In Practice September 26, 2018

PANC 2018: Financial Wellness

The importance of measuring return on investment and addressing participants’ short-term needs.

Reported by

A recent PwC survey found that retirement plan participants’ top three financial concerns are insufficient emergency savings, not being able to retire when they want to and not being able to meet monthly expenses, said Michael Kane, managing director at Plan Sponsor Consultants, and moderator of the 2018 PLANADVISER National Conference panel on “Financial Wellness.” “People are stressed,” Kane said.

John Hancock Retirement Plan Services has conducted a financial stress survey for the past five years to uncover what, exactly, people are concerned about, said Lynda Abend, chief data officer with the firm. “Four out of 10 employees feel less productive at work because of financial worries, and this is costing employers $5,000 a year per employee,” Abend said.

The survey also found that 25% of people have no emergency savings, and 40% could not cover a financial emergency costing $500, she said. Thus, they are leveraging their credit cards and taking out loans. They are reluctant to tell their employers about their financial dilemmas because they feel there is a stigma attached to financial difficulties, she said.

“Financial wellness programs offer employers an opportunity to offer guidance to help individuals get on the right path, but they must be personalized solutions,” Abend said. “Advisers need to drill in to understand the needs of a particular company.”

Chad Brown, vice president and managing director of wholesale distribution at Transamerica said that the “conversation around wellness needs to go beyond finances. You need to learn about participants’ health habits, because they make financial decisions related to their health. Sixty-two percent of loans or hardship withdrawals from 401(k) plans are related to health expenses,” Brown said. “Eighty-one percent of people over the age of 65 have chronic health problems. Eighty-one percent of the participants we serve say they appreciate it when an adviser addresses their health issues.

“As a workforce ages, they are 14 times more likely to face higher healthcare expenses,” Brown added.

In order to get an employer’s buy-in into a financial wellness program, you need to demonstrate the measurable benefits to the employer, said Michael Domingos, vice president, national corporate strategy and distribution at Prudential Retirement.

Thus, nine years ago, Prudential started measuring its own financial wellness program and its impact on its employees and organization, Domingos said. In 2009, 35% of employees said they had some level of financial stress and were taking it with them to work. By 2017, Prudential reduced that to only 14% of employees and accomplished this through plan design (automatic enrollment at 4% with annual 1% escalations up to a 15% threshold), plus group and one-on-one meetings, he said.

In addition, for participants with child and elder care needs, Prudential increased benefits for them. The firm also began offering digital financial education.

For clients, Prudential now measures the cost of not offering financial wellness programs, Domingos said. One client, for example had 25% of its employee base, or 25,482 employees, distracted at work because of financial concerns. Of this group, 43% admitted they spent three hours or more a week addressing these financial challenges. Prudential calculated that this comes to 1.8 million hours a year in lost productivity.

“Find such a return on investment (ROI) measure,” he advised the audience. “Take this from an interesting conversation to something measurable.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Tina Wilson, senior vice president, head of investment solutions innovation at MassMutual U.S., agreed that coming up with that ROI figure is key. “It is the way to align human resources and the chief financial officer around a common goal and getting them in agreement on the value of the financial wellness plan,” Wilson said. “If a participant says beyond their retirement date, they become a liability to the organization, costing $20,000 to $30,000 a year in presenteeism, workmen’s compensation and health care costs.”

But to resonate among participants, a financial wellness program needs to address their concerns. “Long-term savings has been our focus, but participants have short-term goals, such as emergency savings and balancing college savings and retirement savings,” Wilson said. “You cannot ignore them. And, give them guidance at an individual level.”

Because people like to learn in different ways, a financial wellness program also needs to take a “multipronged approach,” she added. “It should be a combination of digital tools, education and one-on-one meetings.”

Abend said that investment management firms have the ability to take financial wellness “to the next level by being predictive about who is most likely to take out a loan and to get in front of them before they make that decision.” Automatic emergency savings accounts would be one solution, Domingos said.

Compliance September 25, 2018

Closely Watched Case Regarding Burden of Proof Dismissed And Settled

A significant split among circuit courts on this issue remains unresolved.

Reported by

When Pioneer Centres Holding Co. v. Alerus Financial on September 20 was settled instead of going before the Supreme Court, many people in the retirement legal profession and retirement industry were disappointed. With the case settled confidentially, the expected clarity the decision would offer has been lost. What remains is a significant split among circuit courts regarding the burden of proof in Employee Retirement Income Security Act (ERISA) fiduciary-breach cases.

The 10th U.S. Circuit Court of Appeals found that Pioneer Centres was required to prove a transitional trustee was at fault for a failed transaction and failed to do so.

ERISA and employee stock ownership plan (ESOP) litigator Chris Nemeth, partner at McDermott Will & Emory in Chicago said, “This particular issue that we thought was going to be decided by the Supreme Court is an issue, from an ESOP litigation perspective, that we had been dealing with at a significant level in matters that are publicly filed and in pre-litigation matters and it is an issue that crops up again and again.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Nemeth summarizes the issue in his own words: “There’s a split of authority at the Federal circuit level about who bears the burden of proving what is called loss causation—if a plan participant has sued because of harm that the participant alleges is due to action taken by a fiduciary. Certain circuits courts have said causation is an element of a cause of action. Certain circuits have said that it’s the plaintiffs burden to show that the harm was attributable to the fiduciary. Other courts have said that once a participant makes out a prima facia case, alleging the elements, that the burden shifts to the fiduciary to say whatever harm that is alleged to have been caused is not harm that fiduciaries caused. The basis for that is a shifting rule grounded largely in trust law.

“That is, different courts have used these issues differently. For practical purposes what that has meant over the last several years is that in certain instances, people have tried to file lawsuits in different jurisdictions because perhaps certain jurisdictions have a rule that may be more favorable to plaintiffs than defendants.”

The issue behind this case also has implications outside of ESOP litigation because of the way it’s positive for purposes of showing harm. It would be equally applicable in a straight ERISA case that didn’t involve any ESOP, says Erin Turley, partner at McDermott Will & Emery in Dallas.

“While it’s not going to be settled in this instance, it will continue to be split among the circuits and we’re still going to have to know who bears this burden. That’s why I think it’s bigger than just an ESOP case, because that same causation and burden issue is applicable in any case involving a stock bonus, a 401(k) or any type of qualified retirement plan.”

Were Nemeth or Turley surprised that the case was dismissed and the case was settled?  Nemeth says, “These cases are expensive to litigate and pursue, and settlements at any stage of litigation are not surprising. We were hopeful that we would have some kind of articulation in this case from the Supreme Court, but there will be another opportunity in the near future for the court to comment on it.”

Turley says, “Aside from the forum shopping that plaintiffs do because of the non-uniformity of the law, the problems with inconsistencies in the law is that decisions come out in different ways based on similar facts, which is why we’re all the more hopeful that the SCOTUS in the near future will weigh in on it.”

«