Products March 16, 2018

Addressing DC Plan Participant Behaviors With Predictive Analytics

Using “predictive analytics” means using data, technology and tools to look at what has happened to anticipate what an individual might do in the future and address potential behavior that may hurt retirement outcomes.

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John Hancock Retirement Plan Services (JHRPS) has expanded its data analytics capabilities to help plan sponsor clients and advisers make plan and platform decisions to help participants save more for retirement.

Lynda Abend, chief data officer for John Hancock Retirement Plan Services in Boston, explains to PLANADVISER that using “predictive analytics” means using data, technology and tools to look at what has happened to anticipate what an individual might do in the future. An example would be considering why participants are taking loans from defined contribution (DC) plans. Predictive analytics looks at which participants are taking loans, what activity were they doing before taking the loan and what activity did they do after taking one. Were participants looking into buying a house then taking a loan? Were they doing a college search then taking a loan? She adds that analytics can determine if there are other participants in a similar situation, and plan sponsors can then segment that population to possibly offer other solutions for financing activities.

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So, where does the information come from to do predictive analytics? “Technology has grown significantly over last five or ten years, and consumers produce a significant amount of data with technology that is connected,” Abend says. “In addition, there is a lot of information available to purchase. And, we can go to Bureau of Labor Statistics (BLS) data to get consumer spending habits. While this is not necessarily personalized, plan sponsors can identify participants in similar situations and the challenges they might have. The capabilities today are even different from five or ten years ago.”

JHRPS conducted a predictive analytics pilot with long-term client Farm Credit Foundations (FCF) which had very high participation and retirement readiness but wanted to know why the few non-contributors had opted out after they were auto-enrolled.

Using predictive analytics, JHRPS modeled participant data to identify participant segments—top, normal, and non-contributors—and enriched the data with third-party data to provide broader insight into the personas. It then used machine-learning algorithms to predict future outcomes. The analysis identified who the non-contributors were and provided insight into what might help them save more.

Farm Credit used the data to make targeted plan design changes, decreasing the auto-sweep default to encourage more employees to participate. With the lower default rate, 90% of the non-contributors stayed in the plan after the last auto sweep. In addition, 70% of the new contributors remained at the lower default rate, 16% elected a higher contribution rate and 4% elected to contribute after-tax.

“John Hancock’s advanced analytics team stepped in and helped us change our approach,” said Cynthia M. Burkel, CEBS, SPHR, vice president, Employee Benefits, Farm Credit Foundations, in a statement. “The results of the deep dive into our non-contributing employees surprised us. Without John Hancock’s analysis, we would have continued with our annual auto-sweep unchanged, which would have left some participants behind. John Hancock’s ability to understand the behaviors of these participants enabled us to turn around employee behavior and achieve our goal of getting more people in the plan.”

When asked what is meant by enriching the data with third-party data to provide broader insight into the personas, Abend explains they used data from the recordkeeper about participants’ date of birth, compensation and interactions on the web site with the call center. The company also used data from BLS or other sources to see what challenges this demographic has—such as having debt or being single. “This data helps us create a deep persona about the groups we look at,” she says.

More examples of using predictive analytics

Another example of work JHRPS has done with predictive analytics involves understanding participants’ plans for retirement and the expenses they will have. Looking at what they plan to do in retirement and where they plan to live, predictive analytics can help participants forecast how much their expenses will be and how great an income replacement ratio they will need to achieve their goals. “For example, if a participant is working for a company in New York City, but plans to move to Florida in retirement, expenses will be lower. We can use this to supply advice on a personalized level—how do they need to adjust their savings or investment strategy,” Abend says

JHRPS has also looked at participants who are at risk of lowering their deferral rate. “We looked at the people who have lowered their deferral rates and what is common among them. We identified people who fit into this persona and provided target information and education to try to get in front of that decision, conveying information about why it is important to stay at the higher deferral rate,” Abend says.

She continues, “Predictive analytics allows for plan sponsors, advisers and providers to communicate in a very targeted manner, to get really relevant information in front of participants.”

Abend says JHRPS is using predictive analytics with business partners. “Ideas come from challenges of clients, then we find results are valuable to other clients. The work we do is available across our business and comes from dialogue about what is happening,” she concludes.
Compliance March 16, 2018

Confusion Abounds After Fifth Circuit Decision Vacates DOL Fiduciary Rule

The latest decision out of the Fifth U.S. Circuit Court of Appeals throws a dramatic new element of confusion into the epic regulatory saga that has been the rollout of the Department of Labor fiduciary rule.

