Data & Research May 19, 2015

Education Key to Prompting Participants to Save

Educated participants have higher levels of trust, higher savings rates and greater use of retirement planning tools, NARPP finds in a report.
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When retirement plan providers take the time to educate participants about the importance of saving for retirement, this builds a level of trust that results in higher savings rates and the use of retirement planning tools. This is the key finding of the National Association of Retirement Plan Participants’ (NARPP) second annual Retirement Plan Participant Financial Empowerment, Literacy and Trust (FELT) Study.

The data shows that a provider’s education program and levels of trust are closely intertwined, says Laurie Rowley, NARPP’s co-founder and president. Education can create the necessary trust that encourages people to participate in the plan, increase their deferral rates, and use retirement planning tools and calculators, she says.

However, participants’ level of trust in their financial institutions is low, the FELT study found. A mere 13% trust financial institutions, and only 38% are satisfied with providers’ education programs. Surprisingly, though, 63% of participants answered the questions in a financial literacy questionnaire correctly.

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Recordkeepers and advisers need to do a better job of educating participants, Rowley says. “Current education materials are generally jargon-filled and complicated, and they often include a healthy dose of thinly veiled sales information,” she says. “People react negatively to these messages, especially Millennials. It’s the 21st century; people expect—and should demand—simple, customized messages that are relevant and engaging.”

Education is critical, since “employers and their employees and relying on service providers in helping to secure a financially stable future,” she says. “We need to start measuring success not just in terms of assets under management, but in more human-centric metrics, like the factors that contribute to retirement readiness. Obviously, the provider is not entirely responsible for participants’ savings behavior, but they can have a huge influence in helping people achieve retirement security.”

Next: Education Needs a Reboot 

Auto can’t Stand Alone

Auto features alone are not enough to improve savings, Rowley contends. Participants need effective communication to help them make better decisions, an d advisers and plan sponsors need to press their service providers to start innovating in education. Rowley notes that both plan sponsors and advisers have historically given low ratings in satisfaction to education programs.

Bank of America Merrill Lynch ranked as the top provider in the FELT rankings. David Tyrie, head of retirement and personal wealth solutions at Bank of America Merrill Lynch, attributes this to the bank’s “range of financial education resources across several channels, including in-person, phone, online and via mobile devices, so employees can choose the avenues that fit their needs and preferences.” Tyrie says Bank of America Merrill Lynch is focused on “helping people make more informed decisions, achieve better outcomes and improve their overall financial wellness” and notes that “there’s work to be done across the industry to further improve participant programs and confidence.”

Sylvie Feist, director of financial guidance services at Bank of America Merrill Lynch, says that while the bank has “been communicating the importance of saving,” it has gone beyond to “meet them where their needs are.” That has led to the development of seven life priorities that the bank works with employees on: work, home, health, family, leisure, giving and finance.

Feist says the study should underscore for advisers and plan sponsors the importance of working with them to achieve what is important to them.

The top 10 FELT Score recordkeepers are:

1.)  Bank of America Merrill Lynch
2.) Fidelity
3.) Vanguard and Nationwide (tied)
4.) Empower and Wells Fargo (tied)
5.) Charles Schwab
6.) Hewitt
7.) T. Rowe Price
8.) Voya
9.) Prudential
10.) Valic


The findings mirror NARPP’s 2014 FELT Study that revealed only one in four (26%) of participants believe they can “always trust” their recordkeeper to do what is right, and only 37% said information that their recordkeeper presents to them is always in their best interest.

Compliance May 19, 2015

Retirement Plan Investment Monitoring after Tibble Ruling

Jesse Gelsomini, a partner in Haynes and Boone LLP specializing in employee benefits, feels the Supreme Court decision in Tibble v. Edison has strengthened the ongoing duty to monitor investments under the Employee Retirement Income Security Act (ERISA).
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He explains that the top federal court in Tibble held there is an ongoing fiduciary duty to monitor investments in a 401(k) plan to ensure that the investments remain prudent, “which applies even if there is no intervening change in circumstances.” The Supreme Court actually vacated and remanded the specifics in the long-running fee case back to the 9th U.S. Circuit Court of Appeals, which is left with the task of more closely defining what the duty to monitor should look like in this particular case or others like it.

Limited in size and scope—the text of the ruling covers just 10 pages—the decision from the Supreme Court still seems to solidify the ongoing duty to monitor investments as a distinct fiduciary duty, so it’s important for plan sponsors to consider what the ruling means for them.

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“What this means is that an employer or other responsible fiduciary will not avoid potential liability if it selects an imprudent investment alternative for the 401(k) plan, but then successfully waits out the six-year ERISA limitations period,” Gelsomini suggests.

Generally, 401(k) plan investment fiduciaries carefully examine a potential investment when first deciding what options to offer under the 401(k) plan, Gelsomini tells PLANSPONSOR. This is especially true in the case of the plan’s qualified default investment alternative (QDIA), which will serve as a catch all investment vehicle for anyone automatically enrolled into the plan without actively choosing another investment from the menu. Prudent selection and documentation are key requirements underlying the QDIA safe harbor, which protects ERISA plan fiduciaries from liability in the case that the automatic investment loses money and participants seek damages.

“If the investment is deemed to be prudent and is selected as [the QDIA], the fiduciary generally will continue to offer the investment as an alternative unless a change in circumstances renders it imprudent,” Gelsomini says. “Following the Supreme Court’s decision in Tibble, an investment alternative must continue to be monitored for prudence under ERISA on an ongoing basis even if there is no material change in circumstances.”

Specific issues to monitor for in the QDIA and other investments include impermissible changes in investment style or risk taking, Gelsomini explains. Others include persistent underperformance over a series of quarters, excessive increases in fees, and any other factors outlined in the plan’s investment policy statement or plan documents.

While it’s clear the duty to monitor is an independent duty from the duty to prudently select, Gelsomini notes the Supreme Court did not actually opine regarding how often or comprehensively a responsible plan fiduciary must perform the review of an investment alternative if there has been no blatant intervening change in circumstances that might indicate the alternative is imprudent. Another ERISA litigation expert, Sidley Austin LLP’s Mark Blocker, also says it’s unclear whether this decision will have a substantial impact on retirement plan sponsors and their advisers, given that most plans have already taken steps to avoid Tibble-like liability.

“Virtually all large employers already conduct periodic reviews of the investment options in the 401(k) plans they sponsor, so the decision will not require any major new activities on their part,” Blocker explains. “What remains to be seen is how the duty to monitor will be interpreted, a question that was not answered by the court and was left to the lower courts to determine.”

“This is an open question that may need to be fleshed out by the courts in upcoming years,” Gelsomini agrees. “In the meantime, there are other steps that employers can take to protect their investment fiduciaries.”

He suggests each employer could review the 401(k) plan’s investment policy statement to ensure that it contains clear guidelines specifying how often the responsible plan fiduciary must perform a comprehensive review of investment alternatives, even absent an intervening change in circumstances. The policy may also specify the proper steps to remove an investment if it is deemed imprudent, Gelsomini says. One thing to note is that, once language about periodic investment reviews is placed into the policy statement, it's absolutely critical to ensure the plan operations match what is written down. 

“If there are no clear guidelines in place, or if the guidelines provide for infrequent review, the employer should amend the investment policy statement to provide for a comprehensive review of each investment alternative at least annually, and more frequently if the responsible plan fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards,” Gelsomini says. “Finally, perform a comprehensive review of all investments, if such a review has not been performed recently, and otherwise comply with the compliant investment policy statement.”

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