Advisory Council Report of the Working Group on Financial Literacy of Plan Participants and the Role of the Employer

This report was produced by the ERISA Advisory Council’s Working Group on Financial Literacy of Plan Participants and the Role of the Employer. The ERISA Advisory Council was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not represent the position of the Department of Labor (DOL).

Executive Summary

The 2007 ERISA Advisory Council formed a Working Group on Financial Literacy of Plan Participants (hereinafter referred to as the “Working Group”) to study numerous issues in increasing the financial decision-making skills of plan participants. The desired result of the Working Group was to discover and present matters that would enhance the ability of plan participants to manage assets throughout their financial life cycle.

Testimony to the Working Group was provided on July 10, 2007 and September 19, 2007 by 13 speakers, representing educators, investment management, organizations that represented multi-stakeholders, lawyers/consultants, and the federal government. After careful debate and analysis of the issues and transcripts, the Working Group submits the following recommendations to the Secretary of Labor for consideration:

Recommendations

Recommendation 1: Make Best practices Available to Plan Sponsors - For plan sponsors who wish to craft their own program, a best practices grid would point to the core literacy skills needed for a successful retirement. The Working Group recommends that the Department of Labor determine and publish best practices for the plan sponsor and fiduciaries to consider for use in educating plan participants with a focus toward increasing financial literacy.

Recommendation 2: Draw Attention to Publications Already in Existence - For plan sponsors who wish to incorporate generic material to accomplish literacy, heightened awareness of existing material is needed. The Working Group recommends that the Department of Labor publish and continue to publish information which provides information regarding the unique needs and requirements for managing finances in retirement.

Recommendation 3: Update, Expand, and Amend 96-1 - The Working Group recommends that the Department of Labor expand the reach of IB 96-1 by changing and updating it. As innovation continues in the financial marketplace, educational initiatives will need to address items heretofore not necessarily addressed in 96-1. 96-1 needs to address information, education, and advice in the de-accumulation stage as well as the accumulation phase. Further, as innovation continues in this area, 96-1 needs to be continually updated.

Recommendation 4: Coordinate and Bring Together Government Agencies, Private Sector, and the Academic World - The Working Group recommends that the Department of Labor initiate, engage and facilitate interaction with regulatory agencies, self-regulatory organizations, industry trade groups and academic institutions like Financial Industry Regulatory Authority, Investment Company Institute, National Association of Insurance Commissioners, IRS, SEC, Health and Human Services Department, Department of Education for the purpose of creating “partnerships” of common understanding, materials and resources that employers, plan sponsors and fiduciaries can draw upon to increase financial literacy of employees and plan participants.

Recommendation 5: Encourage and Allow the Use of Income Replacement Formulas and Final Pay Multiples - The Working Group recommends that the Department of Labor encourage, allow and facilitate plan communications that use retirement income replacement formulas and final pay multiples in employee benefit statements on a personal participant basis. Plan communications should encourage participants to have a numerical goal, whether as a result of a sophisticated or elementary formula, and repeat that message. At the very least, participants should be able to determine and have access to an estimated plan account balance necessary for retirement.

Respectfully Submitted,

Richard Landsberg, Chair
Trisha Brambley, Vice-Chair
Robert Archer
Edward Schwartz
Dennis Simmons
Elizabeth Dill
Randy DeFrehn
Stephen McCaffrey
Willow Prall
Kathryn Kennedy
Christopher Rouse
Edward Mollahan
Richard Helmreich
James McCool, ex officio
William Scogland, ex officio

Introduction

The Working Group on Financial Literacy of Plan Participants undertook several issues for study. The balance of this report will address the scope of the Working Group, the questions for witnesses, dates of testimony and list of witnesses, current environment for the issues of inquiry, consensus recommendations to the Secretary of Labor and summary of testimony from the witnesses.

