Data & Research March 1, 2017

Short Term Financial Wellness is Key to Retirement Planning

Even though retirement plan sponsors are seeing higher participation rates, several employees struggle with handling debt, budgets and savings, which is undermining retirement readiness.

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Failure to manage short-term financial obligations such as budgets, debt and savings can have a lasting impact on financial health and retirement readiness, according to an independent study by retirement consulting firm AFS 401(k).

The survey found 38% of employees said they don’t feel comfortable with their current debt. Of that percentage, 42% don’t check their credit reports annually, 62% don’t pay their credit card bills in full every month, and 71% said they don’t have at least three months’ worth of emergency savings.

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However, the firm also found that a majority of employees are seeking help facing these challenges, and many are turning to their employers.

Speaking with PLANADVISER, Alexander Assaley, managing principals with AFS 401(k), says effective financial wellness programs can help. He explains that successful wellness programs typically combine financial literacy content in a range of media, incentive-based challenges to drive financial behavior, and one-one-one coaching and advice to personalize the experience.  

He stresses that while retirement savings is critical to financial wellness, employees typically won’t make the most of it if they’re struggling to meet short-term financial obligations.

“What we’ve found is that regardless of their age or income, if employees aren’t getting access to financial literacy tools, resources and educational advice that helps them make wise financial decisions for today and tomorrow, they can create negative impacts on their long-term financial future and retirement,” says Assaley.

Moreover, the firm found that mishandling one financial obligation can have a ripple effect across their entire financial well-being. For example, AFS found that those who don’t have at least three months of emergency savings tend to fare poorly on the other two aspects of financial wellness, compared to those who do have at least three months of emergency savings.

Out of the non-emergency savers, 44% say they don’t feel they have cash flow under control, 66% say they don’t pay off their credit cards in full every month, and only 14% are retirement ready. Out of those with adequate emergency savings, 86% feel they are in control of cash flow, 60% say they pay their credit card bills on time each month, and 31% are on track to meet their retirement goals.

Clearly, financial wellness programs can benefit from emphasizing the importance of saving for unexpected financial obligations, while also getting workers to take action toward meeting this goal. The educational component can come from print and online educational materials, webinars, group sessions, and individual meetings. But a crucial component to any financial wellness program is its ability to drive action and change behavior. Assaley points to incentive-based challenges that motivate employees to engage with these programs, while being rewarded with various incentives such as cash bonuses or reduced premiums for health benefits. One example AFS presents to clients is a 90-Day Budgeting challenge in which employees play a mobile game to meet different financial milestones and are rewarded.

“I would be very excited for a future in which there is more flexibility inside the retirement plan, where you can use different kinds of incentive-based programs to reward employees with something like an additional employer match or discretionary contribution,” explains Assaley, noting that such a move would require some regulatory change.  

However, one financial wellness program may benefit one company and flop with another. Assaley recommends taking a customized approach that considers the specific needs and preferences of a particular work force. He says this can be done with various surveys, assessments, and one-one-one counseling that can provide “a good amount of data about the demographics around the organization, as well as the financial challenges and obligations that are most important to them.”

And despite advances in technology, the firm finds that financial professionals can learn a lot from employees and help them through one-one-one sessions. The survey found 63% of respondents prefer one-on-one meetings with financial professionals.

But over the last few years, financial wellness has become a buzzword in the industry and a lot of money has been pumped into creating programs around this concept. So, is it a bang for the buck? Research suggests some financial wellness providers are not doing it right.

NEXT: Does Financial Wellness Work?

Some research suggests several financial wellness providers aren't doing it right. 

Assaley tells PLANADVISER, “One of the most important questions we ask is, ‘Does financial wellness live up to the hype?’ In a lot of cases, I think it’s being pitched as financial wellness, but it’s really just recycled presentations on different broad-based topics. Generally, what we’re seeing now in the market place is not integrated and engaging programs.”

Still, AFS drew some positive outcomes from several financial wellness programs and offered some case studies in its research.

One banking client that started working with AFS in December 2015 managed to boost participation rates from 73% to 93% and average savings rate from 5.4% to 7.5% after “implementing a structured financial wellness education program that includes group and one-on-one financial counseling, as well as online resources employees may access at any time they wish.” These results were recorded as of September 2016. Notably, auto enrollment features had not yet been implemented by then.

Nonetheless, Assaley acknowledges it’s often hard to truly measure whether the benefits of these programs outweigh the costs. “Many employers have been hesitant to offer these programs because they are not sure of their value or how to measure their value.”

He recommends looking at the standard metrics such as participation rates, savings rates, and retirement readiness levels; as well as other facets such as the reduction of liabilities an employer may have in retaining their employees past retirement age, and seeing how financial wellness can help employees retire on time. “If their employees aren’t retirement ready, what does that cost them in terms of health care and workers’ compensation, and human capital? Ask, ‘how can you improve your bottom line by getting employees retirement ready?’”

