Client Service September 29, 2016

Certain Elements Important to Financial Wellness Programs

An analysis by Fidelity found financial wellness topics and needs important to certain groups of individuals.
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An analysis of individuals participating in Fidelity’s financial wellness program finds there are definitely some groups that have unique needs, and suggests ways plan advisers and sponsors can tailor their programs to address these concerns.

Meghan Murphy, director of thought leadership at Fidelity in Boston, tells PLANADVISER approximately 270,000 individuals have completed Fidelity’s financial wellness checkup, which shows “they want to tell their situation and get ideas for next steps.”

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Overall, most people (88%) are not confident about their financial future. More than half do not have healthy saving and spending habits or behaviors, and only about one-third (38%) have more than three months’ salary in an emergency fund. The top three topics that they are interested in: health savings accounts (HSAs), simple rules for saving and spending and saving for an emergency fund.

One group Fidelity pulled a snapshot of is what it calls “Unconfident Millennials.” Most of these individuals (89%) don’t feel confident or are wary of their current financial picture. About one-quarter (22%) are do-it-yourselfers, but they admit that they’re not confident in their investing and managing skills. Despite having the longest time horizon, more than one-quarter (28%) don’t invest in the markets.

Murphy adds that most Millenials said they are either stressed financially or just ok. Forty-two percent have little or no emergency savings. “Emergency savings is something on which plan sponsors can focus,” she says. “If individuals don’t have that, credit card debt increases, they are less likely to save and financial confidence decreases.”

NEXT: Helping single moms and Gen X

Fidelity also found single moms are in need of the most help. Most (97%) do not feel confident about their financial situation. More than half (60%) have little or no emergency savings, and 67% have credit card debt. About one-quarter (27%) spend more than they earn, while half (49%) break even each month.

“Single moms have so many competing financial priorities—their child’s next field trip or a sport their child wants to play,” Murphy notes. “Seventy-six percent said they are either living paycheck to paycheck or spending more than they earn.”

She adds that women in general tend not to talk about money, so employers need to get them engaged and talking about a strategy. “Budgeting is a key pillar of a financial wellness program,” Murphy says. “Fidelity has a rule of thumb: Spend 50% of pay on essentials, 15% for retirement—or at least work toward that, then save 5% for short-term expenses.

In its analysis, Fidelity also noticed a group it calls “Vacation Dreamers.” “Regardless of confidence, income, age or savings goals, everyone wants to get away,” Murphy says. This was especially true for Generation X individuals; they have a lot of competing financial priorities, but 48% said their top savings goal is for a vacation. However, 30% of Gen X have education debt, 54% have a mortgage, and they also have credit card debt.

Fidelity found having multiple savings goals decreased financial confidence. A financial wellness program can help individuals put a plan in place, perhaps to save in different investment vehicles “where the money is not easily accessible,” Murphy says. Or, having too many savings goals may not be best. “Prioritizing which are short-term and which are long-term may help,” she adds.

Murphy notes that other Fidelity research has found that people who have the ability to save even a little are much more financially confident. Individuals should be encouraged to save enough in their retirement plans to get the company match.

However, the goal of a financial wellness program expands beyond just savings, and should not all be focused on retirement. “Financial wellness is about so much more than retirement,” Murphy concludes.

Compliance September 29, 2016

Second Circuit Affirms Fiduciary Liability for Poor Diversification

A concise example of summary judgement published by the 2nd U.S. Circuit Court underscores retirement plan fiduciaries’ absolute duty to diversify and carefully administer participant assets. 
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The 2nd U.S. Circuit Court of Appeals has affirmed a lower court’s ruling in Severstal Wheeling Retirement Committee v WPN Corporation, a complicated but informative example of retirement plan litigation that considered the extent of a plan fiduciary’s duty to diversify investments, as well as the allocation of liability among plan managers.

By way of background, WPN Corporation and its lead executive Ronald LaBow are named fiduciaries of two defined contribution plans sponsored for the employees of a company called Severstal Wheeling Inc. The plaintiffs in the initial suit include Severstal Wheeling Inc. Retirement Committee and other named fiduciaries of the plans, who sued WPN and LaBow on behalf of the plans for breaches of their fiduciary duties.

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Until late 2008, according to case documents, the plans were funded and maintained through a trust sponsored by the WHX Corporation. The combined trust pooled the plans’ assets with assets from other employee benefit plans sponsored by WHX. After Severstal Wheeling, Inc. separated from WHX, a portion of the assets was transferred from the Combined Trust to a separate trust holding the plans’ assets. Before and after the transfer, the plans were managed by WPN, whose sole employee was LaBow.

The main charge of wrongdoing was that WPN and LaBow did not put into action demands by the investment committee to diversify and otherwise properly manage participant assets. According to the district court opinion, the committee testified that LaBow’s account of whether and how the plans could be diversified was “an ever evolving story of what could or could not be done” that “seemed to change just about during every conversation.” 

Crucially, the judge also found that governing documents did not give LaBow and WPN the option of abdicating responsibility to the retirement plans’ committee. LaBow argued that he met with several impediments to diversifying the plans’ assets, including that not all assets the committee wanted were available, that he was not given an investment policy to guide him and that the custodian of the trust did not recognize his authority to direct investments. The bench trial judge was persuaded by testimony of several experts to reject these arguments, case documents show.

The court ordered the investment manager to pay the plans $9,710,438, including disgorgement of the $110,438 paid in investment management fees during the period, plus $5,305,889.74 as prejudgment interest. 

NEXT: Details from the appellate decision 

The appellate court’s summary decision explains that, in late 2008, LaBow directed the treasurer of WHX to transfer all of the assets maintained in an account managed by Neuberger Berman, LLC, from the combined trust to the newly created Severstal trust. On November 3, 2008, the entire contents of the Neuberger account, an undiversified portfolio comprised of mostly energy stocks, were transferred to the Severstal Trust.

“LaBow and WPN argue that this transfer did not violate ERISA,” the appellate decision states. “But the district court’s finding of liability was not based only on the transfer itself; rather, the district court held that LaBow breached his fiduciary duties by selecting the Neuberger assets—an undiversified portfolio of energy stocks—as the only assets to be transferred to the Severstal Trust, and did so without informing the committee before or after the transfer what investments had been transferred, with the knowledge that Neuberger Berman was not going to manage the assets, and without taking any steps to ensure the ongoing prudent management of the assets.”

The appellate court explains LaBow and WPN’s challenge to these determinations largely turns on the district court’s assessment of the evidence and its credibility determinations as to expert testimony.

However, it is “within the province of the district court as the trier of fact to decide whose testimony should be credited,” the summary order contends, “and we are not allowed to second-guess the district court’s credibility assessments … Because LaBow and WPN have not asserted any arguments that suggest, let alone confirm, that the district court’s factual findings are clearly erroneous, we have no basis to set aside the district court’s ruling.”

Appellants additionally argued that the district court erred in finding that they had been granted management control and authority—and thus were fiduciaries under Section 3(21)(A)(iii) of ERISA—because LaBow could not have exercised such authority had he attempted to do so.

“Even assuming that the inability to actually exercise control over assets could present a defense to a finding that a person is a fiduciary under Section 3(21)(A)(iii)—which requires only the grant of discretionary authority, not its actual exercise, see Bouboulis v. Transp. Workers Union of Am., 442 F.3d 55, 63 (2d Cir. 2006)—the district court made explicit factual findings rejecting that argument at trial. None of Appellants’ arguments indicate that those findings are clearly erroneous.”

The full appellate decision is available for download here. 

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