Scope of the Working Group

The working group is undertaking this topic to discern standards and make recommendations that the Secretary of Labor can deliberate upon and take action as the Secretary deems appropriate. The study concerning financial literacy of participants and the role of the employer (“financial literacy”) will focus upon initiatives, programs and education that will develop skills for participants to make informed decisions and take action to maintain and improve financial well-being in retirement. The scope of the study will be to see how plan sponsors and vendors may be able to assist plan participants with financial literacy in all aspects of retirement asset management beyond accumulation and management of self-directed accounts. The goal of the study is to assess and recommend ideas, methods and programs to enhance financial literacy of plan participants. The desired results of the study undertaken is a

Determination of whether:

  1. New skills development for participants is necessary to attain new competencies for effective personal financial management
  2. Advice and education can be provided/sponsored by the employer that provides accurate, unbiased information for effective participant decision making
  3. Programs and methodologies can be implemented to enhance financial literacy of plan participants without undue burden or regulation accreting to the employer/plan sponsor.

Questions for Potential Witnesses

Does the plan sponsor have any responsibility to educate the participants about their decisions at retirement?

Are programs in place now adequate for sound decision making? Why or why not?

Should the plan sponsor receive any incentives to provide this education? What would be a sufficient incentive?

What specific message should participants receive at retirement? What are the preferred ways to deliver the message?

In addition to management of retirement savings, what are the three main financial issues facing retirees? Are there regulatory hurdles? If so, what do you recommend to aid retirees without undue cost and burden to the employer?

What potential disruptions to retirement income stability exist for retirees?

Inherent within “advice” provided to participants is the specter of fiduciary responsibility. Can “education” be provided without fiduciary responsibility and still deliver effective information for retirement decision-making regarding personal finances and health care?

Should the prohibited transaction exemption provided for investment advice contained within the Pension Protection Act of 2006 be expanded to allow for other forms of financial advice, e.g. insurance, health care choices? If so, what safeguards would you recommend for satisfactory regulatory oversight of such and expanded PTE?

The scope of inquiry for the Working Group and the attendant questions were given to all of the witnesses in advance of testimony. The witnesses were told that the questions were merely a starting point to generate thought and discussion of the scope of the Working Group. The questions were not intended to limit the parameters of testimony.

The Working Group solicited testimony of witnesses from a broad cross-section of the qualified retirement plan industry and financial educators and vendors. The witnesses did not answer every question and in many instances, there was not enough information presented to form a consensus as to every inquiry by the Working Group. The witnesses and the dates of their testimony were as follows:

July 10, 2007

  • Melissa Kahn, Metropolitan Life Insurance Company, testifying on behalf of the American Benefits Council
  • Sharon Burns, Executive Director, Association for Financial Counseling & Planning Education
  • Spencer Williams, Rollover Systems
  • Annamaria Lusardi, Dartmouth College
  • Ted Benna, Malvern Benefits, Malvern Pennsylvania

September 19, 2007

  • Robert Doyle, Department of Labor
  • James Danaher, Aon Consulting
  • Jane White, Retirement Solutions Foundation
  • Dallas Salisbury, Employee Benefit Research Institute
  • Liz Davidson, Financial Finesse, Inc.
  • Mary Swanson, Life Insurance Marketing and Research Association
  • Anna Rappaport, Rappaport Consulting
  • Dorann Cafaro, The Cafaro Group

Current Environment for the Scope of Inquiry

The visibility of financial literacy as a major national issue has increased significantly during the last decade. Televisions and radio programs, as well as Websites, books, magazines, and newspaper columns are devoted to it. Financial literacy has been the subject of extensive Congressional testimony, and has been mentioned in both state and federal legislation. For example, financial literacy was addressed in the Savings are Vital to Everyone’s Retirement (SAVER) Act of 1997, which mandated a series of national summits on the topic, and the No Child Left Behind Act of 2001, which formally recognized the importance of financial education in schools. In addition, financial literacy is the object of countless programs, meetings, projects, classes and seminars. And yet, consider these facts:

  • In 2001, an AARP survey of older baby boomers (age 51-59) showed that nearly 40% were not confident about a secure retirement
  • The United States reportedly has the lowest individual savings rate in the industrialized world
  • From 1990 to 2000, the rate of personal bankruptcy in the United States rose by 69%. It appears that this trend will continue supported by recent statistics showing a 19.2% increase between 2000 and 2001.
  • High school seniors taking part in a 2002 national survey of financial knowledge sponsored by the Jump$tart Coalition for Personal Finance scored an average of 50.2% - a failing grade. Scores have been declining since the first survey was administered in 1997