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The United States Court of Appeals for the Fifth Circuit has ruled, by a two-to-one majority, to vacate the Department of Labor (DOL) Fiduciary rule, based on arguments put forward by the U.S Chamber of Commerce and the Securities Industries and Financial Markets Association.

This latest decision comes nearly a year a Texas district court judge roundly rejected the investment industry advocacy groups’ arguments that the DOL exceeded its authority in crafting the fiduciary rule. Exactly what this latest move spells for the regulation’s future under the Trump administration is yet unclear, especially given that just this week the Tenth Circuit issued an essentially opposite ruling, determining in no uncertain language that DOL’s fiduciary rulemaking process has played out properly and within the confines of the regulator’s broad existing authority. Experts are still grappling with the question of how the conflicting rulings should be interpreted, particularly on the point of whether an appeal to the Supreme Court could occur. 

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Ropes & Gray tax and benefits partner Josh Lichtenstein warns that the Fifth Circuit’s decision to vacate the DOL’s fiduciary rule in its entirety creates “a new round of uncertainty in the ongoing saga of the rule.”

“The Fifth Circuit is now at odds with multiple other courts that have upheld the rule, including the 10th Circuit,” he tells PLANADVISER. “While the government decides whether to request an en banc review of the ruling, appeal the case to the Supreme Court, or take no action, financial institutions are forced to decide how to react, especially if part of their operations is located in the Fifth Circuit.”

Lichtenstein says this possibility of having the rule apply in some parts of the country but not in others “creates new risks and compliance challenges for institutions, reopening the period of uncertainty around the rule shortly after the DOL had resolved similar uncertainties by delaying the compliance date for portions of the rule.”  It also remains to be seen, he warns, whether state regulators will move forward with new enforcement actions or create new rules in response to the new uncertainty that this decision brings.

As pointed out by Brendan McGarry, attorney at Kaufman Dolowich and Voluck who advises broker/dealers and advisers, the Fifth Circuit majority uses strong language in vacating the rulemaking more or less in its entirety, “crossing over from legal arguments to fundamental arguments against the rule from a business perspective.”

In explaining why it has ruled the DOL overstepped its authority in crafting and implementing the strict new conflict of interest and prohibited transaction requirements of the new fiduciary rule, the majority opinion uses terms like “burdensome” and “onerous” to describe the requirements placed on financial industry participants, which appears to signal a position stronger than one solely about the DOL’s power to enact the rule as written, McGarry argues.

As laid out in the text of the Fifth Circuit majority opinion, the business groups’ challenge succeeded on multiple grounds, including: “(a) the Rule’s inconsistency with the governing statutes; (b) DOL’s overreaching to regulate services and providers beyond its authority; (c) DOL’s imposition of legally unauthorized contract terms to enforce the new regulations; (d) First Amendment violations; and (e) the Rule’s arbitrary and capricious treatment of variable and fixed indexed annuities.”

Finding merit in several of these objections, the Fifth Circuit takes the strong step of wholly vacating the DOL rulemaking. The full text of the decision is available here and includes detailed argumentation on all of these points. 

Both McGarry and Lichtenstein agree that it will be interesting to see if the DOL tries to appeal this decision to the Supreme Court. This is far from a certainty, despite the conflict among the circuit courts, given the change in executive branch leadership since the rule was implemented. One additional confusing aspect here is the emerging role of the U.S. Securities and Exchange Commission (SEC), and whether this ruling could strengthen or weaken that regulator’s resolve to get involved in policing conflicts of interest in the retirement plan and retail investing arenas.

Speaking to this element of the developing story, Blaine Aikin, executive chairman at Fi360, urges the DOL to continue to work with SEC and others on the fiduciary rule, calling this necessary to alleviate persistent industry and investor confusion over fiduciary status.

“Fi360 has always supported a strong fiduciary standard for financial services professionals who clients must rely upon for trustworthy advice,” Aikin says. “At the same time, given the uncertainty with regard to compliance and liability concerns, as well as investor protection under the DOL’s fiduciary rule, we urge the Securities and Exchange Commission to continue to work closely with the DOL in drafting a standard across regulatory jurisdictions that is principles-based and requires advisors to act in the best interest of the client without regard to their own financial interests.”

“At the end of the day, it is the professional closest to the client who establishes the strongest and most sustainable relationships,” Aikin adds.  “Professionalism involves utilizing a prudent process firmly grounded in fiduciary principles, and both advisors and their clients will benefit when policymakers and the courts recognize this important relationship.”

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