Compliance December 30, 2020

SEC Deregulations Diminish Investor Protections, Office of the Investor Advocate Says

The office is also calling on the SEC to establish an ESG framework.

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In its “Report on Activities: Fiscal Year 2020,” the Office of the Investor Advocate at the Securities and Exchange Commission (SEC) outlines several areas in which it believes the SEC fell flat this year.

The office’s first objection concerns the change to the Exchange Act that makes it easier for public companies to exclude shareholder proposals from corporate proxy statements. Specifically, the office says it is now harder for shareholders with smaller investments—which it says often have fruitful ideas with respect to governance reforms—to submit proposals.

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According to the office, the SEC also amended the proxy rules in a way that requires proxy advisory firms to act as a conduit for company management to rebut the advice given. The office says the SEC made this change based on “the claims of select market participants that proxy voting advice historically had not been transparent, accurate and complete. The commission did not evaluate the substance of these claims or distinguish biased opinion from fact, and these claims remain unsupported by empirical evidence. … We believe investors should be free to seek the services of a third party to provide independent, objective advice about voting their shares—and investors should not be forced to pay for feedback mechanisms that subject them to further lobbying by corporate management.”

The SEC also adopted amendments to several Securities Act registration exemptions.

“A central underpinning of the Securities Act of 1933 is the idea that a company must register its shares with the commission and provide robust disclosures if it wishes to sell its securities to the general public. … However, over the past several decades, the central tenet of securities regulation has eroded as Congress and the commission created ever-expanding exemptions that allow companies to raise increasing amounts of capital with less and less public disclosure,” the office says. It says the new rules make “registration entirely voluntary.”

With respect to amendments to Investment Company Act rules concerning the use of derivatives, the office says “critical investor protection provisions contained in the proposed version of the rule were stripped away prior to adoption.” It would have also required broker/dealers (B/Ds) and investment advisers to exercise due diligence before approving retail investor accounts to invest in such products. The office is recommending that the SEC rescind the rule and reconsider the rule as it was originally written.

The Office of the Investor Advocate also detailed new priorities it would like to see the SEC champion, including environmental, social and governance (ESG) disclosure standards. The office notes that, for many years, investors of all sizes have called on the SEC to require public companies to disclose more ESG data, as is already being done in the European Union and elsewhere. “The information provided by companies tends to vary in quality, and it is not presented in a standard format that enables comparisons between companies,” the office says.

The office is also calling for minimum listing standards on corporate governance standards for exchanges. “The primary listing exchanges are now for-profit entities that, unlike their prior mutual ownership structure, have an inherent conflict of interest between protecting investors and generating business revenue from listed issuer fees,” the report says. Some exchanges, according to the office, have lowered their qualitative corporate governance standards in an effort to attract issuers. The office is calling on Congress to “set, by statute, certain minimum standards to guarantee investor protections.”

The office also says it is time for machine-readable disclosures, through a uniform legal entity identifier, as a way to modernize financial services firms. This, the office says, “would help investors utilize publicly available data from multiple sources.”

Client Service December 29, 2020

Measuring Success an Important Part of Financial Wellness Programs

Whether they take part in implementing the programs or not, advisers can help clients establish metrics for measuring the success of financial wellness programs.

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Eric Henon, executive director of the Retirement Advisor Council, says it makes good business sense for advisers to offer financial wellness programs or services. However, advisers have different business models, and while they have to make decisions for a client’s best interest, they also have to be able to deliver on their services based on their resources.

He says many advisers rely on recordkeepers or other third parties to administer financial wellness programs, but there are also advisers who are personally involved in the delivery of services. Advisers might provide staff of dedicated coaches to work with employees directly.

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Henon notes that some plan sponsors that have won awards from the Retirement Advisor Council for their financial wellness programs have advisers personally involved in implementing the programs.

It is important for employers offering a financial wellness program to measure the success of their programs. This will help determine whether employers are getting a good return on their investment, as well as whether there is a need for change to financial wellness program components.

In a Viewpoint article, “A Return on Wellness—Measuring Financial Wellness Programs,” the Retirement Advisor Council notes that employee surveys and internal information gathered prior to the launch of a financial wellness program establish a baseline from which to measure the program’s success.

Some goals such as improving retirement readiness are relatively easy to measure, Cerulli Associates says in a 2019 report. However, others, such as improving financial literacy, increasing workplace productivity and decreasing employee stress (14%) can be more nebulous.

