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Sharpen Your Pencils 

Do financially educated employees perform better?  

A MetLife paper claims that financial education can have a positive effect on employee wellness and productivity.

MetLife’s 9th Annual Study of Employee Benefits Trends found 78% of respondents said concerns over financial problems while at work can have a negative impact on employee productivity. In conjunction with the study, MetLife also released a white paper with the Boston College Center for Work & Family, titled “The MetLife Study of Financial Wellness Across the Globe.” 

The white paper includes case studies of multinational corporations American Express and EMC, focusing on their financial wellness programs at sites in Hong Kong, India, Ireland, Mexico, and the U.S. The paper reveals how government provisions and cultural variations in different countries impact company decisions regarding benefit allocation as well as financial training. The study looks at the specific steps employers have taken to enhance their employees’ financial wellness to attain solutions that fit business and employee needs.

Key findings from the survey include:

• A majority of consumers worldwide (90%) want to become better at managing money.

• Fifty-eight percent of employees in the U.S. would like their employer to provide access to financial planners to help them make decisions about financial needs.

• Seventy-four percent of consumers worldwide expect ill health to be significant, or make quite an impact on their finances. 

• Seventy percent of financially literate people save for old age, while only 47% of those with poor financial knowledge save for old age.

Carried out correctly, financial education can have a benefit effect on employee wellness; financial education programs have the potential to lower financial stress, reduce absenteeism, increase productivity and lead to a more loyal workforce.

Consumers are generally poorly prepared to make good investment choices, according to MetLife. Consumer financial illiteracy is widespread globally and consumers are not sufficiently committed to their own financial well-being. While most people recognize the government will not provide them with an adequate retirement income, this realization does not translate into increased savings or investments. 

Global programs often require local adaptation. While a company may have a global financial wellness program, such a program must be adapted to local needs. 

MetLife also discusses how governmental provisions can have a large impact on employer-provided benefits. Governments differ widely in the extent to which they support people with social welfare provisions; such funds are coming under increased pressure due to an aging population and global economic challenges.

Cultural differences regarding financial education are significant as well. The amount and type of financial education as provided by employers varies from one country to another. There are cross-cultural differences regarding the general level of financial literacy, attitudes toward retirement, wealth and risk, as well as expectations regarding employer involvement in the field of financial wellness.

Return on investment may not be the best measure of financial wellness programs. The companies interviewed saw a clear connection between financial well-being and the work they are doing proactively to improve employee health and wellness. They believe financial stress has a negative impact on productivity,­ even if it is difficult to measure directly through ROI calculations. They are using participation measures and metrics that evaluate changes in behaviors to determine the success of their efforts. —Nicole Bliman 

Favored Participants 

Do 401(k) plans benefit low-income workers more than others? 

Low-income workers receive more benefits when participating in a 401(k) plan, according to the Center for Retirement Research at Boston College.

The Center for Retirement Research released a new brief titled “Do Low-Income Workers Benefit From 401(k) Plans?” The brief’s authors’ Eric Toder and Karen E. Smith challenge the assumption that only high-income workers benefit from the tax incentive 401(k) plans offer. The authors test whether employer contributions actually may increase total compensation for low-income workers, who may be more reluctant than high-income workers to accept wage reductions in exchange for retirement savings contributions.

According to the brief, past studies have concluded that 401(k)s disproportionately benefit high-income workers because they have higher participation and contribution rates than low-income workers, and they receive higher tax benefits from each dollar of contribution.

The researchers used a sample consisting of workers offered a 401(k) plan who have held their current job for one to five years and also had a prior job. The goal of the analysis was to determine the effect of employer 401(k) contributions on earnings, and whether the effect differs for low-income and high-income workers, controlling for other factors that could influence earnings.

The results show that, holding other determinants of earnings constant, additional employer contributions do reduce wages and the size of the reduction does vary by income level. These results are all statistically significant. The question of interest concerns the absolute dollar reduction in earnings associated with an additional dollar of employer 401(k) contributions. The final calculation shows that, among male workers, an additional dollar of employer 401(k) contributions replaces 90 cents of wages for those with high incomes, but only 29 cents for those with low incomes. Among female workers, an additional dollar of employer 401(k) contributions replaces 99 cents of wages for those with high incomes, but only 11 cents for those with low incomes.

These results support the notion that the fringe benefit/wage tradeoff can vary for workers at different income levels. For high-income workers, additional 401(k) contributions are almost fully offset by lower wages. For low-income workers, additional contributions reduce wages only modestly—by just 11 cents to 29 cents per dollar—suggesting that employer contributions increase total compensation for lower-income workers.