Most important to this Working Group, and at the core of its undertaking, are the fundamental changes in the economic system, most notably in retirement funding. In just two decades, the norm has shifted from defined benefit plans (pensions), provided and managed by employers, to defined contribution plans – 401(k) and 403(b) accounts – managed and funded primarily by individual employees. Individual Retirement Accounts (IRAs) enable some Americans to independently set aside money for retirement, tax free, every year and invest it as they see fit within the terms of the law. The same freedoms and the same responsibilities apply to other new retirement options. However, according to the Retirement Confidence Surveys (“RCS”), Americans are not handling the responsibility well. Survey results show an ongoing, continuation of a trend in that fewer workers are planning and saving for retirement than in the past. In addition, the number of people who said they had calculated the amount of money they need to save for retirement has steadily declined as well.

The RCS also shows that younger Americans, between the ages of 20 and 39 are more likely than older workers to believe private savings and investments will provide the largest share of their retirement income. Meanwhile adults between 40 and age 60 still largely expect to rely heavily upon Social Security. Although the survey results bode well for the standards of young American workers, they reinforce the need for financial education to ensure wise investment and financial management decisions.

The aging of America is also a major factor for consideration in any discussion about financial literacy. With an increase in life span comes a corresponding need for an extended income stream. This, at a time when the traditional “three-legged stool” of pensions, savings and Social Security is dangerously wobbly. The latest Wealth Span Model shows that Americans now devote fewer years to accumulating wealth and more years to spending it. The model compares the life-long spending and saving patterns of Americans from 1930 to 2000. The model shows that in 1930, Americans began accumulating wealth at about age 20 and continued to do so into their 60s. In the last 10 years of the 20th century, wealth accumulation began after the age of 25 and ceased before age 65. In the 1930 scenario, Americans generally spent a maximum of 20 years in retirement; at the turn of the century, retirement was expected to last up to 35 years.

As employers have shifted from offering employer-driven defined benefit retirement plans to employee-directed defined contribution plans, many individuals have of necessity assumed greater responsibility for planning for their financial needs in retirement. Many employers have instituted training seminars to help employees assess their needs and evaluate their options for the future.

A study by Fannie Mae entitled Personal Finance and the Rush to Competence found that employers most often initiated financial education for reasons associated with their 401(k) programs – to increase participation and contribution levels, to comply with related regulations and to avoid potential liability for investment losses. The study profiled programs on long-term financial and retirement planning at Weyerhaeuser Company and United Parcel Service. Both programs are strongly supported by management and offered at regular intervals. The programs consist of one or two day workshops tailored to specific age groups. Employees receive extensive resource materials, including workbooks that incorporate explanations of the companies’ benefits in the context of broader financial planning strategies. The Weyerhaeuser program takes a ‘holistic’ approach covering nonfinancial topics such as health and quality of life in the workshops. The UPS program augments written resource materials with a web-based service to help employees develop a personal financial action plan and computer software to provide information on such topics as budgeting, managing debt, saving, insurance and wills.

Employee response to workplace financial education programs and the results of studies of the influence of such training on employee financial behavior have generally been favorable. One study found that employees who attended training workshops subsequently increased their participation in 401(k) plans (Kim, Kratzer and Leech, 2001). Another study drew a similar conclusion, with more than half of those participating in counseling sessions and workshops changing at least one financial behavior (Kim and Horgarth, 2001). In a study evaluating the effectiveness of financial education offered by a company, 75% of employees reported deriving a sense of benefit from work-place sponsored training; they believed that they had made better financial decisions after attending the workshop and were overall more confident in making investment decisions (Garman, Kim, Kratzer, Brunson, 1999). Other researchers have conducted telephone surveys of a national sample of individuals aged 30 to 48 to examine the effects of employer based financial education on savings – both in general and for retirement. Retirement accumulation, by all measures was found to be significantly higher for respondents whose employers offered financial education. In addition, rates of participation in 401(k) plans for both respondents and spouses were higher in the presence of employer-sponsored financial education. The study found a significant relationship between financial education and the rate of total saving; however, there was essentially no relationship between financial education and total wealth accumulation (Bernheim and Garret, 2002).

