Benefits April 16, 2014

Retirement Plan Participant Financial Literacy Low

April 16, 2014 (PLANSPONSOR.com) – A study by the National Association for Retirement Plan Participants (NARPP) finds a low level of financial literacy among retirement plan participants.
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Financial literacy in the NARPP study was measured using a widely accepted series of questions testing the participants’ ability to answer basic financial questions. Less than half (49%) of participants correctly answered the eight basic financial literacy questions.

In addition, NARPP found that few participants have a good understanding of common investing terms. For example, only 30% of participants said they understand very well the term “asset allocation,” and only 36% of participants said they understand very well the term “diversification.”

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Participants seem aware of their lack of financial literacy. When asked to assess their own perceived literacy level, only one in five participants described themselves as knowledgeable about financial matters. The study also found only 38% of participants are satisfied with the financial education programs from their respective providers.

The purpose of the participant study was not only to understand levels of financial literacy, but also to assess its impact on savings behavior. NARPP says the study sets a baseline of financial literacy among plan participants. It also ranks service providers’ education programs.

“There seems to be a big disconnect with what participants need in terms of financial information and education, and what they are receiving from their recordkeepers,” says Laurie Rowley, founder of NARPP. “At a time when service providers are selling education programs as part of their value proposition, I think it is critical to both employers and employees to be able to measure the impact of these programs.”

Rowley says NARPP has started working with plan sponsors to help them assess their employees’ level of financial literacy and savings behavior so they can begin to strategize for better retirement savings outcomes for their participants.

The study shows participants’ level of financial literacy and level of confidence in being able to amass sufficient financial resources to comfortably retire are key drivers of deferral rates (see “Recordkeepers Have Strong Influence on Participant Outcomes”).

Information about the study can be requested by emailing laurie.rowley@narpp.org.

Administration April 16, 2014

Detroit Pensions Agree to Smaller Benefit Reductions

April 16, 2014 (PLANSPONSOR.com) – Negotiators for Detroit’s two pension boards have agreed to limited retiree benefit reductions.
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According to a news report from the Detroit Free Press, police and fire retirees would see no cuts to monthly pension checks under the preliminary agreement, but they would absorb a reduction in cost-of-living adjustment (COLA) increases, down to 1% from 2.25%. Other retirees would see a 4.5% reduction to their monthly pension checks and the elimination of COLA increases.

This announcement comes two weeks after Detroit submitted an amended plan of adjustment for a benefit reduction of 6% and elimination of COLAs for the Police and Fire Retirement System. For General Retirement System participants, the previous offer was for a 26% pension benefit reduction and elimination of cost of living adjustments (see “Detroit Announces Planned Pension Benefit Reductions”).

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One source familiar with the deal told the Detroit Free Press that the proposed pension cuts are lower than Orr’s initial offer in part because the stock market’s surge in the last 18 months improved the financial health of the pension funds, while the higher investment rate of return also lowered the unfunded liability. In his initial proposal, Orr estimated that the city’s unfunded pension liabilities totaled $3.5 billion. But that figure is expected to drop drastically when he delivers his final restructuring documents.

According to the news report, the deal comes after the city of Detroit agreed to a concession with retirees—raising the expected rate of annual investment returns for pension funds to 6.75%, which correspondingly improves their funding outlook. The city also agreed to allow the pension cuts to be reduced over time if the pension funds outperform their expected rate of return.

The two pension fund boards would stay intact under the recent deal, but an independent investment advisory committee would be established to vet all the investments the boards would make.

Board trustees for the two pension funds must still sign off on the agreement. The deal—not as good for general city retirees because, for years, their pension fund was less well-managed than the police and fire fund—could expedite Detroit’s trip through bankruptcy, the news report says.

By agreeing to support this deal, Detroit’s pension boards are expected to recommend a “yes” vote to retirees. They are also expected to drop their legal battle with the city and give up the right to sue the state over pension cuts. The state of Michigan must still agree to contribute $350 million over 20 years to the pension funds as part of the preliminary agreement.

The police and fire retiree association also agreed to support the establishment of a Voluntary Employee Beneficiary Association (VEBA) to manage retiree health care, which is expected to deliver significantly reduced benefits to retirees. A separate VEBA will be set up for general retirees.

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