conferoconferoISSUE NO. 5

A quarterly publication of Westminster Consulting

www.ConferoMag.com

EDUCATIONVS.

ADVICE

EDUCATIONVS.

ADVICE

conferoconferoISSUE NO. 4

A quarterly publication of Westminster Consulting

www.ConferoMag.com

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Winter Issue 2014 • Issue no. 5

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PARTICIPANT EDUCATION VS.

ADVICE

AN INTERVIEW WITH MARY ELLEN

WHITEMAN

SMALL CUES CHANGE SAVINGS

CHOICESMary Ellen Whiteman of T.Rowe Price

talks to Confero about topics around Participant Education.

Scott George, CFP®, CRPS® discusses whether participant education or advice is

the key to retirement readiness.

What can plan fiduciaries do to persuade their employees to change their saving habits?

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Features

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ContentsWinter Issue 2014 • Issue no. 5

IN EVERY ISSUE:3 UPCOMING EVENTS 4 PUBLISHERS LETTER5 CONTRIBUTORS

ONE PAGE MAGAZINE

A brief overview of some recent events and notable discussions within the industry.

6

DEFINED BENEFIT

Pension Funding Relief from MAP 21 — A thoughtful overview on MAP 21.

10

16

DEFINED CONTRIBUTION

Fiduciary Checklists — How checklists can help prove adherence to proper procedure, why they are important, and some checklists you can use.

20

22

18

ON TOPIC

Telling Good Consultants from Bad— How can you tell if a consultant is good or bad?

RES IPSA LOQUITOR

Safe Harbors — It is in the goal of corporate retirement committees to provide the best options for their employees while limiting their corporation’s liability.

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New Year’s Day

Martin Luther King

Jr. Day

Awards for Excellence 2013March 11, 2014

Chelsea Piers, NYThe PLANSPONSOR Awards for Excellence is the industry’s annual networking event to celebrate the accomplishments of the best of the best in the retirement plan industry. www.plansponsor.com/event/PSPAAwards2014/

Awards for Excellence

President’s Day

St. Patrick’s Day

Valentine’s Day

Defined Contribution ConferenceMarch 2-4, 2014

Miami, FLMeet and hear from experts on the most pressing investment, legislative, plan design and communication issues. You’ll go back to your office with tips, ideas and checklists you can put to work to make your plan the best it can be.

conferences.pionline.com/conference/dc-east/2014/home

P&I’s 2014 Alternatives in DC Conference

February 11, 2014New York, NY

Pensions & Investments is gathering industry experts to discuss the topic of alternative investing within DC plans. It’s a strategy that has helped enhance DB plan portfolios for years.

conferences.pionline.com/conference/alternatives-in-dc/2014/home

Alternatives in DC

Conference

NAPA 401(k)

Summit

NAPA 401(k)

Summit

NAPA 401(k)

Summit

ASPPA Regional

Conference: Los Angeles

ASPPA Regional

Conference: Los Angeles

Welcome to 2014 where most of us are in the midst of cold winter days. Despite the frigid

weather outside, our dedicated team has produced this edition of Confero which has as its featured discussion the topic, “EDUCATION vs. ADVICE”.

We open our discussion with an interview with Mary Ellen Whiteman who is Head of the Individual Investor Experience at T.Rowe Price. Gabriel Potter and Mary Ellen discuss the challenges employers and plan providers face when trying to educate a workforce on their retirement plan and its benefits.

Scott George, who is President of the Retirement Plans Division of M. Griffith Investment Services in Utica, NY offer us an insight on a successful methodology for engaging participants and achieving positive retirement outcomes. Scott’s firm delivers one-on-one advice to participants in a fiduciary capacity and has achieved significant results because of their methodology.

Gabe Potter looks at education and advice for participants by referencing Prof. James Choi of Yale and his whitepaper on how participant savings and engagement habits can be improved simply by effective messaging and verbal cues in participant communications.

Further in this issue, we leave the discussion of participant education and take up the topic of pension funding relief from MAP 21. Larry Peters, CPA, EA provides an overview of this recent funding option and its features.

Please enjoy the other contributions to this issue of Confero and your continued feedback is both welcomed and important.

Thanks again for your continued support.

PUBLISHER’S LETTER

4 | WINTER 2014

Tom & Sean

conferoA quarterly publication by Westminster Consulting

Publisher

Westminster Consulting, LLC.

Editor-In-Chief

Gabriella Martinez

Contributing Editors

Sean Patton, AIF®Thomas Zamiara, AIFA®

Creative Director

Gabriella Martinez

Contributors

Gabriel Potter, AIF®Diana K. Powell, Esq.

Thomas Zamiara, AIFA®Gabriella Martinez

Lawrence R. Peters, CPA, EADavid Bard, CRPS®, AIF®

A quarterly publication of fiduciary ideas by various contributors within the industry.

Questions or Comments?email us at info@conferomag.com

The information contained in this on-line magazine is for general information purposes only. The information is provided by Westminster Consulting and while every effort is made to provide information which is both current and correct, Westminster Consulting makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the on-line magazine or the information, products, services, or related graphics contained within the on-line magazine for any purpose. Any reliance you place on such information is therefore strictly at your own risk.

In no event will Westminster Consulting be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage what-soever arising from loss of data or profits arising out of, or in connection with, the use of this on-line magazine.