The preliminary findings imply that low-income workers receive a benefit that is separate from the tax deferral: Their total compensation rises due to 401(k) contributions from their employers.

In order to test this theory, the authors’ main data source for analysis was the Survey of Income and Program Participation (SIPP), a nationally representative longitudinal survey of households conducted by the U.S. Census Bureau. The SIPP provides data on demographic characteristics of workers and job characteristics, such as whether workers are offered a pension plan and whether and how much employers contribute to a plan. The analysis uses data that match the 2004 and 2008 panels of the SIPP with longitudinal Social Security administrative earnings data from the Summary Earnings Records and Detailed Earnings Records.

The writers state the main reason low-income workers would prefer income versus fringe benefits like 401(k) contributions is because the income meets their immediate needs, rather than their additional savings. Another reason is low-income workers who have no income tax liability or are in the 10% tax bracket gain much less from the availability of tax-free accrual in a 401(k) than high-income workers.

Toder and Smith say, in theory, employers could respond to worker preferences by structuring compen­sation differently for low- and high-income workers. They could pay low-income workers relatively more in wages and less in fringe benefits and vice versa for high-income workers.

To read the brief and related working paper in their entirety, visit http://crr.bc.edu/briefs/do_low-income_workers_benefit_from_401_k_plans.html. —Tara Cantore 

Getting Better 

403(b) sponsors improving plans 

In the face of prolonged economic instability, 403(b) plan sponsors are forging ahead with a variety of plan improvements.

The latest 403(b) plan sponsor survey from the Plan Sponsor Council of America (PSCA) and sponsored by the Principal Financial Group found increased use of automatic enrollment, greater participant education, and refined investment lineups among 403(b) plans.

A little more than 10% of respondents added automatic enrollment in the last year compared with 8% of 401(k) plans that added automatic enrollment. More than half of organizations increased their employee education efforts, with nearly one-quarter providing education specifically on market volatility.

More than 30% of organizations changed the investment lineup in the last year, including nearly 65% of organizations with 1,000 or more participants.

In addition, the survey found a little more than 16% of 403(b) sponsoring organizations either increased or restored their matching contributions in the past year. Nearly 40% of organizations that suspended or reduced their match during the last four years have now restored it to previous levels.

Nearly 45% of respondents indicated an increase in participation, up from 38% reporting an increase the previous year.

“The survey shows that the 403(b) system actually is improving during this volatile period,” says David Wray, president, PSCA. “Employers are following through on their commitments to their employees, and employees are responding.”

The survey also gives insight into plan sponsors’ evolving awareness of their Employee Retirement Income Security Act (ERISA) status. Compared with the previous survey, fewer plan sponsors identify their plans as non-ERISA plans (12.1%), and more are uncertain of their plan’s ERISA status (12.6%). Larger 403(b) plans are converting to ERISA status at twice the overall rate.

Half of all plans now have a committee responsible for reviewing fund performance and/or plan compliance. The percentage is actually higher among plans with 200-999 participants (77.8%) and plans with 1,000 or more participants (89.2%).

Nearly 10% of all plan sponsors report they are monitoring whether participants are on track for retirement, but twice as many (20.3%) of sponsors with 1,000 participants or more say they are doing so.

Five percent of organizations have consolidated the number of service providers to their plans. The average number of providers prior to consolidation was five, and the average following consolidation is two. Another 4% of organizations say they plan to consolidate the number of service providers to their plan in the next year. —Rebecca Moore 

Americans Believe Social ­Security Age Will Jump to 80  

Thirty-nine percent of Americans say the Social Security retirement age will jump to 80 by 2036, according to a survey commissioned by Engage America for its Social InSecurity Project. The survey also revealed 63% of respondents do not believe that, in 2036, Social Security “will remain fully funded and operate basically as it does today,” and 37% think Social Security “will cease to exist.” —Tara Cantore  

Nearly Half of Americans Feel Unprepared for Retirement  

Forty-eight percent of Americans do not feel prepared for retirement. According to ING’s Retirement Revealed survey, despite this fact, 75% of respondents that are employed full-time and have an annual income of $40,000 or more, are contributing to their workplace retirement plan. The survey also found 71% of respondents say they do not have a formal investment plan in place to help them reach their financial goals. —PA 

Gen X and Y Saving More for Retirement than Boomers 

Generations X and Y have embraced the concept of self-directed retirement savings more than their parents and grandparents. A survey from TD Ameritrade found that 85% of working Americans have an Individual Retirement Account (IRA) and/or a 401(k)/403(b) plan; more than a third (36%) have both. However, it’s the younger generation of workers who are saving more diligently: 25% of Gen Y and 23% of Gen X are funding both their 401(k)/403(b) plans and their IRAS, compared with 16% of Boomers and 9% of Matures. Yet, 74% of Boomers are not completely confident that they will reach their savings goal by the time they are ready to retire. —Tara Cantore 

Gathering Assets 

Report examines growth of investment options in DC plansRecord-setting levels of defined contribution assets will continue to grow, yet mutual funds will not be the sole beneficiary.

