Watson in Arlington, Virginia, explains that under the final rule, recommendations to plan sponsors managing more than $50 million in assets (vs. $100 million in the proposed rule) will not be considered investment advice if certain conditions are met and hence will not require an exemption. There must be a written validation that the plan sponsor has the wherewithal to make investment decisions.

However, for plans with $50 million in assets or less, the plan sponsor and adviser will have to enter into a BIC explaining there are no conflicts of interest and the appropriate fees, Credico says.

NEXT: Education and rollovers

As for the one time use of an adviser for specific projects, such as DB risk transfer, the rule remains the same. These advisers are considered fiduciaries. Lynn Dudley, SVP, global retirement and compensation policy at American Benefits Council in Washington, D.C., explains that the fundamental redefinition of fiduciary that was put forth in the rule proposal still stands in the final rule. The previous five-part test for determining if a person or entity is providing fiduciary investment advice is gone, eliminating the “on a regular basis” standard, she tells PLANSPONSOR.

Credico says requirements about participant retirement investment education have been improved. Advisers, plan sponsors, or providers holding retirement plan education meetings can talk about the investments in the plan. “This was not allowed before,” she points out.

Dudley explains that specific funds can be mentioned, but only if each fund is named. For example, if a participant asks, “Can you tell me about the small cap fund I’m invested in and whether most people my age use that fund,” the plan sponsor, adviser or provider can respond, but must talk about every small cap fund in the plan. “You can’t suggest whether the participant is doing right or wrong by investing in that fund,” she says.

The DOL rule exempted health and welfare plans from its final rule requirements except where they have an investment component, Dudley adds. So if an HSA has an investment component, anyone giving advice about those investments will need to enter into a BIC with the plan sponsor or participant.

According to Credico, advisers helping with rollover decisions are subject to BICs. “Providers and adviser will have to provide participants comfort that there are no conflicts of interest or receive a document about conflicts, and the adviser fee must be independent of the investments selected,” she says.

Even if a participant has been working with the plan sponsor’s adviser for years, at the point of rollover, there has to be a BIC. “It’s a whole new relationship once the participant takes money out of the plan,” Credico says.

NEXT: What should plan sponsors do?

Credico recommends that plan sponsors with more than $50 million in plan assets look at the education provided to participants and the advice they and participants receive to make sure they meet the new requirements. For advice solutions, someone should be identified as a fiduciary.

She also recommends these plan sponsors have an investment committee with the appropriate people in place. To get the exemption, they have to make a statement that they have appropriate people in place to make investment decisions.

As for education, Dudley says in group meetings, there will be a lot of caveats. More general information will be offered and there may be a reluctance to answer individual-specific situations, but educators can direct participants to where they can find answers.

Credico adds that plan sponsors should make sure they are not responsible for plan advisers once a participant takes a distribution. “Make sure you’re not endorsing the plan’s adviser. Make a written communication that once a person leaves a plan, the plan sponsor is not responsible for what the employee does with assets,” she says.

Credico concludes that as sponsors, providers and advisers review the new rule more thoroughly, there will be more questions. But, for plan sponsors it seems the new rule is not as much a big deal as the proposal.

“It’s a lot to process and a big change, and people are figuring out the best way to comply, but the DOL has made it workable,” Dudley says.

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