The research notes that the process of implementing a financial wellness program and measuring its real ROI can take years, but have lasting impact.

“When structured, managed, and delivered in the right way with buy-in from the employer, these programs can drive significant results and provide benefits for the employee and the organization.”

Of course, there is plenty of room for improvement in the industry.

“What we’re seeing in the market place generally is not integrating and engaging programs that create a model, challenge or incentive for employees, and then support that with one-on-one coaching. Those are the pieces that are a launch pad to getting working Americans on track for today, tomorrow and for retirement.”

The study "Beyond Retirement: An Examination of Financial Wellness for Employers" by AFS 401(k) was conducted by interviewing more than 1,000 working professionals and surveying more than 500 employees to learn about their financial priorities and struggles. A white paper based on the study can be accessed at afs401k.com. 

Compliance March 1, 2017

DOL Fiduciary Rule Delay Language Emerges

The new leadership at Department of Labor has published the rulemaking through which it hopes to delay the strict conflict of interest rules championed by the previous administration and set to take effect next month.
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The U.S. Department of Labor has announced a proposed extension of the applicability dates of the fiduciary rule and related exemptions, including the best interest contract (BIC) exemption, from April 10 to June 9, 2017. The announcement follows a presidential memorandum issued on February 3, 2017, which directed the department to examine the fiduciary rule to determine whether it “may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

As the “new DOL” explains, the proposed extension is “intended to give the department time to collect and consider information related to the issues raised in the memorandum before the rule and exemptions become applicable.”

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Bucking the expectations of some observers, the Trump administration is apparently disregarding the tradition that “economically significant” rulemaking, which this has been declared to be by the Office of Management and Budget, accept at least a 60-day public comment period. Instead, the Trump-lead DOL “will accept public comments on the proposed extension for 15 days following its publication.” The new proposal will be technically published in the March 2, 2017, edition of the Federal Register.

Advisers will understandably be a little hesitant to read into this latest development, given the mixed signals that have emerged from the Trump White House pertaining to the fiduciary rule and other regulations policed by Labor. There is not even a DOL secretary yet, and indeed, even if the 15-day comment period stands and the DOL delays the fiduciary rule’s initial implementation for two months, a June applicability date still presents a significant challenge for firms that have not fully prepared themselves for compliance. It remains entirely unclear whether the review that will occur in this two-month window will result in the actual elimination of the new fiduciary standard. Of course this is presumed based on Trump’s anti-regulatory agenda, but the actual process of gutting the fiduciary rule has proved massively complex already. 

Still, after so much speculation from industry sources, it is refreshing to hear the DOL spell out its intentions clearly for the difficult weeks and months ahead. Much of the text of this new rulemaking is dedicated to justifying the 15-day comment period, and in the document the DOL calls for industry sources to explain how they will be impacted by such a delay, rather than how they view the actual fiduciary rule. Accordingly, there is less of a focus on the actual merits of the fiduciary rule, which will presumably be left to whatever additional rulemaking may (or may not) come out of DOL during the 60-day delay/review.

NEXT: Reading into the new rulemaking 

It can be a little tricky to keep all the moving pieces straight, but this is how the DOL outlines its current position: “There are approximately 45 days until the applicability date of the final rule and the PTEs. The Department believes it may take more time than that to complete the examination mandated by the President’s Memorandum. Additionally, absent an extension of the applicability date, if the examination prompts the Department to propose rescinding or revising the rule, affected advisers, retirement investors and other stakeholders might face two major changes in the regulatory environment rather than one. This could unnecessarily disrupt the marketplace, producing frictional costs that are not offset by commensurate benefits.”

DOL officials suggest this newly proposed 60-day extension of the applicability date “aims to guard against this risk.” The extension would, DOL argues, “make it possible for the Department to take additional steps (such as completing its examination, implementing any necessary additional extension(s), and proposing and implementing a revocation or revision of the rule) without the rule becoming applicable beforehand.”

In this way, advisers, investors and other stakeholders would be spared the risk and expenses of facing two major changes in the regulatory environment, DOL posits. “The negative consequence of avoiding this risk is the potential for retirement investor losses from delaying the application of fiduciary standards to their advisers.”

It is easy to presume this new rulemaking is yet another death-rattle of the stricter fiduciary rule envisioned by the previous administration, but there really is fairly little in the newly emerged document to hint at how the President Trump and his leadership team want to proceed toward a final fiduciary solution. Advisers will clearly be watching closely for a sense of what the final fiduciary solution may be, and they can now get directly involved once again by either commenting on the 15-day delay or the presidential memorandum via www.dol.gov/ebsa. 

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