Financial Education Over Time Improves Savings Behaviors

An analysis finds repeated use of financial wellness resources improves retirement savings behaviors.

Financial wellness education is becoming popular at many workplaces.

Financial Finesse says employers offering an online financial learning platform since 2010—when the firm’s tool was originally launched—have seen registrations grow 59% annually, and overall usage grow 69% annually since then.

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“We see hopeful signs that employees are becoming more proactive, especially those who are making regular use of the financial wellness program offered by their employer,” Cynthia Meyer, resident financial planner for Financial Finesse, based in Gladstone, Connecticut, tells PLANSPONSOR.

According to Financial Finesse’s 2014 Year in Review, repeat users made up 15% of all users in 2014, up from 6% of all users in 2013. These employees show improvement in key areas of financial wellness that is far above the improvement seen in the general population.

Forty-six percent of repeat users indicated in their last assessment that they feel confident their investments are allocated appropriately, compared to 31% in their first assessment. Nearly one-third said they know they are on target to replace at least 80% of their income in retirement, compared with 17% who said so in their first assessment. Forty-seven percent reported that they regularly rebalance their investment accounts to keep their asset allocations on track, versus 35% who said the same in their first assessment.

Repeat users are also seeing significant progress in handling bills and paying down debt, Meyer says. “Multiple touches build a pattern of success over time.” She explains that as employees get more financially self-reliant and get control of their monthly cash flow, they increase saving for retirement.

The Year in Review report shows three-quarters of questions received by Financial Finesse’s team of Certified Financial Planner professionals were proactive in nature, seeking guidance about long-term financial planning issues such as saving for college and retirement, rather than dealing with short-term issues like losing a job or facing foreclosure.  Retirement planning continues to be the main focus, accounting for 35% of all questions received in 2014, and up four percentage points since last year.

COMING UP: How report findings can inform targeted education.

Another finding of the review that Financial Finesse finds encouraging, according to Meyer, is that the program seems to be reaching the demographic that is most vulnerable to financial issues. Employees with household incomes below $35,000 saw improvements in cash management, which has led to improvements in debt management, fewer 401(k) loans and hardship distributions (23% in 2014 vs. 29% in 2013), reduced stress, and a greater feeling of control over their financial situation. “This is the first time we’ve seen good movement in those numbers,” Meyer says.

She notes that some of the review findings reveal an opportunity for employers to tailor certain financial wellness messages to address challenges of different employee demographic groups. For example, 70% of African Americans and 62% of Hispanics identified managing cash flow as a top concern, and both of those demographics reported that getting out of debt is a top concern. Retirement plan participation is also lower for those demographic than for Asian America or Caucasian employees.

Women were less likely than men to say they have a handle on their monthly cash flow (66% vs. 80%); they know they are on target to replace at least 80% of income in retirement (17% vs. 24%); they have a general knowledge of stocks, bonds and mutual funds (67% vs. 84%) or they feel confident their investments are allocated properly (34% vs. 48%).

In addition, employees younger than age 30 listed cash flow and debt management as top financial priorities. For employees ages 30 to 44, the top two priorities are retirement planning and cash flow; for employees ages 45 to 54 , they are retirement planning and debt management; and for employees ages 55 and older, they are retirement planning and investing.

The full Year in Review report is available here.

Index Fund Proxy Voting and Fiduciary Liability

Could a general failure to address the importance of index fund proxy voting rights derail the ongoing indexing trend among ERISA plan sponsors?

A recent report from Wintergreen Advisers argues there is a critical flaw underlying the current trend of plan sponsors pushing more and more assets into lower-fee index funds—a flaw that could be construed as a fiduciary violation.

The report’s title doesn’t mince words: “How the Votes of Big Index Funds Feed CEO Greed and Put Americans’ Retirement Savings in Peril.” Neither do David Winters, CEO of Wintergreen Advisers, and Liz Cohernour, chief operating officer (COO) of Wintergreen, in discussing what they see as major failures on the part of the big index fund providers to ensure individual investors are treated fairly.

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Winters tells PLANSPONSOR that passive U.S. equity funds gathered an impressive $167 billion in assets in 2014, ending the year with about $2.2 trillion in assets under management (AUM). He suggests the growth has been fueled by “huge advertising and PR budgets” among some of the largest and well-known index fund providers—whom are well aware that sponsors running plans under the Employee Retirement Income Security Act (ERISA) are highly sensitive to fee issues.

This fee sensitivity has continued to increase with the prevalence of ERISA lawsuits and class action challenges around higher-priced investments, Cohernour notes, and with the reintroduction of the Department of Labor’s new fiduciary rule. As a result, sponsors feel a huge amount of pressure to use passive index funds that have lower stated fees than more active investments.