Lawrence R. Peters, CPA, EAContributing Writer

Lawrence Peters is a seasoned Human Resources Professional with extensive experience developing and executing Human Resources and Benefit strategies designed to meet corporate objectives. Larry is currently a member of the American Academy of Actuaries (MAAA), American Institute of Certified Public Accountants, New Jersey Society of Certified Public Accountants and a Fellow for the American Society of Pension Actuaries (FSPA). He has also served on the Advisory Committee to the Joint Board for the Enrollment of Actuaries, as well as a member of the Education Committee and Board of Directors of the American Society of Pension Actuaries. Larry holds a BA in Economics from Upsala College and an M.B.A. in Accounting from Fairleigh Dickenson University and is both a Certified Public Accountant and an Enrolled Actuary.

Gabriel Potter, AIF®

Contributing Writer

Gabriel is a Senior Investment Research Associate of Westminster Consulting where he designs strategic asset allocations and conducts proprietary market research. He earned a B.A. in Economics and a Certificate of Business Management from the University of Rochester and an M.B.A. with concentrations in Corporate Finance and Computers & Information Systems from the University of Rochester’s William E. Simon School of Business. He also holds an Accredited Investment Fiduciary Analyst (AIF®) designation and has been quoted in Human Resources Executive Magazine and his articles have been published through fi360 and AdvisorOne.

Gabriella A. MartinezEditor

Gabriella is a marketing professional with over seven years of experience. She currently holds a Bachelor of Science in Multidisciplinary Studies with concentrations in Marketing, Printing & Publishing, Photographic Arts & Sciences and Psychology from Rochester Institute of Technology. She has been a featured writer and editor in several publications including Rochester Woman Magazine and Pup Culture.

www.conferomag.com | 5

CONTRIBUTORS

David Bard, CRPS®, AIF®

Contributing Writer

David is the Senior Consultant of Westminster Consulting where he provides fiduciary governance and oversight services to the fiduciaries and plan committees of qualified plans.

Prior to joining Westminster Consulting, David was a corporate retirement plan advisor with Courier Capital Corporation. David’s extensive career experience includes the positions of: Vice President of Investments with Smith Barney, Associate Vice President with McDonald Investments in Buffalo NY, Director of Fixed Income trading for CIBC Oppenheimer, and Vice President of Corporate Bond Sales for Mabon Securities in New York City.

David earned his BA in Economics from Hobart College. He is a Chartered Retirement Plan Specialist (CRPS), has achieved his Series 7, 31, 63, and 65 securities licenses, holds a New York State Life/Accident/Health Insurance license and is an Acrredited Investment Fiduciary (AIF®).

Diana K. Powell, Esq.Contributing Writer

Diana K. Powell, Esq. is Senior Legal Advisor with over 20 years of experience. She was a sole practitioner who advised educational organizations, government bodies and private corporations. Diana is a graduate of the University of Rochester with a B.A. in Political Science and Albany Law School of Union University, J.D. She holds a Certificate of International Law from the University of Notre Dame, London Law Center and has studied negotiations, mediation and arbitration at the University of Cornell’s School of Industrial Labor Relations, as well as Statistics and International Studies, specializing in the Republic of China, and Educational Policy and Research Methods at the Warner School of Education at the University of Rochester.

Scott A. George, AIF®, CFPS®

Contributing Writer

Scott George is the President and CEO of the Retirement Plans Division of M. Griffith Investment Services. Scott’s Retirement Plan focus allows him to take a detailed, comprehensive look at corporate and not-for-profit Retirement Plans and provide a tailored solution.

6 | WINTER 2014

WINTER 2014

THE ONE PAGE MAGAZINEAll-Etf 401(K)S Showing How

Less Can Be More

Less Spent in Fees = More Money Invested for Retirement

Until recently, most Americans were in the dark when it came to understanding the fees in their 401(k)—in fact, many weren’t even aware they were paying any. But thanks to fee transparency laws put into effect in 2012, 401(k) providers are now required to disclose their fees more clearly. With this transparency, investors are coming to understand the impact fees can have on long-term savings. Many are also learning that ETF-based 401(k)s are, on average, much less expensive than more traditional plans that invest in actively-managed mutual funds and insurance-based investments.

Average 401(K) Balance Hits Record High As Stock Market Surges

The surging stock market has helped push 401(k) balances to record highs, according to one report—positive news for baby boomers and others nearing retirement.

Fidelity Investments, the nation’s largest 401(k) provider, said the average balance of 401(k) accounts it administers was $84,300 at the end of September, up 11% from a year earlier. Workers who were continuously active in their 401(k) plans for the past 10 years saw their accounts gain 20% in the past year to an average of $223,100, Fidelity said in a news release.

In the past few decades, many employers have phased out company-funded pension plans in favor of 401(k) accounts, in which employers and workers stash pre-tax cash to help fund employees’ retirements.

Many workers have expressed confusion about the myriad investment options in the accounts. Fidelity said it has seen an increase in the use of target-date funds, in which investment firms model ideal stock and bond holdings based on workers’ estimated retirement dates. One-third of employees in Fidelity 401(k) accounts now utilize target-date funds, up from just 3% 10 years earlier, the company said.

Plan Sponsors To Focus On Retirement Readiness

Plan sponsors will do a better job of promoting retirement readiness among their employees during the next five years, according to a new study by Transamerica Retirement Solutions.

In its report, “Prescience 2017: Expert Opinions on the Future of Retirement Plans,” the company asked 55 retirement plan experts from 45 organizations across the nation to make predictions about the trends most likely to take place in retirement plans with assets of $25 million to $1 billion by 2017. Those surveyed estimated that 39 percent of plan sponsors will change their plan design to enhance the retirement readiness of participants; 55 percent will implement automatic enrollment and 45 percent of those will adopt default deferral rates of 6 percent or higher. The majority of retirement plan service providers will show employees if they are on track to achieve a successful retirement and how much they need to save to stay on track. Twenty-five percent of plan participants will have looked into offering in-plan retirement income solutions, like annuities, and 10 percent will have made the leap and begun offering such a solution, the experts predicted.