Overall, evidence concerning the benefits of financial training is consistent with conventional wisdom, i.e. financial education can result in more-informed individuals who make better investment and financial decisions. It is important to note, that when it comes to specifics, many challenges remain in identifying the most effective and most efficient means of providing relevant information to educate individuals at appropriate points in their financial life cycle.

The challenges for policymakers, plan sponsors and educators in designing, delivering and measuring financial literacy assistance to meet the needs of all groups within the population are many. However, the elements that must be considered can be defined by asking “who, what, where, when and how.”

‘Who’ is the targeted audience?

“What’ does the audience need to know to assess personal circumstances, identify future goals and implement behaviors consistent with those goals?

‘Where’ should financial literacy be delivered to reach the broadest audience with effect?

‘When’ is the appropriate time to expose individual plan participants to both general and specific information about financial issues and options?

‘How’ can financial education be delivered both at specific points in time and over the long-term to assist plan participants in adjusting their financial plan to suit their needs?

‘How’ can the effectiveness and impact of financial literacy programs be measured?

Consensus of Recommendations

Introduction

The Working Group posited a number of questions to witnesses regarding how to improve financial decision making and increase financial literacy of plan participants. Our consensus recommendations do not ask for a change to any, or new statute, regulation, interpretive bulletin, notice or opinion. Instead, the Working Group would like the Department of Labor to create a publication to stress ‘best practices’ in the execution of providing financial literacy training to retirement plan participants. In addition, the Working Group would like the Department of Labor to continue to publish its educational magazines/pamphlets addressing financial needs analysis and financial decision making. Likewise, the Working Group believes that increased competition, technology and general innovation of the financial marketplace necessitates a constant vigilance regarding IB 96-1 and its delineations between and among information, education and advice as new products, strategies and techniques are developed requiring new choices and decisions of plan participants. The Working Group believes that a common platform of thought leadership regarding financial literacy as a result of interaction between public and private regulators and trade groups is necessary to the formulation, dissemination and acceptance of financial literacy training. Finally, the Working Group recommends that retirement income replacement measurements be allowed for use on a per participant basis and as often in the different plan communication disclosures.

The Working Group recognizes that the Department of Labor has the ability to influence plan sponsors short of formally changing the written law. The Working Group believes that plan sponsors need more education relating to ‘best practices’ of assisting employees/plan participants with obtaining and increasing financial literacy. The Working Group has found that all the pieces of effective regulation are already in place. The Working Group has also found that what seems to be lacking is a commonality to approach and content.

The Working Group found that from the literature on the subject and the testimony of its witnesses, the findings of studies of the effectiveness of financial literacy training have been mixed. While the Working Group found that some literacy education initiatives have discrete objectives (like reduction of debt or increasing savings in employer-sponsored benefit plans) and show limited success to those objectives - improved financial behavior does not necessarily follow from increased financial information.

The Working Group submits its recommendations on the basis that financial literacy training is an undertaking in its infancy and that it must be nurtured in order to flourish in the next century and beyond.

Recommendation 1: Make Best Practices Available to Plan Sponsors - Financial Literacy as a topic could encompass ‘all things attendant to personal finance.’ The Working Group has attempted to limit is recommendation to retirement plan economics, i.e. what employees and plan participants should be educated on and about with regard to properly managing investments and streams of income. Necessarily, there some items that cannot be considered tangible retirement finance. The Working Group would like to see those items addressed in the publication on ‘best practices.’ The reason is that those non-plan account balance issues are substantially important as to be properly incident to retirement plans and retirement decision making.

From testimony and the literature the Working Group has come to realize that financial literacy and improved financial decision making can be delivered and is dependent upon three different variables – timing, content and media. Accounting for all the variables associated with financial literacy training, i.e. ‘when,’ ‘how,’ and ‘where’ it is delivered, ‘who’ is trained and ‘what’ information is presented poses the great issues and challenges to program developers. For example, regarding medium of delivery all witnesses agreed that face-to-face financial counseling works best. Some believe telephone counseling is successful and some believe it isn’t and still others believe telephone counseling with the same ‘telephone counselor’ each time a plan participant calls is sufficient and successful. As to timing of the message, all witnesses agree (and the literature as well) that several meetings and several counseling sessions over a lifetime of works best in terms of modifying behavior and learning financial topics.

