In Practice July 8, 2007

Participant Education Still Important in Automatic Era

Although the Pension Protection Act has officially ushered in a wave of automation to retirement plans, education is still a vital part of a successful 401(k) and advisers can help plan sponsors measure the effects of their education campaigns.
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In fact, despite this being the era of auto enrollment, “I believe nothing has changed,” Sheila Wales, Vice President and National Director of Education Services at Transamerica Retirement Services; “We need to educate plan sponsors that participant education is still important.”

Automation is promoting defaulting into the retirement plan with a 3% deferral, but the industry knows that is not enough to accumulate a proper retirement savings, Wales explained. Therefore, it is important to educate people to stay in the plan and hopefully they will take more of an interest in their employer’s offering.

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John Mott, Corporate Client Group Director & Senior 401(k) Advisory Member, at Smith Barney, agreed with Wales, asserting that with a slowdown in the economy, increases in the cost of living, participants need to be engaged to understand why they should save and what to save. Although automatic enrollment can be a strong tool, Phyllis Klein of CAPTRUST Advisors also commented that people typically targeted in default funds are often the most transient part of the workforce, which means they are most likely to cash out when they leave the firm.

Companies need to take the initiative to educate employees, but must figure out what the best way to engage their employee base is – whatever specific educational tool a plan chooses to use, the effort won’t be easy, Mott said. Klein suggested that the key to connecting to participants is to be able to act in the moment the education is being delivered.

“To get them to make a change, it has to be high touch,” Mott continued. “With some people, you have to spoon feed them.”

Measuring Results

Although education is important, it is equally important not just to offer it, but to benchmark the plan and participants and understand who is doing what, Mott said.

If a sponsor hasn’t yet spoken to the retirement plan provider about getting plan data, he should, Klein said. Wales said that Transamerica is able to offer impact statements that show non-participants what the benefits would be if they were to join the retirement plan.

However, Klein commented, the numbers are only worthwhile if you take the time to look at them – which can be difficult for a plan sponsor wearing a lot of hats, but is something the adviser can help with.

Case Study

Motorola’s director of Global Rewards, Randy Boldt, shared his experiences with educating an auto-enrolled participant base after the company moved to auto-enrollment seven years ago. He said the company tried various meeting types – live meetings, webinars, and workshops – to see how they could best engage their participants.

According to Boldt, Motorola had 95% participation before instituting the auto enrollment. After, 54% of new hires remained at the 5% default, 30% increased their deferral, 6% decreased their savings and 10% opted out. Non-participants now get an annual targeted communication from the company, as do those who are not saving up to the company match level and those who are only saving between 5% and 8% of their salary.

When examining a participant communication campaign, Boldt said he asks the following questions: is the communication personable, it is easy to enroll, does it offer a call to action, and how many times are the participants going to be touched during the year.

In Practice July 8, 2007

Bringing a PPA Fiduciary Adviser to a Retirement Plan

Suggesting that many retirement plan advisers will become fiduciary advisers under the Pension Protection Act (PPA), attorney Fred Reish, Partner at Reish Luftman Reicher & Cohen, said plan sponsors should expect these advisers to be experts on a successful retirement plan, not just investments.
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Even with the PPA, there is still a fundamental misalignment in the industry between sponsors, providers and participants, Steven Greenstein, VP with SunGard ProNvest commented. Sponsors are focused on liability and costs, providers are delivering services in a one-size fits all approach, and participants are focused on themselves, he said. In order to have a successful system, Greenstein suggested, it is critical to bring these three groups into alignment.

There are, and will continue to be, participants in retirement plans who need advice, commented Joan McDonagh, Manger, 401(k) Technical Resources, Great-West Retirement Services; whether because of large account balances, or to understand their risk tolerance or because they do not want to be invested in the default and want to be advised in selecting an appropriate lineup.

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The focus should be on participants, so both sponsors and providers commit to helping participants get on track and develop a retirement income plan. Doing work strictly at the plan level might not be enough to help participants achieve retirement security, Lou Harvey, President of DALBAR said; therefore you have to do work at the plan level, which can be done through hiring a fiduciary adviser.

Benchmarking the Advice and Adviser

When hiring a fiduciary adviser, a plan sponsor is responsible for selecting, monitoring and auditing the adviser. So far, Harvey said, the Department of Labor (DOL) has only given guidance for the selection and monitoring process.

Plan sponsors have no benchmarks by which to evaluate the advice and advisers, Greenstein said. Luckily, they have no liability for the advice given to participants, only for the person they put in front of their employees.

Two specific areas that plan sponsors should benchmark, according to Reish, are reasonableness of fees and results of the advice. Look at the big picture, he advised – “are the people who scored themselves as conservative [investors] more in bonds and are those who are aggressive [investors] more in equities than bonds?’

Reish also noted that he think sponsors should ask advisers more than just their qualifications. Advisers should give plan sponsors tools to help the sponsor monitor the adviser’s services – and sponsors shouldn’t be afraid to ask the adviser how he will do this – and advisers should be prepared to answer those questions.

FAB 2007-1 from the DOL offers a road map to selecting a fiduciary adviser. If the goal is for sponsors to minimize fiduciary liability regarding participant investing, having a fiduciary adviser, if properly selected, is a way to do that, McDonagh commented.

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