Compliance December 21, 2012

SPD Omission Not a Conflict with Plan Terms

December 21, 2012 (PLANSPONSOR.com) – An omission from a retirement plan’s summary plan description (SPD) does not entitle a widow to a greater spousal benefit, a court found.
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Margaret A. Lipker contends that AK Steel’s calculation of her benefit is wrong because its construction and application conflicts with the terms of the governing SPD, according to a 6th U.S. Circuit Court of Appeals opinion. The SPD defines the surviving spouse benefit as “50% of the participant’s pension less 50% of the amount of widow’s (or widower’s) Social Security benefit or, if higher, a minimum benefit of $140 per month,” whereas language in AK Steel’s pension plan document says 50% of the participant’s pension will be reduced by 50% of the amount of the widow’s Social Security benefit “without regard to any offset imposed by law.”   

The court noted that “widow’s insurance benefit,” as used in the Social Security Act, is defined as equal to the primary insurance benefit of the deceased husband (in this case $1,469). However, the Act makes clear that a person who is entitled to an old-age benefit (as Lipker is) and any other monthly Social Security insurance benefit (such as a widow’s benefit), will not receive both benefits in full simultaneously. So, it offset Lipker’s widow’s benefit by the amount of Social Security she was receiving on her own. Lipker perceived a conflict because Social Security only paid her $458 as a widow’s benefit.  

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The 6th Circuit pointed out that because employees rely on SPDs in making decisions about their future benefit needs, it has held that language in an SPD may control over any conflicting language in the employee benefit plan itself. “This does not mean, however, that an omission from the SPD will, by negative implication, be deemed to alter the terms of the plan itself,” the court said.  

The court determined that the omission from the SPD is not misleading, and the discrepancy between the language of the two provisions does not rise to the level of a “conflict.”    

The court’s opinion is at http://www.ca6.uscourts.gov/opinions.pdf/12a0374p-06.pdf.
Benefits December 21, 2012

Using Behavioral Economics to Educate Employees

December 21, 2012 (PLANSPONSOR.com) - Plan sponsors can use behavioral economics to educate employees about saving for retirement. 

 

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Participants’ “suboptimal” decisions over time can result in an older workforce due to delayed retirement, as well as higher labor costs and lower productivity. Sibson Consulting’s Paper, “Using Behavioral Economics to Encourage Employees to Make Better Decisions about their 401(k) Plans,” explains why employees make poor decisions regarding their 401(k) plans, as well as how organizations can help improve their decision-making.

Although people should rationally contemplate important decisions, many find the process laborious and instead rely on mental shortcuts and cognitive biases, according to Sibson’s paper. Some of these biases and mental shortcuts include excessively discounting future costs and benefits; complexity aversion, or procrastinating because of too many complex options; and clue-seeking bias, or looking for clues they hope will be helpful for decision-making. “People aren’t as concerned about future costs as they are present costs,” Chris Goldsmith, vice president of Sibson and co-author of the paper, told PLANSPONSOR. As a result, they discount future costs at an irrational level.

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To help combat these biases, plan sponsors and advisers can communicate in a manner that helps employees relate to what their lives will be like in retirement, Sibson’s paper explained. Goldsmith cited a study—“Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self,” published in the Journal of Marketing Research—in which half of the participants saw a current image of themselves and the other half saw a “virtual reality-type” image of themselves in their elderly years. Those who saw their future selves contributed on average 1.8% more to their retirement plans than those who saw their current image. “That’s very significant over a long time frame,” Goldsmith said.

Decisions are made using both the rational and emotional sides of the brain, so sponsors and advisers must be attuned to this when educating participants about saving for retirement, Goldsmith said. “We can’t underestimate the importance of emotion in everyday decision-making,” he emphasized.

Goldsmith suggested several methods sponsors and advisers can use to help participants make sound decisions:  

  • Use testimonials. Testimonials of employees who have saved adequately for retirement, as well as those who regret not saving, are a great way to inform participants about the importance of saving.  
  • Outline lost opportunities. Sponsors and advisers can discuss with employees the opportunities they missed by not contributing enough, or not contributing at all. For example, sponsors or advisers can meet with employees and say, “If you had contributed X during the rising market, in 25 years you would have accumulated Y.” 
  • Make saving easy. Plan sponsors must guide employees through the process of making better choices the next year and should educate them about how to do this. Explore all options for saving, including automatically rolling over extra sick and vacation days into the employee’s 401(k) plan.  
  • Contemplate the investment option order. This can be difficult because vendors and plan sponsors may want to list the investment options in alphabetical order to appear unbiased. However, placing the options in an A to Z list can be problematic, as participants may simply choose investments only from the beginning of the list. “Ordering has a big impact on the choices that people make,” Goldsmith said.  

  

Advisers play a role in educating plan sponsors and participants on the influence of behavioral economics. Many advisers are familiar with the research, Goldsmith explained, yet have not applied it to the advice-giving process. “But I think we’re on the verge of advisers focusing on the behavioral aspect of investments,” he added.

Sibson’s research is available here.

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