Data and Research January 24, 2019

More Local Governments Should Adopt Financial Wellness Programs for Employees

Among those that do offer financial literacy programs, 51% say workers increase their contributions to supplemental savings plans, 43% say workers become more engaged with compensation issues, and 41% say they see cost savings for the jurisdiction that at least partially offset the expense of offering the program.

Reported by

Pointing out that local governments have changed their retirement benefits since the Great Recession, and that these changes require more decision-making by employees, the Center for State & Local Government Excellence has issued a new practitioner-oriented report, “Financial Literacy Programs for Local Government Employees.”

The Center says financial literacy programs are critically important, as 61% of Americans cannot answer more than three of five questions correctly in a financial literacy quiz. Furthermore, 54% of Americans don’t have enough money set aside to cover three months of unexpected expenses, and 16% spend more than 20 hours a month worrying about personal financial issues while at work. Financial literacy programs can combat these problems, the Center says, resulting in more productive and engaged workers, improved morale, lower absenteeism, lower stress and lower health care costs.

However, only 26% of human resource directors report that their local government offers a financial literacy program and a mere 13% say their local government is planning one. Asked why they do not offer a financial literacy program, 45% said it is because leadership has not identified it as a priority, 30% say it is due to a lack of internal resources, and another 30% say it is because of a lack of financial resources.

Among those that offer a financial literacy program, 95% say it is the human resources staff that championed the program. Only 23% said it is because leadership was the champion, and a mere 15% said it was driven by employees.

Asked what their financial literacy program covers, more than three-quarters say it is planning for retirement and budgeting. More than half address debt and investments, and less than 20% cover banking and payment methods, long-term care and elder care, and non-bank borrowing.

As some local government workers have limited formal education, the Center notes, it is no surprise, then, that 64% of programs use plain language instead of technical terms. Only 3% use mobile technology, text messages and social media.

Ninety-one percent of financial literacy programs are offered to the entire workforce, and one-third also make them available to non-employees, such as spouses and dependents.

Asked what benefits they witness from financial literacy programs, 51% say workers increase their contributions to supplemental savings plans, 43% say workers become more engaged with compensation issues, and 41% say cost savings for the jurisdiction that at least partially offsets the expense of offering the program.

Best practices for practitioners

The Center recommends that local governments first conduct a formal, or informal, needs assessment to find out what topics their workers would like to be covered in a financial literacy program, as well as how they would like it to be delivered. The Center also suggests that financial literacy programs for local governments use easy-to-understand language and offer the materials in multiple languages.

The Center advocates for offering financial literacy programs to non-employees, and that financial literacy programs be made available on mobile devices, as well as through text messages and social media.

To get the buy-in of leadership, practitioners need to tell leaders how financial literacy programs improve productivity, reduce health care costs and improve morale and retention. Certainly, the Center says, it is important to evaluate the impact of the program, to communicate the impact to leadership and to use the information to continuously improve the program.

The Center notes that since the Great Recession, many local governments have not been able to fund wage increases and are shifting more benefit costs to workers. As such, it is important to educate workers on financial concepts, terms and considerations, the Center says. For retirement benefits, because local governments are reducing pension benefits, employees need to increase their contributions to 457 or 401(k) plans. Additionally, because some local governments are moving to high-deductible health care plans, workers need to be educated about health savings accounts (HSAs).

“As more benefit costs and management responsibilities are transferred to local government employees, their ability to understand and make financial decisions for themselves will increasingly be linked to their long-term financial security,” the report says. “It is essential for local governments to provide the educational tools necessary to best position their employees to make informed financial decisions.”

Topics such programs should cover, according to the Center, include planning for retirement, spending versus saving, creating a rainy day fund, planning for college, basics on buying a home, paying off debt and loans and non-bank borrowing.

The “Financial Literacy Programs for Local Government Employees” report can be downloaded here.

Compliance January 24, 2019

American Century Defeats Self-Dealing ERISA Lawsuit

The district court had several times ruled against the firm in summary dismissal and discovery decisions—but the firm has prevailed against ERISA fiduciary breach claims after an 11 day trial.

Reported by

A federal district court judge has ruled in favor of the defendants on all counts in an Employee Retirement Income Security Act (ERISA) lawsuit alleging American Century inappropriately favored its own investment products in the company’s retirement plan.

Plaintiffs tried three claims before the court over 11 days, from September 4 to 20, 2018. As noted in the decision, all of plaintiffs’ claims rested on the need to establish definitively that defendants committed a breach of fiduciary duties relating to loyalty and prudence. 