Celent, a financial research and consulting firm, examines the current retirement landscape in the U.S. in its report, “Developments in the Defined Contribution Market: New Funds and New Investment Vehicles in the U.S. Market.”

By the end of 2010, private defined contribution (DC) plans represented $4.5 trillion dollars in assets and a record high 25.8% of U.S. retirement assets (excluding Social Security). Celent says the marketplace can be categorized in several ways: by plan type (401(k)s, Keoghs, etc.), by fund type (hybrid, target risk, target date), and by investment vehicle (separate accounts, mutual funds, collective investment trusts). The report highlights major changes for each of these categorizations.

Historically, mutual funds have been the investment vehicle of choice in the DC market, with more than 50% of assets held in mutual funds. However, over the past decade, new investment vehicles have continued to gain exposure in the DC market. These vehicles include: separate accounts, collective investment trusts, variable annuities and company stock. The report outlines the evolution and growth of these investment vehicles.

According to the report, the DC market is expected to continue to evolve and grow. Drivers of growth include: use of auto-enrollment, auto-escalation, concern among the mass affluent population that Social Security benefits will be cut, and stronger adoption rates among younger generations.

Other trends expected in the DC market include:

• The top 10 recordkeepers will continue to win large plan sponsors and maintain their strong market share of the recordkeeping business.

• Collective investment trusts (CITs) have grown from $400 billion in 2006 to $900 billion in 2010 in the DC market. By 2015, CITs are expected to grow to approximately $2 trillion within the DC market.

• More conservative glide paths among target-date funds (TDFs) will cause lower payouts for plan participants.

• More plan sponsors that are not currently using custom designs will consider switching from off-the-shelf to custom-designed funds in the next couple of years.

“The defined contribution market is undergoing several developments. One of the most interesting is the growth of collective investment trusts,” said Alexander Camargo, Celent analyst and author of the report. “Even though these vehicles have been around for a long time, it’s as though plan sponsors are discovering some of their regulatory and cost benefits for the first time. 

—PLANADVISER staff 

Adviser Opportunity 

Room for 403(b) plan improvement means room for advisers  

“There is still tremendous opportunity for advisers in the 403(b) space, particularly among smaller plans,” said Aaron Friedman, national non-profit practice leader, The Principal.

The latest 403(b) plan sponsor survey from the Plan Sponsor Council of America (PSCA) and sponsored by the Principal Financial Group found 403(b) plan sponsors are forging ahead with improvements to plan design and plan oversight. However, Friedman told PLANADVISER that smaller plans (those with 1 to 49 employees) continue to lag larger plans in making improvements in several areas.

In particular, the survey found more than one-third of all 403(b) plan sponsors have made changes to their investment lineups within the last year. However, four times as many larger plans made changes (64.5%) than smaller plans (15.4%). Friedman said this shows there are not a lot of people working with smaller plans that are paying attention to the investments or doing due diligence on the investments.

Also, Friedman pointed out that 78% of sponsors of larger plans (1,000 or more participants), but only 34% of sponsors of the smallest plans have increased participant education in the last year. With the changes in the regulations and the plan changes sponsors are making, there is certainly a need for more education, and this is a place where advisers can add value, he says.

More than a quarter (26.9%) of the smallest 403(b)s indicated they are unsure of their Employee Retirement Income Security Act (ERISA) status, an increase from 19.3% a year ago. “This is a great opportunity for qualified advisers. They can make sure the plan is operating in the appropriate manner, with appropriate investments,” Friedman said.

The number of plans with an accountable committee for investment and/or plan oversight has grown tremendously over the years, but only about 20% of the smallest plans have one. Advisers can bring to the table expertise about how to run a responsible plan. Advisers can “help these small 403(b) sponsors organize, develop, and implement strategies for their plans,” Friedman added.

