Should Education Have Its Own Policy Statement?

Retirement plans governed by the Employee Retirement Income Security Act (ERISA) are subject to a range of regulations and requirements, but plan advisers can recommend their plan sponsors adopt a formal policy statement—an increase in the rules to which they must adhere.

“I would say they’re not really universally used the way investment policy statements are,” says Chris Carosa, president of Carosa Stanton Asset Management. “When I talk to ERISA attorneys and even advisers who are expert in the area, they say you don’t want an education policy statement; you want to have an education guideline. A guideline doesn’t have the same legal liability that a policy statement would have, but it presents and gives guidance on the direction you want to go.”

Education policy statements could be limiting, according to Liz Davidson, chief executive and founder of Financial Finesse. “The more important thing to have is a strategy, and more plan sponsors are in the early stages of defining what that is,” she tells PLANADVISER. The financial wellness space has a lot of new entrants creating noise right now, she says, and a great deal of capital is flooding the financial wellness space. Loan alternatives and payday lending firms, among others, are striving to rebrand themselves as offering some form of financial wellness, Davidson points out.

“The whole education policy statement never really stuck,” says Jim Sampson, managing principal of Cornerstone Retirement Advisors. “I never really saw it as a thing.” He notes that the investment policy statement has a clear purpose, but when he first heard about the education policy statement, he says he scratched his head and wondered about its purpose. “Is that someone trying to create a marketing thing they can sell? Education programs are customized to each group. You’re either doing group meetings or one-on-one meetings, but I don’t know that they warrant a statement.”

Once, Davidson recalls, she had about a dozen advisers ask for a template statement for an education policy. “Now the discussion seems to have waned,” she says, and the focus is more on implementing financial wellness programs. “There might have been some concern that the statement would be too over-reaching,” she points out. “There’s a trend toward flexibility.”

Trisha Brambley, founder and chief executive of Retirement Playbook, who works with numerous plan committees, from medium to jumbo plans, to help them select the advisers appropriate for their plan, says she hears from retirement plan sponsors that they have a strategy for education rather than a formal policy. Often, the strategies are emerging as plan sponsors coordinate offerings among their vendor and recordkeeper to maximize what is available. “They all talk about that,” she tells PLANADVISER, “but commit to put it in writing? Probably not. It’s more about developing a strategy.”

Also important, Brambley says, is tracking the effectiveness of plan design and communication to see what resonates with participants. The last part of the process is the financial wellness component. In the defined contribution world, Brambley observes, trends take a while to gain momentum. “Five years ago, you never heard a plan sponsor say, if we don’t get our employees ready for retirement, it’s going to cost us, but now it is the beginning of a significant trend.” The committees Brambley deals with often talk about the need to tackle retirement readiness from multiple angles. Often, they don’t want to get stuck with that bill of having more people work past retirement age.

More frequently, Brambley says, she hears “financial wellness” mentioned. “But we are not all talking about the same thing,” she says. “Some people think it’s enrollment meetings, and some think it’s a person’s total financial situation—how to ready them for life events, like a first baby or getting a better credit score, as well as retirement.”

If the defined contribution industry is experiencing a shift in its approach to educating participants, it’s very slow, Carosa says, turning like an aircraft carrier. “Only now is the industry starting to catch up to reflect how employees are investing their money,” he says. Part of the issue is plan design itself, which is beginning to move away from the smorgasbord of dozens of mutual funds and turn to tiered categories that reflect investor preferences.

Carosa calls the investment stylebox an artefact from modern portfolio theory, and younger advisers now look to behavioral finance for inspiration. “We’re going away from teaching people how to allocate, to teaching people how to save,” he explains. “The whole point of the 401(k) plan is to be a retirement savings vehicle. The idea was always to encourage people to save more money.”

There has been some frustration over the fact that the education programs have barely budged the needle on participant behavior, according to Kevin Stophel, principal at Kumquat Wealth, an advisory in Tennessee. He believes the move toward default mechanisms and auto-features in a plan are so successful because of the failure of financial literacy to actually change participant outcomes.

The rise of default mechanisms and target-date funds (TDFs) have in fact helped change what education in a retirement plan means, Carosa believes. “The need to be educated in funds is diminishing,” he points out. “Allocation is less important than teaching participants how to save.”

Carosa prefers the notion of retirement readiness to financial wellness. “It’s more on point,” he says. “Am I on track? That’s what most people really want to know.” Measuring readiness, Carosa believes, will be the next data set that plans begin to care about. “A number of service providers are taking all the data from the 401(k) industry and trying to put it together,” he says. “That is the level we’re seeing, and it’s a new type of service provider that is doing it, not the investment adviser or third-party administrator.” What people are saving and whether the assets are placed in appropriate investments are two points of interest.

Measurement is key, Brambley observes. “It’s not enough to say we’re going to make people financially well—there’s a real concern with making sure the program will have an impact. Plan sponsors want to see if the needle moves. Is it having an impact on other areas of the business? Like health care costs, absenteeism, turnover?”

Plan sponsors want to see if the money spent on an education program is doing what they hoped it would do, Brambley points out. Within the plan sponsor’s firm, the cost of the program has to be sold to upper management. “You have to approach this as you’d approach any other business decision,” she says. “You have to have the ROI; where is it actually helping? It’s good business sense.”

Stophel believes that education goals for a retirement plan will try to strike the right balance between how much education is needed to help with the plan’s 404(c) safe harbor, what is actually going to help participants, and how much effort and time are need to develop and implement a program.

Sampson says that the conversation about education policy statements, if there is a conversation, is muted. People aren’t talking about them or selling them, which is what can drive much of what the industry is concerned about. Education policy statements may be nice to have, he says, but they are not solving a specific problem. “I don’t see it as an ‘Oooh, I’ve got to have that.’” Perhaps more telling, Sampson notes, is the absence of regulation. “When’s the last time you heard a DOL auditor asking to see the education policy statement?”