While improvement in employee situations and actions is one part of measuring the success of financial wellness programs, employers can also measure how the financial wellness program improves the cost employee financial stress imposes on them. The sixth annual edition of John Hancock Retirement’s Financial Stress Survey shows more than half of employees worry at least once a week about personal finances while on the job, causing workplace distraction and a loss of productivity. This loss of productivity, combined with absenteeism from financial stress, has a major impact on organizations, John Hancock says.

In dollar terms, absenteeism and lower productivity tied to financial stress is costing more than an estimated $1,900 per year, per employee, and totaling an estimated annual loss of $1 million for midsized employers and $19 million for large employers, according to John Hancock’s findings.

Issues Financial Wellness Programs Should Address

The Retirement Advisor Council’s Viewpoint article suggests root causes of employee financial stress that wellness programs should address.

These include, but are not limited to:

  • Increased housing prices and extreme housing shocks;
  • Increased student loan and consumer debt that employees are carrying throughout their working lives and into retirement;
  • Market volatility and its relation to retirement savings;
  • Rising health care spending, which has outpaced any increase in employee wages over the last decade;
  • Periods of high and prolonged unemployment;
  • Increased longevity of loved ones and escalating caregiving needs;
  • The changing nature of work and increasing integration of technology, requiring new skill sets to advance in current jobs and be marketable for other jobs; and
  • Increased lifespan in retirement that needs to be funded, as well as a greater possibility of needing long-term care.

“An objective financial wellness assessment can play a pivotal role in providing actionable feedback to employers regarding the appropriate intervention and [financial wellness program] design,” the article says. “The financial wellness program can then be tailored to address the specific goals and needs of the particular workforce.”

No Success Without Employee Engagement

In a previous Viewpoint, “What Do You Mean When You Say Financial Wellness?”, the Retirement Advisor Council points out that financial wellness programs must be engaging to be successful.

It says the program should be accessible and usable to anyone regardless of literacy, wealth or earnings; delivered to employees as early as possible and using a combination of media (online, print, in-person, video conferencing, podcasts, audio content and toll-free contact centers); supported live at least 12 hours a day and six days a week; available from a trusted source; and mindful of privacy requirements, cybersecurity and data protection needs.

One strategy to drive engagement from participants is to design these programs to be entertaining, the paper suggests.

Eric Henon, executive director of the Retirement Advisor Council, says that a survey of advisers found that on average, 19% of clients use a rewards program to encourage financial wellness program engagement. Most advisers are in the 1%-to-25%-of-clients range. “On the high end, 3% of advisers say all their clients have a rewards program for financial wellness; 8% say 75% of their clients or more have a rewards program in place; and 14% say 50% or more of their clients have a rewards program for financial wellness,” he says.

Measuring engagement of employees is one way to measure the success of financial wellness programs.

Henon says the financial wellness service provider itself will monitor the use of services. Levels of engagement are measured by the number of employees who access the program, the number who attend education sessions and the number who meet with advisers/coaches. “The responsibility for measuring engagement depends on the model used for the program and whether it is recordkeeper provided, adviser provided or provided by another third-party firm,” he says.

Henon adds that the champion for financial wellness within the employer’s organization should also track other information, such as the number of employees who provided information for the baseline and the number of employees that have created a step-by-step plan of action. “There needs to be someone accountable for measuring various engagement metrics,” he says. “Whether a person gathers the information or it is provided through automation, the person accountable should be identified before the program is rolled out.”

Measuring Program Success

The Viewpoint report suggests qualitative and quantitative metrics to measure the return on investment of financial wellness programs. It says employee and manager surveys can be used to measure changes in employee morale and job satisfaction, absenteeism, satisfaction with the financial wellness program, financial stress, debt level and confidence in retirement readiness.

Henon notes that a hypothetical calculation of employer costs due to financial stress doesn’t include the cost of employee turnover or increased use of health care because of the stress. He says the best way to identify turnover costs is through manager surveys.

The report also identifies data points that can be used in measuring the success of financial wellness programs. Data can show changes in health insurance claims and costs, in addition to the number of employee absences and tardiness, the level of employee participation in the employer’s retirement plan, the use of retirement plan loans and in-service distributions and the participation in and use of other employee benefits.

Henon says the measurement of the return on financial wellness should be done at least annually, but he thinks every six months is even better. “If you look at the progress Prudential made in the case study in our Viewpoint, there was a fair amount of progress from year to year, and decisions to modify the program can be made annually,” he says. “But, a mid-year measure will help to discern changes needed for the following year.”

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