Without the help of an adviser, consultant or attorney, smaller plans may not be connected and know what the new rules are and what they need to do. Friedman told PLANADVISER that advisers need to visit nonprofits in their communities, such as houses of worship, Chambers of Commerce and places they volunteer, and ask questions about whether they have a 403(b), how it runs and how it’s working for employees.

“As we’re out there in various communities speaking to advisers, this is still a message that is hitting home. Advisers realize they already have these contacts and the opportunities are just waiting for them to act,” Friedman concluded. —Rebecca Moore 

Coming to a Close  

Walmart and Merrill Lynch to pay $13.5m for excessive fee suit 

Walmart Stores and Merrill Lynch have agreed to pay $13.5 million to settle a class-action lawsuit.

Walmart and Merrill Lynch, its retirement plan administrator, allegedly breached their fiduciary duty for nearly two million past and present Walmart employees in the company’s 401(k) plan, according to news reports.

According to papers filed in a Kansas City federal court, the two defendants admitted no wrongdoing. However, Walmart said it would “further its goal to offer investment options with fees that are reasonable,” remove mutual funds that charge high fees and provide more financial education to its employees.

Matthew Card, a spokesperson for Bank of America, said to PLANADVISER: “We are pleased to have been able to work with Walmart to resolve this matter and continue to serve its employees with a high-quality 401(k) platform.”

Walmart employees will not directly receive the $13.5 million from the settlement, which will go toward reducing future 401(k) plan fees. However, named plaintiff Jeremy Braden will receive $20,000 from the settlement funds. Lawyers representing the class could receive as much as $4 million. A court hearing that will approve the settlement and the fees will be held at a future date.

The lawsuit was originally filed in 2008 by Braden, a Walmart employee in Highlandville, Missouri. The lawsuit charged that Walmart did not do enough to get lower fees for its mutual fund offerings. The lawsuit alleged various violations of fiduciary duty and federal pension law. 

The trial judge’s dismissal of the case was reversed by the federal court of appeals in St. Louis, Missouri. In an amended complaint, Braden added Merrill Lynch to the suit as a defendant, alleging the investment firm received undisclosed kickback payments from outside mutual fund companies just for allowing them to be in the plan, reports Forbes. —Tara Cantore 

Missing an Action 

Affluent Americans lack comprehensive plans 

“Comprehensive” is a key word, according to a poll of affluent Americans regarding retirement; they might say they have a plan, but what does that include?

A survey of affluent Americans from Wells Fargo & Company shows that many of them are feeling some of the same deep insecurity felt by middle-income Americans about their ability to retire in comfort.

“We find the rich versus poor narrative in the U.S. is more complex than we might expect, with fears and concerns about retirement felt along the income spectrum,” said Karen Wimbish, director of Retail Retirement at Wells Fargo, at a media briefing in New York.

In the survey, “affluent” was defined by having more than $100,000 in investable assets. This was further divided into “mass affluent”—having between $100,000 and $250,000—and “affluent”—having more than $250,000. The ages ranged from 25 to 75, with most of the 801 respondents being older than 40.

Wimbish said she was surprised by several of the findings. For one thing, nearly one in five (19%) of the mass-affluent respondents said they will need to work until “at least age 80,” a sentiment reported by 25% of middle-class Americans surveyed at the same time. Among all the affluent surveyed, 12% say they will work until age 80.

“I don’t think companies are planning on keeping people around past the ages of 65 or 75,” she said. The effects this will have on younger employees hoping to move up in their company may be cause for concern.

Also surprising was that 21% of respondents between the ages of 60 and 75—those in the “red zone” of retirement—don’t know when they’ll be able to retire. “You’d think they’d have more clarity at that point, but far too many are unsure,” noted Wimbish.

Wimbish also discussed the value of having a comprehensive retirement plan in place. While many affluent Americans say they have a plan, when you dig a little deeper, significant holes in these plans exist. “We found that many of these plans do not include a budget, have expected deferral rates of 8% or are not written down,” she said. She also said that more affluent respondents are more likely to have a comprehensive plan.

This lack of a comprehensive plan can affect significantly one’s confidence in the ability to retire. The survey found that about one-quarter of affluent Americans (23%) say they are not confident they will have saved enough for retirement, and this is especially true for Americans with assets between $100,000 and $250,000 (33%), people without a written retirement plan (32%) and women (31%). Additionally, four in 10 affluent Americans (40%) say their biggest fear about retirement is they “will do all the right things today and it still won’t be enough for tomorrow” and 9% fear they “will have undersaved and won’t recover.”