AARP: States More Active Than Feds In Seeking Retirement Plans For Pension-Less

The states are being more aggressive than the federal government in looking for ways to enroll employees in pension plans who don’t have access to retirement savings vehicles on the job, two AARP executives claimed Tuesday. “States aren’t waiting,” said AARP Executive Vice President for

Policy, Strategy and International Affairs Debra Whitman. Nine to 14 states currently have proposals at various stages in their legislatures to create state-sponsored retirement savings plans. That number includes California and Oregon, which set up studies this year to draft legislation to establish the system. “These are not Washington-style reports that are dead on arrival. These are the first steps in the legislative process,” said AARP

Senior Strategic Policy Advisor David John. While public money might go into establishing the systems, he said, they do not put state treasuries at risk because the states would not be liable if investments go bad or if the money in the funds would not be enough to pay the recipients.

www.conferomag.com | 7

In this issue, Mary Ellen Whiteman of T.Rowe Price talks to Confero about topics around Participant

Education.

For the benefit of readers, how do you distinguish advice vs. education for employees?

There is a definition we have been using as sort of a guidepost internally that might be helpful here. There are 3 criteria that would need to be met that would indicate that something has moved from guidance to advice. The first is around the recommendation to the advisability of buying or selling a security—so a very specific recommendation that says you should buy this, sell this, or invest here. It has to be something specific to the individual’s unique circumstances.

The last is whether the recommendation serves as the primary foundation for a decision. So, you may be in a situation where a specific investment is recommended, but other data is being used to compare one decision vs. that specific investment recommendation. It’s very much a very specific, individualized type of recommendation in which the participant acts based on that recommendation. That is the advice definition we have been using.

Guidance comes in a lot of different forms, but generally the way we speak about guidance is that it’s a set of recommendations or options that a participant can use for further decision making or further analysis. 99.9% of what we do is provide guidance versus advice. We do provide in general— through 3rd party services—the level of advice investors require. But I would say on the whole, most [investors] don’t engage—they have the option, but the adoption of those types of services is pretty low.

In your opinion, what is it – advice or education - that the typical employee actually benefits from?

It’s typical to say guidance, but [I think] it’s more of the education and guidance. It will certainly vary among investors, depending on their level of sophistication and interest. So, how interested are [employees] in keeping on top of things and doing it on their own, versus the people who want a specific directions. Most people want to be told what to do, but there are also a lot of people who want to be validated in what they already think. And so it is definitely a balance across those dynamics. It ultimately will depend

on sort of that level of sophistication and interest the investor has in this type of topic.

There have been studies which question the efficacy of participant education programs. Companies can throw money at education campaigns without new enrollments. How can employers avoid this?

There are two core ways. I would say from an employer’s perspective, there is communication happening about the 401k plan, and then there is communication about the participants. Generally speaking, at a plan level, the things that are happening in a plan (fund changes, plan match, etc.) are not necessarily messages that are efficient—because it’s really from an inside out viewpoint. So, as a sponsor, you have a job to communicate specific things about the plan, but ultimately those specific things aren’t the things most relevant to the participant. [Communications are] very broad, non-targeted. Not only does participant communication need to come from the participants point of view, but it also needs to be very targeted to what they need to the extent providers can know their participants well enough to be able to communicate

By Gabriel Potter, AIF®

An Interview with Mary Ellen WhitemanHead of Individual Investor Experience at T. Rowe Price

An Interview with Mary Ellen Whiteman

18 | SUMMER 2013

Feature

relevant messages—that’s the efficiency. Ultimately if it is not relevant to the person who’s reading it or interacting with it, it’s going to fall on deaf ears. It’s not going to hit them at a level where they are going to take action because it’s not necessarily relevant to what they are thinking. That is a really important thing to consider, because ultimately if it is not about the participant or not relevant to the participant, it s probably not going to get through.

What’s a good rule of thumb to how hard employers should try to engage employees? Does safe-harbor give employers protection? Does the law of diminishing returns mean that employers can feel satisfied once they’ve pushed hard enough, and where is that point?

Generally, I don’t know that I would necessarily declare it as a rule of thumb. What is the right number of times to engage or convey a message? I would say that in most cases, what happens is it’s not enough or it’s too broad of a message. It all goes back to being targeted—you could hit somebody with a message over and over and over again, but if it’s not a targeted and relevant message, even the first time it goes out it’s probably not the right use of resources and not right way to do it. As you get more targeted what are the right number of touch points? I think that is the magic answer we are all looking for. We use a communications rule of thumb here, it’s more of a note that we have in our head which is “an average adult needs to hear a message repeated seven times before they retain it.” This is sort of an old marketing rule of thumb, but it doesn’t say how the message is conveyed, because everyone learns differently: some people are auditory, some people like visuals, some people

prefer hard-copy mail. It’s also about understanding what’s the right mix of conveying those messages; knowing that people are getting so many different messages. It’s also about differentiating and how to get your message to stand out. I think that’s some of the things that we all sort of struggle with and we are trying to think through the best way to get our messages through in sort of the clutter of messages that are out there.

Is there a particular demographic that most benefits from targeted education?

I would say we have found that the pre-retiree population, which we define as aged 50 and above, are the most engaged. That’s inclusive of digital properties, but they’re in need for more high-tech solutions as well—their needs are more complex. They tend to have higher balances just through sheer force of time versus the amount of time they have been saving. There are also several milestones that are happening up to retirement around thinking about further investing, distributions and drawdown—what that is going to look like? How they are balancing their priorities in retirement? So we do get a lot of engagement from them, typically via phone, but also through webinars—they have a high engagement rate as it relates to those. They are really just looking for a lot of information, whereas the younger investor tends to be a little harder to engage. This is for two reasons: one, they are not the type from a demographic prospective that often spends a lot of time on this type of thing and secondarily, they are not necessarily engaged on this topic—it’s too far out—[retirement is] just too elusive to that population for it to be a reality. Whereas when you get into the pre-retiree population, you tend

to have more engagement as you get towards the end of that population. If you get to 55-60, even the 50-55 age range, you could still get people just beginning to think about it.

