Data & Research August 2, 2021

The Number of Excessive Fee Lawsuits Grew in 2021

Plan sponsors also brought D&I efforts to retirement plans and lawmakers continued to introduce retirement plan legislation, according to Janus Henderson Investors’ DC trends webinar.

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A recent Janus Henderson Investors webinar reviewed key defined contribution (DC) trends and developments in the retirement industry for 2021, pinpointing diversity and inclusion (D&I), retirement confidence and environmental, social and governance (ESG) investing as top highlights.

The webinar, hosted by Matthew Sommer, head of defined contribution and wealth advisor services at Janus Henderson Investors, noted that a 2020 survey of DC plan sponsors by Willis Towers Watson found close to two-thirds of respondents extended their organizations D&I efforts to their retirement plans. The study, “Moving the Needle on Defined Contribution Plans” offered four suggestions for plan sponsors to consider, including targeting specific cohorts; extending D&I to the committee composition; incorporating culture and diversity when assessing asset managers, and boosting the financial wellbeing of plan participants.

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On the topic of retirement confidence, Sommer highlighted a 2021 Employee Benefit Research Institute (EBRI) Retirement Confidence Survey that found 80% of retirees say they are confident in their ability to live comfortably throughout retirement, up from 76% from March 2020. According to the survey, despite facing challenges from the coronavirus pandemic in 2020, retiree lifestyle and expenses remained largely unchanged.

Financial priorities changed among different working demographics as well, according to the EBRI study. Compared to white respondents, African American and Hispanic workers said they were more likely to consider debt a major problem and were more likely to say that a connection or commonality between them and an adviser is important. Hispanic respondents, regardless of income, were more likely to say helping friends and family in the current climate is more important to them than saving for retirement.

The webinar also examined popular legislative proposals that would impact the retirement industry and its participants. Among the bills reviewed were the Financial Factors in Selecting Retirement Plan Investments Act, introduced by Senators Tina Smith, D-Michigan, Patty Murry, D-Washington and Representative Suzan DelBene,D-Washington, and the Securing a Strong Retirement Act of 2021, also known as SECURE 2.0.

The Financial Factors in Selecting Retirement Plan Investments Act would ease the path to incorporate ESG factors into investment decisions, said Sommer, provided plans consider such investments in a prudent manner consistent with their fiduciary duties. The proposed legislation would also repeal the Department of Labor (DOL) rule finalized under the Trump Administration, as well as “limit future regulatory actions that impose unfair regulatory burdens in an effort to discourage ESG investing by ERISA [Employee Retirement Income Security Act] plans.”

Other legislative actions, including new state and city mandated automatic individual retirement account (IRA) programs, were discussed throughout the webinar. Maine, Delaware, and New York City have all enacted legislation that would require businesses of certain sizes and without an employer-sponsored retirement program to offer auto-IRAs. 

Sommer finished the panel by reviewing key developments in the retirement industry legal space. He noted how U.S. attorneys have asked the Supreme Court to review an excessive fee case involving Northwestern University, which the 7th U.S. Circuit of Appeals dismissed last year.

Sommer also noted that WakeMed Health and Hospital in Raleigh, North Carolina, agreed to settle a fiduciary breach case that included a $975,000 settlement and required the plan to conduct a request for proposal (RFP). Terms in a Columbia University settlement were also announced, which included a $13 million-dollar settlement, mandatory annual fiduciary training, rebating all revenue sharing and conducting an RFP.

A number of excessive fee lawsuits have targeted 403(b) plans, including those against Bronson Healthcare Group, Wake Forest University Baptist Medical Center and the University of Tampa.

Data & Research August 2, 2021

‘Cautionary’ Messaging Prompts More Participants to Engage With Plans

However, a study found giving participants a view of retirement readiness progress as well as giving them a view of a retirement readiness shortfall resulted in increased intent to take positive retirement savings actions.

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In a study report, the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center contends that, compared with traditional metrics of defined contribution (DC) plan success, “a better measure … is how effective the plan is at driving participants to become more engaged with it or, better still, to act on behalf of their own retirement.”

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The researchers set out to determine how plan sponsors achieve this level of engagement or action from participants by looking at whether they are more apt to respond to messages of fear or encouragement. A series of seven questions was posed to survey respondents about how they engaged with their plan’s sponsor or recordkeeper about their retirement savings. After answering questions about their current engagement, participants were given either an “encouraging” message citing an individual’s progress toward funding retirement or a “cautionary” message warning of a retirement savings shortfall.

For example, one group was shown a graph with the projected retirement income shortfall highlighted in orange, with a message saying, “Caution! We project you’re going to have a 29% shortfall when it comes to achieving your retirement income goal. You will have to make a few changes in order to get to 100%.” A second group was shown a graph with the message, “Great news! We project you’re on track to reach 71% of your retirement income goal. Although you are not at 100% just yet, a few changes can help you reach this goal.”

Respondents then answered the same questions again, this time indicating engagement intent. Those who had not already indicated engagement on any of the seven factors were given an opportunity to “upgrade” their engagement intentions.

The researchers found that either messaging approach significantly improved engagement, suggesting that any type of communication should help. However, fear led to greater post-engagement.

Or maybe “cautionary” is a better word to describe the study messaging. Other studies and anecdotal evidence suggest that communications creating too much fear can have a negative effect. Those in which retirement calculators estimate daunting amounts of retirement savings needed for the participants to reach their goal can cause them to do nothing, as they feel the goal is unattainable, for example.

In the DCIIA study, 23.8% of participants who received the fear message indicated they would think about the percentage of pay they contribute to their retirement account “much more often” compared with 9.8% of participants who received the encouragement message. Thirteen percent of participants who received the fear message indicated they would speak with a financial professional much more often, compared with 11% who received the encouragement message. Nearly one-quarter (24.1%) of the fear-message participants said they would take a look at the investment options to determine whether a change in the way they invest the money in their plan would make sense, while 16.2% of the other group reported the same.

However, among both groups, and among the seven action steps presented in the question, a significant number indicated they would take the action steps “somewhat more often.”

The researchers concluded that providing guidance on retirement readiness appears to significantly improve engagement, and fear seems to be a better way to engage the unengaged.

Last year, five retirement plan advisers shared with PLANADVISER how they build better engagement from participants. Their communication strategies included using fun facts or activities to get participants interested, as well as using context that participants will find relatable.

The advisers said suggesting simple steps to increase savings is more encouraging to plan participants and more likely to get them to act and using real life examples helps participants understand the differences their actions can make.

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