Opinions June 27, 2014

(b)est practices: Retirement Plan Communications: Compliance or Greatness?

June 27, 2014 (PLANSPONSOR.com) - Are you speaking to your employees or just at them?
Reported by

Either can be an effective strategy, depending on what you’re trying to accomplish with your organization’s retirement plan.

A certain amount of ongoing communication is mandated, such as fee disclosure and other notices, depending upon your plan’s design. The minimal approach would be to send out what you are obligated to, in a format that meets the basic regulatory requirements, and to call it a day. The benefits of this approach are:

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

  • It’s the least expensive approach;
  • It requires the least amount of thought or work; and
  • It will receive the least scrutiny from your plan participants.

If you have something to hide, this is a good strategy. For example, if your plan expenses are high or if you offer a safe harbor match you don’t want employees to take advantage of, burying the information in a wad of legal jargon might be the best way to go. You might not want to encourage employees to join the plan, because new participants start with such low balances that they don’t generate enough revenue sharing to offset the recordkeeping costs.

There is, however, another school of thought, one that believes operating a great retirement plan is both the right thing to do, and that it makes good economic sense. Arguments in favor of this approach include:

  • Studies suggest employees engaged with their employer’s retirement plan are less likely to quit.  Reducing turnover expense is obviously a good thing.
  • Other studies suggest employees who feel they are on track to a financially secure future are less distracted in the workplace and consequently are more productive.
  • Others point to the high costs associated with older workers remaining in the workplace; higher compensation and health care costs, and fewer opportunities to bring in new replacement talent. Many older workers would opt to retire earlier if they had the account balances necessary to support this.
  • A successful retirement plan can be a powerful recruitment tool. You can make the case to a prospective hire that helping employees achieve financial independence is part of your organizational culture.

At the beginning of this article, we said that you can speak to your employees or at them. We addressed the “at” approach already – do the minimum to remain in compliance and that’s it.

Speaking “to” employees involves connecting with them and motivating them to take positive action.  Saving for the future is a simple concept, but employer-sponsored retirement plans are anything but intuitive.  From the name on down, they are off-putting. Why don’t we call these plans something user-friendly, rather than quote the Code section that governs them?  We’ve written in the past about the idiotic jargon used. Why are payroll deduction deposits called, “contributions”? Contribution generally has the connotation of a donation – something you will never get back. Investments are confusing enough to most people without using words like “election” or “allocation.” How about “mix”? Without elaborating further, the point is that great communications are ones that are understandable to your audience. They should explain clearly:

  • What is the reason they should take action?
  • What specific action is suggested?
  • Exactly how can that action be taken?

Break down barriers wherever possible. Make your communications relevant, understandable, and make it clear whether follow-up action is requested. Within an employee population, there may be the need to customize communications by sub-sets. For example, a hospital may have hundreds or thousands of employees with a very wide range of financial sophistication. Is it realistic to think that a one-size-fits-all communications program is going to be the most effective?

If you care about your employees’ future financial well-being, don’t be afraid to say so. Sincerity and concern are two powerful communications forces.

Communications programs should be based on needs. Identify weaknesses and address them.  In this era of “big data” most recordkeepers can generate reports that will help identify needs. For example, do you have low participation in certain locations or in certain age or income groups? How do your contribution levels compare with those of your industry peers? Are your participants’ investments adequately diversified and risk-appropriate?

Summing it up, if you want your retirement plan to be great, you need to work at it. Identify needs and develop a thoughtful communications program to address them.  Seek feedback from employees, measure improvements, and keep at it. Don’t be afraid to seek professional help, as specialized skill sets can make a big difference in effectiveness.

Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans.  Jim worked for major national investment firms for 14 years before “going independent” in 1990.  Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.   

Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award.  

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.     

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.
Compliance June 26, 2014

Presumption of Prudence Decision Not a Total Win for Anyone

June 26, 2014 (PLANSPONSOR.com) – The U.S. Supreme Court this week ruled employee stock ownership plan (ESOP) fiduciaries are not entitled to a presumption of prudence for keeping company stock in the plans, but it didn’t just leave it at that.
Reported by

“There’s no presumption, but plaintiffs have to specifically articulate whether it’s public or inside information they think fiduciaries should have used and what the fiduciaries could have done in the alternative that would have helped the plan and not been a detriment,” Dean Schaner, founder of Haynes and Boone LLP’s Houston Labor and Employment Practice group, tells PLANSPONSOR. “They really heightened the pleadings requirement.”