Alternatively, are there demographics which are particularly hard to engage?

I would say generally 35 and below. There are a couple of things that we attribute this to: they may not have as much discretionary income as they tend to earn less and they don’t necessarily have a long-term savings view yet. The other thing we would say is that while they are very tech-savvy and digitally engaged, the topic isn’t as relevant to them and that doesn’t help. I would say the other areas in which we circle are people who have not participated in their plan for a long time—so people who have been with a company for years and don’t participate—trying to get them to engage can be a challenge. Lastly, it’s people who are not digitally engaged. The direction we’ve been going, and are continuing to go, is through digital engagement and digital channels and if people are not engaged in that way, they are going to be receiving a lot less in terms of education.

What has been the single most effective way of engaging employees? How much did it help?

This is where I will go back to targeted messaging. As we have evolved the way that we communicate—away from plan level messaging to targeted, more aged-based and milestone messaging—we have seen much greater engagement in all of our communications. Our emails that we send are sort of topically based by age group as well as our webinars. As an example, we have a program of webinars that we did in 2012 as well

8 | WINTER 2014

www.conferomag.com | 9

An Interview with Mary Ellen Whiteman

as 2013. Year-over-year, we saw three times the attendance at those webinars as we have made them more targeted. The engagement is higher, the actual attendance is higher, and we are seeing satisfaction scores go up as a result of the content being more relevant—that single-handedly is the most effective thing. It’s not necessarily about unique messaging that no one has ever thought of, or differentiating messaging, but more so the ability to really break it down and make the interaction as personal and relevant as possible. That is what has helped us engage more people.

What has been the biggest failure you’ve seen in terms of participant education & engagement? What went wrong and, ideally, what lessons can others learn?

Really it’s some opportunities that have been missed in the past. I wouldn’t say there is necessarily one thing that sort of jumps in my mind. Tied to my last comment about being more targeted, we don’t always have access to information, especially through the [plan] sponsor. There are data points about participants that are of high value when it comes to educating them about their financial priorities. For example, the number of children or the birthdays of children. So if they have a college savings goal related to those children, we aren’t going to know based on the [limited] information that a sponsor transmits to us. We are not going to actually help [employees] meet their goals or provide information contextually if we don’t know about them. So ultimately, what we want to do is become more knowledgeable about all of our participants. I think learning more about investors and being able to use that data to personalize their experience, is a missed opportunity. This is going to become increasingly

important as we ramp up our digital experiences. Secondarily, historically there has been a fine line between what we talk about from a 401k and a retirement perspective, and what we talk about beyond that. We have been very siloed in the way we communicate to participants about their 401k—not in relation to all the other things they are facing from a financial perspective. And not even from a financial, but from a retirement perspective. So there are clearly other retirement vehicles that can help an individual meet their goal, but the way we traditionally communicate with them is specifically only about their 401k. I think that is doing a disservice to these folks because, broadly, there are other things they may consider— whether it’s debt management, setting up an emergency fund, or saving for college. For investors who reach certain limits, there are retail products and services that can help them meet their goals that we have not historically brought tinto mind for these participants. So that is another opportunity as we move forward: to not be inside-out thinking, but really outside-in and thinking about the participant as an investor. What is it that I need to know? What tools and resources are there to help me meet my goals that are holistic and not too focused on one particular thing? Taking that lens will allow us for more opportunities in terms of really getting folks engaged and getting them the education they need.

Imagine you sit on a board of a medium sized corporation and the committee has given you carte blanche to make any single change you want to engage employees for retirement planning. Is there a specific action that works for most businesses that you’d recommend or does your answer specific to the company?

This sort of applies broadly, but I think it’s a matter of how you do it and how much you invest. Ultimately, the best way to engage is through digital properties. It allows an efficient way to personalize the experience without necessarily having to rely on a human to do so. I would compare it to phone consultations and phone conversations, where it is high-touch definitely, but also high cost and also not necessarily the channel of choice for all investors. Really think about how we replicate all those interactions that are high touch and are very relevant and personalized: How do we replicate those from a digital perspective? What I recommend is that we need to have an ongoing, user-focused effort on all digital properties to bring them together. We can be thoughtful on how the website works with iPhones vs. iPad, etc. Where do we want people to get what they need from us? Being very purposeful about that and also dedicating not only funding to ongoing iterations, but also using a very customer-focused development process to help us really understand what users want—that type of process is one in which you will end up with the right digital experience and one that helps you meet your business goals. I would recommend that sort of discipline be invested in and supported and not just “one-and-done”. [Support] an ongoing nature to keep up with changes in technology as well as to keep up with changes in the expectations our customers have. n

Mary Ellen Whiteman is the Head of the Individual Investor Experience at T. Rowe Price. A graduate of Loyola College, Mary Ellen has worked for 15 years with T. Rowe Price

18 | SUMMER 2013

Defined Benefit

Required Contributions to Defined Benefit Plans

On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) was signed into law. As part of this highway construction bill, provisions for defined benefit pension plan funding relief were included.

As many of our DB clients know, beginning in 2008, pension plans were subject to new funding rules under the Pension Protection Act of 2006. These new rules dramatically changed the basis for determining the contribution which plan sponsors are required to make to their plan. The change which has probably had the greatest impact on the minimum required contributions was the mandate specifying the interest rates used for calculating plan sponsor contributions. The mandated rates are based on a corporate bond yield curve. There was a provision to

smooth these rates by the use of a 24-month average of a three segment yield curve.