The Working Group heard in a unanimous chorus from its witnesses that financial literacy is predicated upon the financial basics – time value of money, asset allocation, knowledge of taxation, risk management. To this end, the Working Group believes that the following matrix offered by Dr. Sharon Burns of the Association for Financial Counseling Planning Education best addresses retirement plan ‘basics’ in decision making and can serve as the minimalist model for best practices in terms of content for a financial literacy education and training program. Knowledge, Decision Points and Skills Necessary are in grid form appealing to the visual. For those plan sponsors who want to craft their own program, the following grid represents needed conceptual understanding and decision points that could be incorporated into a Best practices retirement readiness/literacy program.

Table 1 – Knowledge and Skill Competencies

Topic

Decision Points

Knowledge

Skills

Retirement

Can I afford to retire?

Monthly and annual expenses Realistic return on investments

Taxation rules for various income types (more detail later)

Monthly budgeting Prepare a net worth statement Control spending Eliminate debt

Pay off mortgage

Social Security

When should I begin to take Social Security?

What happens to my benefit at death of a spouse?

Benefit levels at various ages Estimate life expectancy

Benefits for surviving spouse

Adjust spending or portfolio withdrawals

Defined Benefit Plans

Which distribution option to take?

Estimate life expectancies of both spouses

Understand tax ramifications of distribution options

Compare budgets with various options Calculate risk to surviving spouse

Manage investment portfolio, if lump sum distribution is chosen

Defined Contribution Plans

Should I rollover account or leave with company? When and how do I begin withdrawals? How do I calculate the minimum withdrawal? How can I minimize income taxes on withdrawal?

How do I transfer account to beneficiaries?

Advantages and disadvantages to each option Taxation issues if withdrawal is being considered Required Beginning Date rules Minimum Required Distribution rules Taking the minimum distribution required will minimize taxes

Understand estate planning basics and beneficiary options

Portfolio management Accessing and completing forms Calculate the Minimum Required Distribution Determine personal marginal tax rate

Complete a beneficiary form

Private Savings and Investments

Where do I invest these funds? When should I use these funds? How can I minimize income taxes on withdrawal?

How do I transfer to beneficiaries?

Basics of savings and investment vehicles including cash equivalents, stocks, bonds, mutual funds Taxation of interest, dividends and capital gains. Timing of investment sales and cash equivalent liquidation.

Understand estate planning basics and beneficiary options

Portfolio allocation, diversification Complete account applications Interpret financial institution statements Calculate capital gain and/or loss Calculate taxes due upon sale of liquidation.

Complete a beneficiary or transfer-on-death form

Work

Should I work?

Interaction with Social Security benefits

Assess net income from working

 

Table 2 – Type of Assistance and Delivery Channels Based on Decision Points

Topic

Decision Points

Assistance Type

Delivery Channel

Retirement

Can I afford to retire?

One-to-one counseling

On-site Telephone supplemented with email follow-up

Social Security

When should I begin to take Social Security?

What happens to my benefit at death of a spouse?

One-to-one counseling

Printed material

On-site Telephone supplemented with email follow-up

Internet information

Defined Benefit Plans

Which distribution option to take?

One-to-one counseling and printed material

On-site Telephone supplemented with email follow-up

Internet information

Defined Contribution Plans

Should I rollover account or leave with company? When and how do I begin withdrawals? How do I calculate the minimum withdrawal? How can I minimize income taxes on withdrawal?

How do I transfer account to beneficiaries?

Printed materials or group education Printed materials or group education Printed materials or group education Printed materials or group education

One-to-one counseling or group education

On-site Internet On-site Internet On-site Internet On-site Internet

On-site Telephone Internet

Private Savings and Investments

Where do I invest these funds? When should I use these funds? How can I minimize income taxes on withdrawal?

How do I transfer to beneficiaries?

One-to-one counseling or group education One-to-one counseling or group education Printed materials or group education

One-to-one counseling or group education

On-site Telephone Internet On-site Telephone Internet On-site Internet

On-site Telephone Internet

Work

Should I work?

