Compliance August 17, 2012

Model Portfolio Guidance Should Not Be Ignored

All the controversy regarding the Department of Labor’s (DOL’s) guidance about fee disclosures for brokerage windows may have overshadowed its guidance for model portfolios. 
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In July, the DOL’s Employee Benefits Security Administration (EBSA) issued Field Assistance Bulletin (FAB) No. 2012-02R (see “DOL Issues Clarification to Participant Fee Disclosure Guidance”), which superseded Field Assistance Bulletin No. 2012-02 and eased some concerns about the DOL’s guidance for brokerage windows (see “DOL’s Answer in Fee Disclosure Guidance ‘Surprising’”). Question 28 about model portfolios, however, may have been overlooked by the adviser community, said Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP, during “Inside the Beltway,” a broadcast series hosted by the firm.

“I just think people are missing a significant issue here, and it could blow up somewhere down the road,” Reish said, adding that question 28 of the FAB calls for additional information to be sent to participants explaining model portfolios.

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Question 28 in FAB No. 2012-02R asks: “If a plan offers 10 designated investment alternatives (DIAs) and also offers three model portfolios (labeled conservative, moderate and growth) made up of different combinations of the plan’s DIAs, is each model portfolio a DIA under the participant fee disclosure regulation?”  The DOL responded by saying that a model portfolio ordinarily is not required to be treated as a DIA under the regulation if it is clearly presented to the participants and beneficiaries as merely a means of allocating account assets among specific designated investment alternatives.

On the other hand, the DOL said that if in choosing a model portfolio, the participant “acquires an equity security, unit participation, or similar interest in an entity that, itself, invests in some combination of the plan’s designated investment alternatives, such model portfolio ordinarily would be a DIA.”  The guidance also advised that a model portfolio “made up of investments not separately designated under the plan … would have to be treated as a DIA.”

“Too many people seem to be missing the trees for the forest,” reading the disclosure to exempt model portfolios from DIA status but not focusing on the conditions required of such a model portfolio, Bradford Campbell, former assistant secretary of labor for the Employee Benefits Security Administration (EBSA) and currently of counsel, the Employee Benefits & Executive Compensation Practice Group at Drinker Biddle & Reath LLP, told PLANADVISER. 

“The DOL guidance essentially creates a new disclosure category for these non-DIA model portfolios because there are three required, but not well-explained disclosure conditions,” Campbell said.  The model portfolio is not a DIA “if it is clearly presented to participants as merely a means of allocating assets among specific plan DIAs.”  Further, Campbell said, the guidance provides that the plan administrator “must clearly explain how the portfolio differs from the plan DIAs" and “should clearly explain” how each model portfolio functions.

Reish and Campbell explained that allocating to other plan DIAs alone will not prevent a model portfolio from itself being a DIA and that certain information must be clearly presented and explained. “It’s pretty clear that in DOL’s view, this is a requirement,” Campbell said, but he believes the Department should clarify these standards in additional guidance.

Question 28 presents some interesting issues for plan sponsors and advisers to consider, Reish said. For example, who is going to create the participant statements explaining how the model portfolio functions and how it differs from the plan’s DIAs?

This information must be distributed to participants before they direct their investments, as well as annually, Reish added. The plan sponsor must also determine who will be sending this information to participants.

Data & Research August 17, 2012

Engaging Gen Y in Retirement Saving

Honest and practical education, social media communications and proper incentives will result in increased retirement plan participation for Generation Y employees.
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If sponsors understand how Gen Y operates, they can better engage this group of employees, said Farnoosh Torabi, author and Gen Y money coach , during MassMutual’s Retirement Services Division’s first PlanSmart online seminar for plan sponsors called “Who Is Gen Y and Why It’s Important to Know.” She describes Gen Y, those born between the late 1970s and the 1990s, as having a strong sense of entitlement, being technology savvy and desiring to see outcomes right away.  

They have also been through the financial crisis and saw the tech bubble burst, and many are graduating with debt and no jobs, so they are aware of the value of being financially secure. However, Torabi contends, the road map for financial security is lacking for Gen Y.  

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One of best strategies for providing honest and practical education is to establish a mentor program, according to Torabi. HR may inform you and give you all pamphlets and resources, but having a resource in the company who is a few years ahead to encourage you to save and talk about what they wish they had done differently is more relatable, she said. Volunteers who have been participating in the retirement plan and can talk about what their account is doing can help the younger workforce see it and believe it.   

Torabi pointed out this is something free that every company can provide. Sponsors may want to offer incentives for mentoring, but many people just want to help.

 

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Gen Y has a very short-term view, so sponsors should focus communication efforts on short-term benefits. Even though it may be true investing today will result in $1 million at age 65, Gen Y employees are not sure they are going to work for their current employers for many years. Torabi said sponsors should relay to Gen Y that even though it may not be their final stop, they are building a career and establishing roots and relationships. They can also start building retirement that they can take with them. She added that sponsors should tell the younger workforce that if they do it now, they will be years ahead of peers. “If you tell them they’ll be $50,000 ahead of their best friend, that will get their attention,” she said.  

Gen Y is used to being rewarded, so retirement plan education should focus on the incentives, such as the company match contribution, according to Torabi. Companies can also offer breakfast or lunch during education meetings. “A free meal goes a long way when you’re young and struggling to pay bills,” she said.

Participation on projects is important to this generation, so sponsors could include them in benefit communications. In addition, sponsors should acknowledge their efforts and praise them.  

Social engagement may be tricky, but social networks and texting are the preferred way for Gen Y to communicate, so retirement plan sponsors should use Facebook, Twitter and texts to communicate about retirement benefits. However, Torabi noted, the message should be customized to them. “The minute they see or read something that doesn’t apply to them, they click it off, but show them something that will make them laugh or provide a picture of their life, and they’ll pay attention,” she said.

Employers should talk to Gen Y employees with understanding about their debt and not knowing how to organize financially, and give them the option to choose how they want to communicate, she added.  

Sponsors should understand that Gen Y generally is commitment-phobic, according to Torabi, so they may think that opening a defined contribution (DC) plan balance is too much of a commitment. Again, this is why sponsors should emphasize that they have total ownership of their accounts and they are portable. Relay the message that “when you leave, it won’t be with just a box of books and a plant; you will leave with huge assets,” she said.  

Finally, Torabi suggested plan sponsors just make it happen for Gen Y. Automate participation, and do not make it too conservative. She said sponsors should start with a deferral rate than higher 3%, because many assume since you start with this, it is the recommended savings rate. Let them know saving more is the key.

A replay of the MassMutual seminar can be accessed here.

 

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