In Practice March 23, 2014

Stronger Education, Stronger Outcomes

It’s a phenomenon unique to the retirement planning advice industry that even those participants who make good investment decisions often don’t know they’re making good decisions.
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And those who make bad investment decisions in employer sponsored plans are in a similar, if somewhat more precarious position, says Stig Nybo, president of pension sales and distribution at Transamerica Retirement Solutions. In other words, there are substantial hurdles to overcome in terms of basic financial literacy among participants in defined contribution retirement plans before advisers can ensure workers accrue adequate assets for retirement.

That means advisers who incorporate a participant education policy statement into their services—and work hard to deliver what it promises—can add substantially to their value proposition, Nybo says, though they must be careful to keep such a statement general enough to limit potential liability that can arise should education programs fail to deliver more specific improvements.

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Nybo and a panel of experts tackled how financial advisers can sell and deliver education programs during a workshop on the opening day of the NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans. The main takeaway is that with new recordkeeping technology advisers are better equipped today to deliver stellar education programs to participants—and to profit by adding participant education policy statements that formalize and benchmark education efforts.

“One thing coming into the picture now is the ability to drive right down to the participant level, and identify savings and investing behaviors, and calculate projected outcomes for each worker,” Nybo says. “That takes the power of education programs even a step further than the conventional education tools we’ve used for years and years.”

Education programs have shifted from increasing general awareness around a retirement plan to actually moving the dial on important retirement readiness metrics among subsets of participants, such as those with age-inappropriate asset allocations. These metrics can include a plan’s average 401(k) contribution percentage, income replacement ratios, enrollment rates and age-based asset allocations, among others. Nybo says new technologies can give an adviser and sponsor clients a complete breakdown of participants according to these various data points—thereby identifying which subsets of participants require what types of education (see “Sending the Right Message”).

And for those advisers not working with a service provider that can deliver this type of granular reporting, Nybo suggests it’s time to find a new recordkeeper.

Devyn Deux, vice president of client relations for Pensionmark Retirement Group and another member of the panel, says advisers can take advantage of this trend by formalizing an education policy statement to serve as a “guiding light” for education efforts. A formal participant education policy should not make specific promises that may be broken, she says, such as guaranteeing a minimum number of group participant education meetings per year, but should instead be a process-oriented document that shows sponsor clients that education is an important part of the adviser’s work.

“The main value of an education policy statement comes from the clarity it can provide to plan sponsor clients in terms of the goals and strategy of participant education activities provided by the adviser," Deux says. The policy could outline the types of metrics that an adviser will work to improve through participant education efforts, she says, as well as general strategies for improving those metrics. Advisers should shy away, though, from including language about the size of improvements or time frames over which improvements may happen.

Deux adds that participant education policy statements can play a critical role in 404(c) safe harbor compliance, which is part of the reason why Pensionmark developed such statements for use by its advisers. One 404(c) requirement is to ensure participants receive sufficient education on the available investment options to make an informed investment decision, she says, so a well-documented and reasonably constructed education process is a key during audits from the Department of Labor and other federal regulators.

“We wanted our sponsor clients to have a way to prove their education process in the eyes of the regulators,” Deux explains. “The education policy comes out of that.”

Panel member Liz Davidson, CEO and founder of the financial education firm Financial Finesse, warns that formulating an education policy statement and generating buy-in from plan sponsor clients is only the first half of the adviser's job. Equally, if not more important, is to ensure enactment of the policy so sponsors see the promised improvements, making them more likely to keep a favorable view of participant education efforts.

“We see a problem that a lot of effort goes into creating the statements, and there’s a lot of excitement and interest from the sponsor, but in some cases they’re not actually implemented,” Davidson says.

Deux suggests that advisers use the policy statement to develop additional, more specific “working documents” that prescribe actual steps for plan sponsors to follow in their education programs. Informal working documents can be used to set more specific benchmarks and make more aggressive promises to sponsor clients, Deux says, without necessarily opening up additional liability should the goals in the working documents be missed.

Compliance March 23, 2014

No Shortage of Challenges or Chances

Retirement advice professionals must confront some acute challenges in the months and years ahead to ensure their ability to support clients—and grow their own firms—remains intact.
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Issues confronting retirement plan advisers and othersproviding financial services to workers and retirees range from mushrooming “retirement crisis deniers” to a new federal focus on tax treatment of 401(k) plans, says Brian Graff, executive director of the National Association of Plan Advisers (NAPA). Should advisers and the various industry groups that lobby for their interests fail to act and influence lawmakers, Graff warns, the results could be disastrous for both the industry and the tens of millions of workers who invest and save through workplace retirement plans.

Graff sounded the familiar-but-dire warning at the opening of the 2014 NAPA 401(k) Summit, hosted by the National Associate of Plan Advisors (NAPA), in New Orleans. He wasted no time at the start of the annual conference in attacking some specific proposals floated in recent months by various parties in the federal government, as well as the Obama administration. If they become law, Graff says many of these proposals would do considerably more harm than good in improving retirement readiness in the U.S.

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Graff pointed to a Treasury Department proposal from 2013 that would cap the total value of taxpayers’retirement savings accounts—such as individual retirement accounts (IRAs) and defined contribution accounts, such as 401(k)s—at the same level as the maximum benefit permitted under defined benefit plan rules. That would be around $3.4 million for 2014 and would rise with inflation.