Shortly after the new rules became effective, the economic downturn began, with the value of plans assets dropping and interest rates declining, both significantly. In addition, the Federal Reserve adopted policies to maintain low interest rates for the next few years. The combination of the reduced assets and the lower interest rates resulted in significant increases in the minimum required contribution to defined benefit plans.

Changes to your DB plan after MAP-21: The corridor

What MAP-21 does is to create a corridor around the 3-tiered segment rates used to determine your minimum required contribution. This corridor is determined using

Pension Funding Relief from MAP 21Lawrence R. Peters, CPA, EA

10 | WINTER 2014

www.conferomag.com | 11

Pension Funding Relief from MAP 21

a 25 year average of the segment rates. Beginning with the plan year which starts in 2012, the 24-month average segment rates must be within the specified rate corridor. This corridor is as follows:

It is estimated that the rates for determining your minimum required contribution will increase between 100 and 150 basis points which may result in a 10-15% reduction in your plan liability and a reduction in your minimum required contribution.

The benefit of this change will be felt in the next couple of years due to the narrow corridor and the current low interest rates. After 3 or 4 years, there may be little or no benefit from this funding relief and, depending on interest rates, it is possible that your minimum required contribution at that time may be higher than under the current rules.

The use of this corridor is voluntary for plan years beginning in 2012 and mandatory for plan years beginning in 2013 and thereafter.

MAP-21 changes only the basis for determining the minimum required contribution; it does not change the basis for determining the maximum tax deductible contribution thereby increasing the flexibility for you to choose the amount of contributions to make to the plan.

Other changes from MAP-21

In addition to the change in funding rules, the act provides for an increase in PBGC premiums beginning in 2013. The flat rate portion of the premium will increase from the current $35 per participant to $42 per participant in 2013, $49 per participant in 2014 and will be adjusted for inflation beginning in 2015. The variable rate portion will increase from the current amount of $9 per $1,000 in unfunded liability to at least $13 per $1,000 in 2014, and at least $18 per $1,000 in 2015. These rates per $1,000 will also increase with inflation, but that increase is not reflected

in these numbers. There will be a $400 per participant limit on the variable rate portion of the premium and the current cap on the variable rate portion for small plans remains unchanged.

In addition there are additional reporting requirements which apply to plans:

• With more than 50 participants, and

• The plan’s funded status is less than 95% before the application of the corridor rates, and

• The plan’s unfunded liability is more than $500,000

The Act did not provide relief from the requirement of Internal Revenue Code Section 417(e) relating to the minimum value of lump sum payments.

Ongoing Recommendations for Defined Benefit Plans

We continue to be sensitive to the issues of Defined Benefit Plans, including:

• The need to keep funding above the minimum level to maintain contribution stability, and

• The fact these new rules don’t really impact the desirability of risk reduction. (The relief is temporary, the accounting rules don’t change, and the long term nature of the liability doesn’t change.), and

• Continuing your conversation with your actuary to determine the exact impact to your plan.

We look forwarding to continuing, and facilitating, these discussions. n

14 | January-March 201212 | WINTER 2014

Feature

By Scott George, CFP®, CRPS®

I have always believed that most do not want to be educated on retirement planning. Most just want the answer to two questions: ‘Am I saving enough?’ and ‘Is it in the right place?’ There is nothing wrong

with educating participants in a Corporate Retirement Plan, however, if the goal is to move the needle on retirement readiness, education is not what produces results.

Most employees leave a group education session with a momentary renewed sense of urgency regarding the review of their account—if the presenter is skilled enough to present the relatively dry material in a manner that piques their interest. The issue I have found with this is that this feeling fades within minutes of leaving the meeting. Once they get back to their work station, they forget most of what they were told and continue doing nothing different than what they have already done with their retirement account in the past. Creating an environment where a participant can easily identify their retirement goal, and quantify the amount they should be saving while also marrying their risk tolerance and retirement goal with a portfolio allocation, is the more effective way to help participants move closer to retirement independence.

www.conferomag.com | 13

Participant Education Vs. Advice

Participant Education

VS. Advice

I suggest using group participant meetings to generate interest in one-on-one meetings to review their individual situation. An advisor that heads down this path should be able to effectively communicate the process in the group meeting while also conveying a feeling that everyone should have a plan and you will help them start theirs. Participants generally do not want to think they are going to have to learn and then apply what you teach them. An effective group meeting will present the need for the planning, the process, and the desired outcome so when the sign-up sheet is passed around, people do not hesitate to place their name on the sheet to get the process started. This means the advisor had to have presented the need for a review of their situation in a way that pushed them to action. I will suggest this is the sales pitch and the critical first step in heading down a road of retirement readiness.

Once the interest has been generated in group meeting(s) the next step is to deliver in individual meetings. This means the advisor needs to be set up to handle the volume, consistence, and fiduciary responsibility of individual meetings. Keep in mind my initial premise that participants do not want to be educated—individual participant advice should be entered into carefully and properly. If set up correctly, an advisor can change a retirement plan from one that is just another benefit to one employees talk and brag about. I say this because employees do talk and how an advisor implements this phase of the advice process is critical to the success of this type of program and quite possibly their future as the advisor to the plan. It is difficult to describe the time and effort commitment necessary to implement an effective participant advice program since the task is basically taking on a large number of individual clients, analyzing their situation, creating a plan with them, and then implementing and monitoring the plan. Participants need to understand exactly what the advisor’s role is in the process and what each party is responsible to do. A miscommunication here can end in a bad outcome if a participant thought the advisor was going to implement recommended changes and the advisor thought they communicated that the participant needed to implement them. Again, one mishap on this front and it could end the program before it gets off the ground.