Another area of concern is in spending habits. Wimbish said affluent Americans want to cut back on spending, but are having trouble doing this—and, she added, this demographic should be able to find places to cut back. The survey found that more than one-third (37%) say they need to cut back their spending significantly to save for retirement, including nearly half (48%) of those with $100,000 to $250,000 in investable assets.

Reliance on 401(k)s and their Financial Advisers  

Among the affluent surveyed, 401(k)s or similar plans represent 42% of household assets. Affluent Americans contribute a median of 10% of their incomes to 401(k) accounts, compared with 6% contributions by middle-class Americans.

“The importance of the employer-sponsored plan in helping save for retirement can’t be stressed enough,” Wimbish said. “Many people simply would not have saved as much if it weren’t for the 401(k).”

Advisers still have much ground to cover with their affluent clients, says Wimbish. The industry has been focused on the accumulation phase, but now, as more affluents approach retirement, they want to be able to take the entirety of their assets and say, “Okay, how does this translate into retirement income?” said Wimbish. To help clients answer this question, Wells Fargo had a “soft launch” earlier this year of an “income illustrator,” which helps clients see where their money will be coming from in retirement.

Wells Fargo is hoping to have a full program out for advisers to use sometime in 2012, according to Wimbish.

The Role of Social Security

The survey also sheds light on the degree to which Americans will support cuts in Social Security and Medicare to keep these programs viable into the future and lessen the country’s debt load.

While affluent Americans are slightly more willing than middle-class Americans to take a reduction in these benefits to help the country (47% of affluent versus 43% of middle-class Americans), among the affluent there is no sharp drop-off among people closer to retirement. Among the middle class, willingness to take cuts plunged from 47% for people in their 40s to 28% for people in their 50s to 19% for people 60 to 75. Among the affluent, the willingness to take cuts was relatively flat at 49% for people in their 40s, 43% for people in their 50s and 44% for people ages 60 to 75.

Age and Gender Considerations  

Previous studies have shown that, while Americans in their 50s or younger are worried about their ability to retire in comfort, those in their 60s or older feel more secure. Wells Fargo says this is because a much higher percentage of people older than 60 have pensions, and proposals floated in Washington to cut future Social Security or Medicare benefits have avoided changes for those already retired or close to retirement age.

“We’ve thought that, for the most part, today’s retirees felt ‘OK’ with the future, yet here is a whole group of them saying, ‘maybe not,’” said Wimbish.

The survey shows that health-care costs are a significant concern among affluent Americans with almost a third (28%) saying that paying health-care bills is the leading day-to-day financial concern, followed by monthly bills (16%) and saving money for retirement (13%).

Affluent women surveyed are significantly less confident about retirement than men. The least confident of all are single women, and the most confident are married men.

Single women are the least confident that they will save enough to retire comfortably: 44% said they weren’t confident, compared with 27% of married/partnered women and 17% of married/partnered men.

The affluent men surveyed have saved a median of $400,000 for retirement versus $250,000 saved by affluent women. Affluent men also say they need more: a median of $750,000 to support themselves in retirement, compared with $500,000 estimated by affluent women.

“It’s very concerning to me that women are under the impression they don’t need as much saved as men do for retirement when, in fact, they’ll need more than men,” Wimbish added.

More information is available on Wells Fargo’s retirement site at www.wellsfargo.com/investing/retirement/.  —Nicole Bliman 

Scientific Shocker  

Men drool over women and cars  

It may seem obvious—but the fact that a car and a woman have the same psychological reaction in men means a lot for marketers.

The advertising world has been banking on this scientific discovery for decades: sex sells.

A professor of marketing at the Kellogg School at Northwestern, David Gal has published a paper in The Journal of Consumer Research, called “A Mouthwatering Prospect: Salivation to Material Reward.” Gal set out to determine whether a desire for material goods would be on the same physiological plane with physical needs. Turns out they are indeed on the same plane and cause the same reaction: drool.

As part of his research, Gal used two groups of undergraduate males. He told one group to imagine what they would do to “win a date” with a dream girl. The other group was told to think about getting a haircut. With these images fresh in their heads, both groups were shown pictures of sports cars. The group that had been thinking about women salivated more. (How was the saliva gathered, you may be asking? The men had rolls of cotton swabs in their mouths, which Gal weighed after the experiment to determine how much saliva they absorbed.)

Gal concluded that, “All objects of desire, whether biological or non-biological, activate the same general reward system in the brain. Salivation might merely be the consequence of the activation of this general reward system.” —Nicole Bliman