Compliance June 12, 2012

PSNC 2012: The New Fiduciary

Distinguishing between education and advice is among the most difficult issues when updating the definition of fiduciary, according to a Department of Labor (DOL) official.
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Basic education would not be considered fiduciary in nature, whereas advice would fall under the definition, but the distinction between the two is often blurry. “The line between advice and education is among the most difficult we have had to answer,” said Michael Davis, deputy assistant secretary for the DOL, during the 2012 PLANSPONSOR National Conference. “It’s the most difficult philosophical question we are dealing with.”

In October 2010, the DOL’s Employee Benefits Security Administration (EBSA) proposed new regulations to update the definition of fiduciary for purposes of the Employee Retirement Income Security Act (ERISA). DOL Secretary Hilda L. Solis told lawmakers in March 2012 that the agency is not rushing on its re-proposal of the new definition. (See “DoL Not Rushing on Fiduciary Definition Proposal.”)

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Following comments received after its initial proposal last year, EBSA withdrew the proposal and announced it would solicit more information before making a new one. (See “Early Praise for EBSA’s Decision to Re-Propose Fiduciary Definition.”)  

DOL has received more than 360 comments about updating the definition of fiduciary, Davis said. “This has been a very interesting discussion,” he said. “And any time you touch the fiduciary third rail, it’s going to be a passionate discussion.”

In determining what is advice rather than education, Davis said it is sometimes unclear whether an “advice-like” statement was made. In addition, recipients may not understand when they are receiving advice rather than education. “Does a recipient understand being sold a product versus being given broad advice?” he asked.

This will remain an important issue, Davis said, particularly as Baby Boomers continue through the system. “We think it’s a very important issue, and we’re taking all the comments we’ve gotten under serious consideration.”

 

Data & Research June 12, 2012

Higher Default Deferrals Linked to Fewer Opt-Outs

Default deferral rates in 401(k) plans with automatic enrollment led to higher participant retention, according to a study of New York Life Retirement Services’ clients.
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The analysis indicates that plans auto enrolling their participants at higher deferral rates have lower participant opt-out rates. Plans implementing auto enrollment with a default deferral rate greater than 3% have consistently experienced lower opt-out rates than plans with lower default rates, year over year. Plans with default rates of less than 4% experienced 14% opt-out rates, vs. 10% for plans with greater than 3% default deferrals for the 12-month period ending March 31.  

The study also shows plans that auto enroll participants at a rate greater than 3% of salary have a 95% overall participation rate—superior to plans auto enrolling participants with less than a 3% deferral rate, which have 88% participation on average.   

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In addition, 30% of participants in plans with default deferral rates higher than 3% proactively increased their deferral rate within a year of being auto enrolled.  The percentage of participants proactively increasing their deferral rate after being auto enrolled at higher than 3% has steadily increased since 2006, where only 13% of the population had done so. By comparison, participants enrolled at lower rates have garnered a strong but flat rate of participant engagement, ranging from 27% to 26% over the same time frame.  

“Participant engagement is one of the toughest nuts to crack, and we need to attack it on several fronts.  It isn’t about the most clever postcard or best app—it is about understanding human behavior and capitalizing on it,” said David Castellani, chief executive of New York Life Retirement Plan Services. “Success begets success. If participants are saving and accumulating assets faster, they are going to realize the value of their plan faster. We encourage our sponsors not only to auto enroll, but to push the auto-enrollment envelope as far as they can.”  

The analysis involved 480 plans and 800,000 participants across New York Life’s retirement platform. The number of plans on the New York Life platform that have adopted auto enrollment climbed to 61% as of March 31, compared with 21% in 2006.

 

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