Treasury officials have made the case that such a cap is large enough to impact only the wealthiest savers, and would have little impact on most plans, where average account balances are far below the cap. Graff says that’s bunk, especially considering that workplace retirement accounts that reach this size typically do so through superior investment performance—not outsized annual contributions from high-wage earners.

Graff pointed to data from the Employee Benefits Research Institute’s (EBRI) Retirement Security Projection Model, which shows that such a cap would affect at least one participant in 75% of plans with 51 to 100 participants. The percentage of plans that would be affected drops with both the size of the plan and as future interest rate assumptions are reduced, but even in the smallest plan category (one to 10 participants) and with the lowest interest rate assumptions, nearly one in five plans would see an impact for at least some participants. 

Graff criticized another proposal from President Obama’s fifth State of the Union Address in January, in which he called on Congress to take action to change “an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans” (see “Industry Divides Over Obama Proposals”). In reality, Graff says about 80% of 401(k) plan participants are middle-class Americans making less than $100,000, and that households with more than $200,000 only get about 17% of the net tax benefits allowed each year for 401(k) plans. He voiced frustration that lawmakers often fail to recognize the retirement savings tax incentive is not a permanent write-off like most other tax incentives—instead, it is a deferral.

“There is this general theme across Washington around this idea that too much of the governmental system is designed to benefit the wealthy,” Graff says. “This is really an outgrowth of the Occupy Wall Street camp. Their perspective is that wealth is a limited pool, and certain people are hoarding it at the expense of others. Those of us in the industry know that’s not how retirement savings work.”

Other initiatives in Washington for retirement advisers to follow and attempt to influence, Graff says, include the continuing debate around the so-called SAFE Retirement Act, proposed in July 2013 by Sen. Orrin Hatch (R-Utah). The Secure Annuities for Employee (SAFE) Retirement Act would streamline current pension programs by providing states, employers, and American workers with tools for providing lifetime annuity payments and more secure retirement savings (see “Bill Would Overhaul Public Pension System”). It would address pension reform in three ways:

  • Public pension reform: A new pension plan, called the SAFE Retirement Plan, would have stable and predictable costs, according to Hatch, that state and local governments could use to deliver secure pension benefits. SAFE Retirement Plans would be state-regulated, market-based, fixed annuity solutions to the retirement income crisis in the states, with a consumer safety net, only minimal involvement by the federal government and no federal taxes.
  • Private pension reform: A host of reforms in the bill are designed to help small and midsize employers establish and maintain retirement savings plans for their employees. The bill would also create a new plan called the Starter 401(k), a retirement savings plan that allows employees to save up to $8,000 per year, more than in an IRA, but does not involve the administrative burden or expense of a traditional 401(k) plan.
  • Access to professional investment advice: The bill would also take action to curb over-regulating of 401(k) plans and IRAs, restoring jurisdiction over the fiduciary rules in the U.S. Tax Code to the Treasury Department. The Treasury Department would have to consult with the Securities and Exchange Commission (SEC) in prescribing rules relating to the professional standard of care owed by broker/dealers and investment advisers to IRA investors.

Preston Rutledge, tax and benefits counsel for the Senate Finance Committee, joined Graff during the opening presentation of the conference and echoed many of his warnings. Rutledge works directly for Hatch and was a leader on the team that developed the SAFE Retirement Act.

Many strong proposals in the SAFE Retirement Act enjoy support from both Republicans and Democrats, Rutledge says. For employers and plan sponsors, many of the administrative and contribution burdens associated with traditional 401(k) plans could be circumvented through the Starter 401(k) arrangement, and no annual Form 5500 filings would be required. Starter 401(k) plans would also utilize various industry best practices, he says, such as mandatory automatic enrollment and escalation features.

Rutledge says the easing of administrative burdens related to 401(k) plans will become more and more important as job growth among startups and small companies accelerates. One of the main drivers of sufficient retirement savings is simply gaining access to and participating in a workplace savings plan, he says, so helping companies that are still developing form a defined contribution plan is a crucial effort.

The proposal includes language that would allow for more “open” multiple employer plans (MEPs)—collective plans that, unlike closed MEPs, would free employers that join from the requirement to be part of an umbrella organization with a common business interest.

The “one bad apple” rule would also be eliminated for MEPs with commonality or open MEPs with a “designated plan provider” that registers with the Internal Revenue Service (IRS) and consents to IRS audits—and is designated under the plan as the party responsible to perform the necessary administrative duties. Under current law, an entire MEP can be disqualified for tax purposes as a result of inappropriate action by one member employer.

Graff voiced support for sections of the SAFE Retirement Act that would allow for electronic delivery defaults for all required plan disclosures, and for the more effective benchmarking of target-date investments.

Not everyone is in favor of the reforms proposed in the bill. Hank Kim, executive director and counsel of the National Conference on Public Employee Retirement Systems (NCPERS), said following the bill’s proposal, "America's private sector is facing a retirement security crisis of unprecedented proportions. Public pension plans, on the other hand, are alive and well. Their investment returns have rebounded robustly since taking a hit, like all other institutional investors, during the Great Recession. Those investment returns, along with widespread procedural and operational reforms, have left public pension plans well-funded, financially healthy and sustainable for the long term." Kim urges lawmakers to focus on the defined contribution system, where employees need encouragement through intelligent plan features and incentives to increase savings levels.

NAPA is a sister organization of the American Society of Pension Professionals & Actuaries (ASPPA), which serves as an advocate and supporter of retirement-related professionals and their practices.

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