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

“After carefully considering all of the evidence presented at trial, the court finds plaintiffs failed to prove defendants breached any fiduciary duty to the plan participants,” the decision states. “Accordingly, the court finds in defendants’ favor on all counts and claims.”

During the trial, plaintiffs sought to prove the retention of proprietary mutual funds in favor of outside investment options in the 401(k) had cost plan participants millions of dollars in excess fees. As an example, they argued, in 2013, the plan’s total expenses were 48% higher than the average retirement plan with between $500 million and $1 billion in assets. The plan had $577 million in assets as of the end of 2013.

A previous ruling coming out of the U.S. District Court for the Western District of Missouri, Western Division, allowed the self-dealing lawsuit filed by participants in American Century’s retirement plan to proceed to discovery. The court later also approved a motion to compel the fund provider to produce profitability, expense and performance reports created under provisions of the Investment Company Act, 15 U.S.C. Section 80a-15(c) (15(c) reports) for funds used in the plan.

American Century opposed this motion, stating the reports sought were not relevant, producing the reports would be unduly burdensome, and the request was disproportional to the needs of the case. However, Chief U.S. District Court Judge Greg Kays, rejected American Century’s arguments, saying plaintiffs have met their burden by making a threshold showing that the 15(c) reports are relevant to their claims and to the calculation of damages in this case.

Despite these early setbacks, the new ruling sides strongly with the defense. The decision goes into some detail about the shortcomings in plaintiffs’ arguments, but in essence the complaint has failed because plaintiffs relied too heavily on bare cost comparisons and statements of industry averages. As other courts have ruled, simply showing that a plan has paid more than other plans does not establish that a fiduciary breach has been committed.

The text of the decision recounts the specific plan oversight process practiced and documented by American Century, underscoring the importance of proving a prudent process when it comes to defending against ERISA lawsuits.

“Upon being appointed to the committee, committee members received training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general,” the decision notes. “The materials also included a copy of the current investment policy statement (the governing document for the plan’s administration). The committee members read these materials and took their responsibilities as fiduciaries seriously. … In determining what funds should be included in the plan, the committee looked to the IPS first. The IPS provides that the plan invest in affiliated funds only ‘to the extent that mutual funds and other investment products offered by American Century Investment Management and American Century Global Investment Management meet the criteria for investment selection.’”

Notably, as recounted in the text of the ruling, the IPS guidelines did not require removal of a fund from the plan for failure to attain certain metrics. Instead, the guidelines provided the committee with broad discretion, which allowed them to use their investment expertise to determine whether a fund’s long-term performance goals could still be achieved despite its underperformance over a specified period.

“Committee members believed this was preferable because an IPS that mandated removal of investments that underperformed their benchmarks would be undesirable in that it would always require removing a fund at its low point, incurring a loss, and preventing participants from taking advantage of any subsequent improved performance,” the decision states. “For example, the American Century Equity Income Fund remained on the watch list for eight quarters between September 2013 and September 2015, before significantly outperforming its benchmark index.”

Also important in the eyes of the court, the committee meetings were documented through a set of meeting minutes. The meeting minutes “were thorough, capturing the topic of discussion, who initiated questioning, and then the outcome of the vote or the committee’s ultimate decision.”

According to the text of the decision, the court found both of the defendants’ fiduciary process expert witness to be persuasive and credible. On the other hand, the court did not deem plaintiffs’ expert testimony to be credible.

The following section of the decision is illustrative of the court’s thinking on these matters: “The court gives no weight to the testimony of plaintiffs’ process expert, Roger Levy. Mr. Levy testified the defendants failed to employ a prudent process when adding and retaining funds in the plan. For example, Mr. Levy opined a fund that remained on the watch list for more than five quarters should be removed absent a compelling, documented reason. Mr. Levy also opined that the committee members should have conducted a winnowing process for each fund in the core lineup and should have taken more detailed minutes. … [On cross examination, Mr. Levy] acknowledged that his approach has not won wide acceptance in the retirement plan industry, with only fourteen to sixteen retirement plans out of approximately 500,000 conforming to these standards. While the court agrees with Mr. Levy that fiduciaries should strive to attain the standards he champions, they are not the standards ERISA requires.”

The court also gives no weight to plaintiffs’ expert on damages, Steve Pomerantz, who has testified in numerous 401(k) cases in federal court, primarily for plaintiffs.

The full text of the new decision is available here. 

«