The one-on-one meetings should be designed to get the critical information to create a plan and leave the “good to get to” stuff for after the plan is created and implemented. This

means that the process of gathering the information needs to be well established, practiced (since the time with each participant is limited), and then consistently communicated to each participant. Each participant needs to leave the initial one-on-one meeting with the same story and the same level of service from the advisor, since they will compare notes. Since each participant will have a unique financial situation, the advisor should have a path for the participant with a relatively simple financial situation and as well as a path for someone with a sophisticated situation. The participant with the easier financial background could have the plan established along with recommendations in two meetings. Being able to do this means the advisor has a repeatable system in place to gather, process, communicate and document the information being discussed.

For the participant with a more sophisticated financial situation, the initial process is a bit longer and requires more work on both the advisor’s and participant’s part. First, the advisor needs to establish a level of trust and competence which gives the participant the confidence to hand over the details of their financial life. I have found this means the initial one-on-one meeting is used to gather the first level of information from the participant. Then there is the information that will need to be provided after the meeting is over since the participant will most likely not bring all of the data they needed for this meeting. Obviously, a system

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Feature

There is nothing wrong with educating participants in a Corporate Retirement Plan, however, if the goal is to move the needle on retirement readiness, education is not what produces results.”

to follow up with the participant is important to keep this process moving forward. I have found this information gathering for the first cut at a plan to put together can take widely different time frames. Some will get the needed information back immediately and others will not meet again for several months or longer. When they revisit the situation they all have to be reminded what is needed to start the planning. Each person is very different on this point and the important part to this working for this type of participant is consistency. A participant of this type will want to gain a feeling that you know what you are talking about, are around on a consistent basis, and will pull them along with gentle tugs. Eventually, the consistent message allows an engaged participant to know where to go when they are ready to move forward with more detailed planning. Being available until they reach this point is the key to success.

Once a plan draft has been crafted, reviewed with the participant and then modified to meet with their approval, recommendations are made to answer the first two questions asked ( ‘How much should I save?’ and ’Is it invested in the correct place?’). Implementing these recommendations will be specific to each retirement plan situation as some plans allow the advisor to make approved changes for participants, some allow for changes to be made by advisors without participant approval (discretion), and some do not let the advisor make changes at all—just recommendations. The important part to this phase is again, consistency of process and documentation by the advisor.

The final step in the participant advice process is to monitor the plans established and update them on a periodic basis. These types of plans have a tendency to get stale unless updated as people’s financial situations continually change as do their goals. Reviewing the plans regularly keeps the participant’s eye on the ball and focused on the goal. Their situations will most certainly change from the first “approved” plan to the final plan that is implemented at retirement. Helping them along the way is the job of the retirement plan advisor that is participant outcome focused and set up to handle this type of practice. n

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Time To Make Time

Scott George is the President and CEO of the Retirement Plans Division of M. Griffith Investment Services. Scott’s Retirement Plan focus allows him to take a detailed, comprehensive look at corporate and not-for-profit Retirement Plans and provide a tailored solution.

Liability is the state of being responsible for something—legal liability, in particular, tends to create a feeling of unease. According to

Investopedia, in business liability is defined as a company’s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. It is in the goal of corporate retirement committees to provide the best options for their employees while limiting their corporations’ liability.

Before President Bush signed the Pension Protection Act (PPA) into law in 2006, employers were hesitant to adopt automatic enrollment options for employees’ 401(k)-type pension plans due to fear of legal liability for “market fluctuations and applicability

of state wage withholding laws.” (DOL) After the PPA was signed and corporate liability was reduced, more companies began to offer plans that included an automatic enrollment option, which has led to an increase in employee participation. This increase in participation was the goal of the Department of Labor’s regulation.

A safe harbor is a “legal provision to reduce or eliminate liability as long as good faith is demonstrated” and was created under ERISA to “protect management from liability for making financial projections and forecasts made in good faith” (Investopedia). The DOL states a Qualified Default Investment Alternative (QDIA) is a safe harbor investment created by the PPA.

According to the IRS, a safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions

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Res Ipsa Loquitor

RES IPSA LOQUITOR

SAFE HARBORS

DIANA K.POWELL,

ESQ.

“The purpose of government is to enable the people of a nation to live in safety and

happiness. Government exists for the interests of the gov-

erned, not for the governors.”—Thomas Jefferson

for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401(k) plans.

QDIAs and safe harbor plans were created in the Pension Protection Act of 2006 to encourage employers to offer automatic enrollment options by limiting the liability of the plan sponsors by affording them legal protections under the safe harbor regulations. If the conditions outlined by the PPA are met, then it is possible for plan sponsors to find relief from fiduciary liability. However, plan sponsors are not relieved of liability for the prudent selection and monitoring of a QDIA. (DOL)

Even with the implementation of the Pension Protection Act of 2006, experts warn that liability can arise for plan sponsors due to their

failure to fully comprehend the conditions set forth in the PPA. (InvestSense,LLC) As Fred Reish has been often quoted, “the vast majority of plans believe that they are 404(c) compliant, …, very few of them satisfy all of the 404(c) requirements.” (Reish, InvestSense, LLC) Therefore, plan sponsors who believe they are not liable because they are covered under a safe harbor, may in fact have liability due from their inability to meet all of the conditions set forth under 404(c).

The goal of creating QDIAs by the PPA of 2006 was to provide relief from liability for investment outcomes to fiduciaries, thereby encouraging plan sponsors to offer the option of automatic enrollment to employees who did not otherwise choose to participate in the pension plans. Experts are studying the long-term effects of QDIAs.