It’s a familiar story to most working in the ERISA domain—but Cohernour and Winters feel there is a key theme that has so far gone unnoticed by most industry practitioners. As Winters puts it, “The problem is simply that the big index fund providers have adopted a pattern of rubberstamping the compensation packages of executives across indexes such as the S&P 500, and this has led to truly runaway compensation and has actually damaged the returns of the end investors routing money into these major index funds.”

The Wintergreen report reviews voting histories of the largest S&P 500 index funds run by Vanguard, BlackRock and State Street, for example, and finds that over the past five years for the 25 largest companies in the S&P 500, these firms’ funds cast their votes in favor of management equity compensation plans 89% of the time, and actively opposed executives’ pay packages less than 4% of the time.

“If you take a step back, this really does not jive with ERISA and the fiduciary duty that sponsors have to ensure fees paid either directly or indirectly from plan assets are reasonable,” Cohernour suggests. “As you know, it’s a basic duty for all fiduciaries dealing with retirement money to look at the value of a security in a few ways. There is the basic price value—the cost of the stock itself. And then in addition to this there is the proxy voting value of the stock, which also has real value and must be considered by fiduciaries making investment decisions.”

This thinking is touched on in a 2008 interpret bulletin from DOL, which sets forth the department’s interpretation of Sections 402, 403 and 404 of ERISA, as those sections apply to voting of proxies on securities held in employee benefit plan investment portfolios. The guidance also touches on the maintenance of and compliance with statements of investment policy, including proxy voting policy.

Cohernous adds that, despite this guidance, “over time it has become very unclear whether the courts and the federal government take seriously the obligation for people controlling retirement dollars to use their proxy votes solely in the interest of the end investor.”

Winters notes that Wintergreen got serious about this issue just a year or two ago, when it was doing some analysis of Coca-Cola stock that it holds in its work as a long-term global value investor. At the time, Winters sent letters to Coca-Cola’s shareholders criticizing the company’s proposed 2014 equity plan, which Winters and Cohernour believe “would have significantly eroded the per-share value of Coca-Cola Shares, by as much as 14% or more per share.”

“The company expected that the 2014 plan would result in the issuance of approximately 340 million new Coca-Cola shares,” Winters explains. “Considering the share price at the time, these shares would have been worth approximately $13 billion. In effect, the board was asking shareholders for approval to transfer approximately $13 billion from all of our pockets to the company's management over the next four years. This would have materially diluted the value of shares held by ERISA participants, no doubt.”

While Coca-Cola at the time suggested Winters’ campaign was misinformed and over-simplified the compensation packages at issue, the company did bow to increasing shareholder pressure and made some changes to how it makes disclosures and ties executive compensation to performance goals.

“We saw that there was excessive compensation being asked for at a time when revenues were not jumping and there were no major accomplishments for management to point to in order to justify the increases they were asking for,” Winters continues. “So we decided to step up and do something about it, and we’re proud to say a lot of that has been rolled back at Coca-Cola.” 

Winters says the process made the firm think about the wider compensation practices taking place across companies included in indexes such as the S&P 500, which gets the lion’s share of new dollars being routed into index funds. “The whole situation really raised our eyebrow on the fact that the big index companies hold so much ownership and power in these really large companies—it’s not a bad thing per se, but they have failed to practice proper governance in this area,” he suggests.

The Wintergreen report goes on to argue this effect gets magnified across the entire indexing marketplace—leading to huge amounts of wealth being siphoned off every year from gross index fund returns and going into the pockets of a select group of executive managers.

As Cohernour puts it, “When we talk about this fee story, and the fact that all these proxy votes are just rubberstamping these unreasonable increases in executive management compensation, it amounts to the investment manager saying, ‘Yes the performance of your company’s stock has lagged in the last year, and the last several years, but we’re going to increase your paycheck anyway.’ That’s doesn’t exactly seem like the reasonable and well-thought-out investment process demanded by ERISA.”

Both Winters and Cohernour are quick to add there are certainly executives and members of upper and lower management among these companies “doing a terrific job and deserving to be handsomely rewarded for their work.”

“But right now it’s practically automatic that, just because management is asking for more stock, more options, more cash and more benefits, that it will get a yes vote from the shareholders,” Cohernour continues. “The pattern of index fund voting appears to be a virtual automatic response—it’s less than a 4% rejection rate when these executives are asking for more compensation. That either means these executives are only asking for appropriate increases—or the mechanism is flawed.”

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