Benefits June 1, 2004

Pension Suit Prediction Proves Prescient

June 1, 2004 (PLANSPONSOR.com) - The Ohio Attorney General's assessment on an employee bonus plan for one of the state's pension funds could wind up being used against the state.
Reported by

Columbus lawyer Michael Szolosi is using an opinion by Assistant Attorney General John Patterson to sue the State Teachers Retirement System (STRS) for at least $1.8 million in unpaid employee bonuses that the pension board voted to deny last week, according to the Cleveland Plain Dealer.

Get more!  Sign up for PLANSPONSOR newsletters.

Probably “Cause”

Divided 5 to 4, the STRS Board of Directors decided against awarding the additional $1.7 million in bonuses that had been promised to 268 noninvestment staff for work done in the fiscal year that ended in June 2003. This despite the legal opinion of Assistant Attorney General John Patterson, who told the board employees would probably win a lawsuit if they were denied the bonuses because they had been promised to them in written agreements (see STRS Board Approves Only $2 Million in Bonuses ).

Patterson wrote the opinion for STRS, which released it publicly. It said, in part, “If STRS fails to pay the incentives and it is sued, the likelihood is that it will lose the suit” – a five-page opinion came with 22 pages of legal citations.

“I relied on it greatly,” said Szolosi, a Columbus lawyer who filed the lawsuit Friday in Franklin County Common Pleas Court. “I was happy to see it”, according to the Plain Dealer.

Fire Storm

A year ago, under fire for awarding $14 million in employee bonuses during a period where the fund lost 21% of its assets – some $12.3 billion – the system suspended all employee bonuses (see Ohio Fund Wants A Closer Look at Bonuses ). However, despite that public criticism about STRS spending patterns (see Ohio Pension Fund Hit for Lavish Spending Practices ), concerns that eventually culminated in the in the resignation of former system director Herb Dyer (see Dyer Steps Down From Ohio STRS Post ) – and pressure from retirees to deny all the bonuses, the board voted in the same meeting (7-2), to pay a total of $2 million in bonuses to 102 members of the investment staff.

The attorney general’s designee on the board voted against paying any of them, saying, “The probability of a lawsuit is not a certainty.”

Szolosi represents five members of the non-investment staff: Thomas Scott of Mount Vernon; Marvin Moore of Columbus; Donald Van Loon of Delaware; Dwayne Lane of Canal Winchester, and Carmen Fenton of West Jefferson, according to the Plain Dealer.

The report says that Szolosi has asked the court to certify the lawsuit as a class action on behalf of all 268 non-investment staff members. The bonuses range from $416 to $46,574, according to the lawsuit, which seeks an unspecified amount of interest, attorney fees and punitive damages.

Benefits May 28, 2004

One Size Fits All Approach – Doesn't

May 28, 2004 (PLANSPONSOR.com) - Providing a dizzying array of investment options in retirement plans does little to help participants with lower than average financial knowledge.
Reported by

When faced with a mind boggling number of investment options accompanied by education material that might as well be written in phonetic Swahili, participants with less understanding of financial options simply opts for the default options, according to the report. The problem is that these offerings are set up by plan sponsors as a “one size fits all” options and may not adequately address of retirement needs of many plan participants, according to the Center for Retirement Research at Boston College’s research paper “Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice and Investor Experience.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

The paper, authored by Julie Agnew and Lisa Szykman,hypothesized that information overload is one reason participants in defined contribution plans often choose the default options. That overload could come in one of three forms;

  • information about the options is frequently presented in a way that both in terms of content and volume is simply too difficult to assimilate,
  • the information must be assimilated for a daunting number of investment options (see Choice Overload ), and
  • a lack of differentiation between like fund choices in the program itself.

Premise Test

To test this premise, the duo devised two experiments in which the display of the investment information, the number of choices offered, and the similarity of these choices was manipulated.

Additionally, the research team measured the financial knowledge of the participants. To come up with a financial knowledge level, the researchers gave each participant a ten-question financial literacy exam, with questions taken from the John Hancock Financial Services Defined Contribution Plan Survey.

Overall, the research foundfinancialknowledge plays a large role in who opts for the default. Referencing the first experiment, the paper says 20% of the “low knowledge” participants chose the default compared to just 2% of the high knowledge individuals. Even more alarming, according to the research, were the results in the second experience, in which 25% of low knowledge participants checked the default box compared to 4% of high knowledge participants.

Challenging the current approach to default elections, the report authors note that default options are “not generally optimized for the individual.” Indeed, the “one-size-fits-all” defaults tend to be conservative and, according to the report, as a result, investment in the default options often results in inadequate savings for many individuals.

The Horse-to-Water Dilemma

There appears to be no helping participants whose financial knowledge is categorized as “below average.” The research suggests “offering investment information in a more easily comparable format or reducing the choices offered does not attenuate the low knowledge individuals’ feelings of overload.” Research in the decision-making literature suggests that rather than processing more information when decisions become more complex, consumers tend to reduce the amount of effort they expend in order to make their decision or choice, according to the report’s authors.

In addition to improving their plan designs, plan sponsor should “also consider improving financial education, especially for participants with below average financial knowledge.” The researchers admit, however, that even this may not reduce the feelings of overload participants feel when they are forced to make financial decisions.

The research provides two possible paths for plan sponsors to consider in improving the awareness of investment options and alleviating feelings of financial overwhelming. One solution offered up by researchers is for plan sponsors to offer more do it for them financial assistance services, such as the new wave of personal account management services. Additionally, the paper suggests increasing financial education efforts may promote more active choice.

But despite the best efforts by plan sponsors, the research understand that ultimately the financial fate of participants rest in their own two hands, citing the old adage, “You can lead a horse to water, but you can’t make him drink.”

“A subset of participants will always choose not to make a decision,” the paper says.

A copy of the research paper is available at http://www.bc.edu/centers/crr/wp_2004-15.shtml.

«