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Safe Harbors

However, researches caution, “most pension-related research has focused on individuals’ behavior – whether workers participate in a 401(k), how much they contribute, and how they make investment choices. Even the discussion surrounding automatic enrollment has focused on how it benefits employees by increasing their pension coverage and ultimately their retirement savings. Comparatively little is known about employer decisions regarding retirement plans, yet employer actions surrounding these plans substantially affect future retirement security. … Employers might respond to the surge in retirement plan costs associated with automatic enrollment by trimming match rates to 401(k) plans or reducing other compensation” (Butrica and Karamcheva, November 2012). n

Plan sponsors who believe they are not liable because they are covered under a safe harbor, may in fact have liability due from their inability to meet all of the conditions set forth under 404(c).”

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Feature

SMALL CUES CHANGE SAVINGS CHOICES

In the financial industry, we hear dire warnings often. Pensions are significantly less common for new employees and existing pensions are already under threat.

Social Security protection is expected to ultimately shrink for all Americans. Given these additional burdens, most employees still aren’t saving remotely enough for their own retirement with their personal savings or through company sponsored retirement plans, like a 401(k).

The fiduciary standard for plan sponsors may expand to include outcome-based measures. In other words, creating an investment lineup with a prudent set of options for employees may not be enough. Instead, actively encouraging a secure retirement for your employees may become the new standard. So, what else can plan fiduciaries do to persuade their employees to change their saving habits?

Finally, some good news about retirement planning

We’ve read an interesting article on this very dilemma which suggests that small changes in employee communications can directly impact savings rates. More specifically, a simply tailored message emailed to employees about their 401(k) savings plan can prime them to increase or decrease their contribution rates. A whitepaper, written James Choi of Yale University and NBER, describes an experiment with tailored email messages designed to influence employee savings behavior.

A useful experiment

The field experiments tested nine separate cues—embedded in mostly identical emails to control and experiment groups. They determined some cues were only temporarily effective, but some presented long term progress at least one year after the study.

The nine cues were in three groups: Anchor, Savings Goals, and Savings thresholds. Anchor cues suggested a contribution rate for employees. For instance, “you could increase your contribution rate by 1% of your income and get more match money for which you are eligible.” Savings Goal cues posited statements like, “contribute $7,000 for the year and you attained it. You would earn $500 more in matching money this year than you’re currently on pace for.” Finally, Savings Threshold cues could quantify the amount of allowable savings, and sometimes demonstrate the gain for an employee. For example, “The next $1500 of contributions you make between now and December 31 will be matched at a 100% rate.”

In short, the study determined that presenting targets or goals above a likely existing savings range had an effect of pulling-up the behavior of employees. In their words, “High savings cues

By Gabriel Potter, AIF®

18 | WINTER 2014

www.conferomag.com | 17

Small Cues Change Savings Choices

SMALL CUES CHANGE SAVINGS CHOICES

increased 401(k) contribution rates by up to 2.9 % of income in a pay period, and low savings cues decreased 401(k) contribution rates by up to 1.4 % of income in a pay period.”

For example, one Savings Threshold cue advanced high savings rates within the email as a way to increase the plausible range. Specifically, “You can contribute up to 60% of your income in any pay period.” The expectation was not that employees would begin to save 60% of their income, but rather providing a sufficiently high cue could increase the employee’s personal target. The object of introducing a large outlier, 60%, was to adjust the perception of an appropriate savings goal held by participants.

Comparison to previous experiments

It is important to note that the benefits of this experiment are essentially free. When faced with the problem—how can

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I change participant savings behavior?—an economically-inclined fiduciary might be tempted to directly incentivize the behavior they are trying to encourage. For example, a plan fiduciary may attempt to increase the company match amount in a 401(k) plan to encourage employees to save more. As the article itself points out, previous study (Kusko, Poterba and Wilcox—1998) found that significantly increasing the match rates, from 25% to 150% of the first 6% of income, have only marginal benefits to increasing the amount employees would contribute to their plan. Other studies (Choi et al—2002) found that increasing the maximum income match level still had inferior results compared to the free benefits of the current experiment.

In a perfectly rational world, changing the underlying incentives should be more than enough to affect behavior, but—in reality—it isn’t enough. This study suggests that it is equally important

to communicate the consequences of behavior to employees—to make the abstract rules more tangible—rather than changing the vague underlying calculus of saving rates. Alternatively, presenting a high, even unrealistic, goal can inspire changes in behavior.

The genuine article

The details surrounding the study are fascinating and, if you are interested in learning more, the article—written in conjunction with representatives from Yale University, Barclays Bank, Google and the University of Pennsylvania— is available on listed author, James Choi’s, website.

The full white paper is available here:

faculty.som.yale.edu/jameschoi/cues.pdf

Defined Contribution

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FIDUCIARY COMPLIANCECHECKLISTS

By Gabriel Potter, AIF®

Checklists Are A Life Saver… Literally

Simple checklists to demonstrate adherence to proper procedure is a well-known advantage to a variety of professional endeavors including everything from spaceflight, air travel, medicine, nuclear energy, military operations, and so on. For example, momentarily disregard this magazine’s usual scope of investing and fiduciary matters; let us consider

the medical field, specifically surgery. Several studies have been conducted which have demonstrated that a simple checklist is invaluable tool for reducing risk. A 2009 Harvard study suggested that a surgical checklist reduced complication and death rates by a third, with subsequent studies corroborating these results many times over.

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In short, whenever consequences of failure are high, using a checklist can significantly reduce worst case scenarios. Checklists can be the difference between good intentions and high quality execution.