Schaner notes that the 6th U.S. Circuit Court of Appeals had determined the plaintiffs in the case of Fifth Third Bancorp v. Dudenhoeffer—former employees of Fifth Third Bancorp who contend the bank became a riskier lender and retirement plan fiduciaries should have known this and divested the plan from company stock—could proceed with their lawsuit because a presumption of prudence could not be applied at the pleading stage. However, the Supreme Court vacated that decision, giving the 6th Circuit—and other courts—a new standard for evaluating the pleadings.

Get more!  Sign up for PLANSPONSOR newsletters.

Schaner says, although he was one who offered policy arguments in favor of a presumption of prudence, he was not surprised that the court rejected the presumption based on the plain language of ERISA, but did find it interesting that the court required lower courts to carefully scrutinize the language of a complaint in a certain context to see if a 12(b)(6) Motion to Dismiss for “failure to state a claim for which relief can be granted” can be applied.

“Regarding publicly available information, the Supreme Court made it very clear that if you have an effective market, just because there’s a stock price drop, that alone does not mean fiduciaries have to outsmart the market. That alone is not a breach of fiduciary duties,” Schaner explains. The court also said plaintiffs did not have to prove impending doom for the company. “So what’s in between?” he queried. “It’s a malleable area, but fact intensive.”

At the same time, the high court was stringent about insider information. “Fiduciaries cannot violate securities laws, and the court recognized the difficulty for fiduciaries to balance what they know and what is legal to disclose. ERISA doesn’t trump securities laws; fiduciaries are subject to both,” Schaner adds.

In the end, the court did not answer the prevailing question posed during oral argument— What is the trustee of a retirement plan that offers employer stock as an investment option supposed to do with inside information that the stock price may be overvalued?—but left it up to the plaintiffs to argue and the courts to decide. In its opinion, the court invited the Securities and Exchange Commission (SEC) to weigh in on whether plan fiduciaries have a duty to disclose any inside information.

Although retirement plan participants who bring such lawsuits against plan sponsors didn’t get a total win from the Supreme Court’s decision, it was not a win at all for plan sponsors. “The problem is, a company getting sued is at increased risk that will not be able to defeat a case at the pleading stage, so it will have to spend money and time to go to trial,” Schaner says. “It’s unfortunate that without the presumption, fiduciaries are in a more precarious position to determine when there’s a drop in stock price, what other facts are there that they should look at to decide what to do about holding the stock.”

Plan sponsors must carefully evaluate whether they want to continue having an ESOP or switch to another plan type to avoid risk now that the presumption is gone, according to Schaner. He says the high court’s decision, since it leaves so much ambiguity, may lead to more lawsuits if companies experience bad economic positions.

However, in a statement released following the Supreme Court ruling, Paul Ondrasik, head of Steptoe & Johnson’s ERISA, Labor, and Employment Group, contends “while the decision initially may result in a new wave of these cases, it is unlikely to change their outcome. As the court recognized, the lower courts can and should continue to ‘divide the plausible sheep from the meritless goats’ on a motion to dismiss.  And the opinion gives them the tools to do so by rejecting as ‘implausible’ claims based on little more than the fact of a stock drop and allegations of insider information.”

Ondrasik notes while the court rejected the presumption standard set forth in the 3rd U.S. Circuit Court of Appeals decision in Moench v. Robertson, “its decision clearly is not the ‘game changer’ the plaintiffs’ bar had hoped for.” He says the court’s pronouncements that fiduciaries cannot trade on the basis of insider information and that they are entitled to rely on prices set by the market largely sound the death knell for divestment claims. “Claims that fiduciaries should halt trading or make public pronouncements that are not required by the federal securities law should fare no better given the court’s recognition that such ‘alternatives’ generally would cause more harm than good.”

Ondrasik adds that the rejection of the presumption may be somewhat disappointing. “The lower courts had come up with a workable rule that provided guidance to plan sponsors and fiduciaries and protected them from meritless claims.”

ERISA Industry Committee (ERIC) President Scott Macey also issued a statement following the Supreme Court’s decision saying, “Although we are disappointed that the U.S. Supreme Court rejected the ‘presumption of prudence’, we are pleased that the Court clarified the manner in which fiduciaries can defend themselves from meritless lawsuits.”

ERIC had jointly filed an amicus brief with the Supreme Court in the case.

«