A Special Reason For Fiduciary Compliance Checklists

Imagine, for a moment, the items you might find on the aforementioned surgical team’s checklist: apply antibiotics, sterilize equipment, verify type-specific blood reserves, etc. These real-world items (or actions) are often distinct and tangible. By contrast, elements of compliance checklist are driven by intangible legal and ethical precepts and, therefore, harder to define.

Going through the exercise of creating (or applying) a checklist to clarify the required elements of compliance can crystallize the vague good intentions of an investment committee into constructive real-world results.

Some Checklists You Can Use

There are a variety of checklists which can be useful when conducting a fiduciary review. These include an Investment Policy Statement provision checklist, a compliance-documentation checklist, or safe harbor protection checklists which delve into features of specific laws, such as a Pension Protection Act (PPA) QDIA checklist or an Employee Retirement Income Security Act (ERISA) 404(c) checklist.

What sort of elements might belong on each of these lists? An Investment Policy Statement (IPS), as most readers know, describes the investment goals and details the appropriate strategies that an institution could use to attain these goals. However, a cursory search on any search engine will show sample investment policy statements in all sizes and levels of specificity as they become tailored to the unique goals of any individual or institution. For instance, IPSs commonly detail their risk tolerances, return requirements and allowable investment strategies. However, an individual’s IPS might include estate planning guidelines whereas an institutional IPS, given the additional layers of complexity, should define the roles of the multiple vendors and consultants working on behalf of the plan. Moreover, a foundation’s IPS might

include a static strategic allocation target (e.g—60% equity / 40% fixed income) whereas a defined benefit plan might allow for changes in the strategic allocation if they are perusing a liability driven investment (LDI) strategy. The required elements in an IPS can be as unique as the client, and the checklist should reflect that.

Compliance checklists, for QDIA or 404(c), might delineate the key features of the law and specify how an institution is meeting the specifications of the law. For example, a QDIA list might check how often participants can opt-out of a QDIA, or verify how the annual QDIA notice was communicated to participants. Alternatively, a 404(c) checklist might check if participants are informed of the investments’ limitations, such as voting rights or additional penalties for fund transfers within a plan.

Moving Forward

Again, the process of designing a comprehensive checklist can be helpful in determining which lists are necessary for your institution and which elements are being satisfied. Be sure to work with a qualified fiduciary consultant for guidance when creating a list or customizing one to work for you.

Fiduciary Compliance Checklists

Whenever consequences of failure are high, using a

checklist can significantly reduce worst case scenarios. Checklists can be the difference between good intentions and high quality execution.”

On Topic

22 | WINTER 2014

As a rule, improvements in technology democratizes access to goods and services. That’s a mouthful, so let me give you an example. When I was growing up, if our family was planning a trip with flights, we

would speak with a travel agent to arrange flights, hotels, car rentals and so on. Today, websites like Priceline.com and Expedia.com have rendered basic travel agent services obsolete for many customers. Similarly, a generation ago, individuals and institutions had to rely on brokers or professional money managers to get access to the capital markets. If you wanted to invest, you needed the access only a registered broker could provide. Now, there are a dozen low cost, efficient stock trading programs which provide continuous access to global markets with professional grade tools. Thus, brokers, feeling the pressure, have become aware that the advice and guidance given is their primary value proposition, rather than merely access to the markets. So, the net result is a flood of brokers trying to adopt the “consultant” mantle in an attempt to preserve their business or, at least, staunch the bleeding.

The practical upshot of is that there are a lot of “consultants” who are not committed to the highest principles and best practices of the industry.

So, how can you tell if a consultant is good or bad? Let us also posit a key factor when searching for a consultant: do they accept fiduciary status for all their clients? We suggest that a consultant who acts as exclusively as a fiduciary bears no relation to the stock-broker model of the previous generation. Conversely, if they wear multiple “hats” and can act as salesmen, then you’ll never be sure which role is being adopted. Thus, another way to test for a fiduciary-only consulting is to check on compensation. Ideally, the only source of revenue your consultant should accept is an explicit hard dollar fee directly from their clients; that way, you are ensured that no external financial arrangements would influence the consultant to suggest a particular product.

Of course, there are other important ways to evaluate your consultant. For example, a running track record of the consultant’s performance versus a useful index should

TELLING GOODCONSULTANTS FROM BAD

By Gabriel Potter, AIF®

Telling Good Consultants from Bad

www.conferomag.com | 23

demonstrate some aptitude. Furthermore, the education, experience, credentials, sophistication, and cost-effectiveness are also worthy of consideration.

Simply having the criteria is not always enough to make a decision. For instance, you may have a clear understanding of your consultant’s costs, but you might not know how that compares to peers. Similarly, it will require some research upon your part to truly determine if the consultant being used has really selected a fair index to benchmark their performance against. You may see a number of credential designations behind the key consultants—AIF, CRPS, MBA, CFA, CIMA, QPFC, CFP—but which are most valuable to you?

If you feel unqualified making these types of judgments, it might be in your best interest to hire a separate consultant for the sole and exclusive purpose of vetting other firms. This arrangement might seem like an unnecessary complication, but the additional level of scrutiny is actually quite common. A key aspect of demonstrating prudence in any endeavor is comparison to peers, and without a thorough understanding, an uninformed comparison can be damagingly misleading. Consultants are often called upon to benchmark the service providers common to institutions—like lawyers, actuaries, accountants, recordkeepers, and custodians - and to provide an opinion on the relative costs and services they provide. Asking for a consultant to run a peer-driven consultant benchmarking can be a valuable exercise and provide superior matching of client needs to consultant capabilities.

TELLING GOOD

WESTMINSTERCONSULTING

800.237.0076 www.Westminster-Consulting.com