One-to-one counseling or group education

On-site Telephone Internet

Recommendation 2 – Draw Attention to Publications Already in Existence - For plan sponsors who want to make more information available, they need to know where to go to get information that already exists. The DOL has provided publications that assist in identifying needs and assisting in locating resources to gain additional information and knowledge in addition to the publication itself. Savings Fitness: A Guide to Your Money and Financial Future, Taking The Mystery Out of Retirement Planning and What You Should Know About Your Retirement Plan are tools that were made available to the Council for review. We find these tools to be able to meet their stated purpose. That is to say, they serve as a framework for analysis and decision making by participants.

The Working Group recommends that the publication of these types of information tools continue and that Field Offices be encouraged to disseminate this material to employers and plan sponsors. This recommendation is relatively important for those employers that don’t want to create their own literacy program described in Recommendation #1 but want to at least point employees in the direction of information on financial topics.

It is critical that the Department of Labor make bolder attempts to reach larger audiences with its publications. The Working Group in hearing testimony from its witnesses found that financial literacy is a critical variable in explaining variations in participant saving behavior and that ‘trust’ plays an essential role in financial decision making. Employers and the federal government have a ‘trust’ factor with plan participants as it relates to these issues that don’t exist with other financial institutions or professionals.

Likewise, the Working Group believes that these tools are excellent starting points, in addition to plan information and DOL studies, for engagement with other entities in the private-public partnership described in Recommendation number 4.

Recommendation 3 – Update, Expand, and Amend 96-1 - The Working Group believes that retirement and distribution options are effectively communicated to retiring and withdrawing participants in terms of timing, media and content. However, the Working Group heard from all witnesses that there is an “information gap” that exists between the participants receiving qualified plan distributions and plan sponsors. Specifically, the Working Group finds plan participants are not afforded decision making tools that effectively facilitate individual management of retirement plan assets. Finally, the Working Group believes that the reason for the information gap is primarily the confusion that exists at the plan sponsor level concerning the applicability of fiduciary liability for tools or information provided to assist plan participants on plan distributions.

The Working Group believes that neither the DOL nor employers need provide any new brochures, worksheets, or pamphlets etc. for participants. Instead, the Working Group suggests that regularly scheduled, constant vigilance of marketplace innovation be reflected in possible future regulatory relief and clarity being afforded in follow-up pronouncements to Interpretive Bulletin 96-1 pertaining to retirement income planning, keeping that Bulletin timely and relevant.

The Working Group heard in witness testimony that numerous factors have led to a complex, specialized financial services marketplace that requires plan participants to be actively engaged if they are to manage their finances effectively. The forces of market technology and market innovation, driven by increased competition, have resulted in a sophisticated industry in which plan participants are offered a broad spectrum of services by a wide array of vendors. Compelling regulatory issues such as predatory marketing and suitability of products have also added to a sense of urgency regarding financial literacy in a ‘participant-directed’ world.

The “safe harbors” of IB 96-1 are accumulation tools. Safe harbor treatment applies regardless of who provides the information, how often it is shared, the form in which it is provided (e.g. writing, telephone, internet, software, video or in a group or one-on-one) or whether an identified category of information and materials is furnished alone or in combination with other identified categories of information and materials.

In Interpretive Bulletin 96-1, the DOL pointed out that information and materials described in the four graduated safe harbors detailed within the bulletin merely represented examples of the type of information and materials that may be furnished to participants without such information and materials constituting “investment advice” for purposes of the definition of “fiduciary” under ERISA Sec. 3(21)(A)(ii).

The first of the safe harbors under 96-1 states that providing information and materials that inform a participant or beneficiary about the benefits of plan participation, the benefits of increasing plan contributions, the impact of pre-retirement withdrawals on retirement income, the terms of the plan, or the operation of the plan that are made without reference to the appropriateness of any individual investment option for a participant or beneficiary will not be considered the rendering of investment advice.

The second safe harbor of 96-1 states that general financial and investment concepts such as risk and return, diversification, dollar cost averaging, compounded return and tax deferred investing, historical rates of return between asset classes based on standard market indices, effects of inflation, estimating future retirement needs, determining investment time horizons, risk tolerance, provided that the information has no direct relationship to investment alternatives available under the plan.

The third safe harbor of 96-1 allows asset allocation information to be made available to all participants and beneficiaries - providing participants with models of asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles. These models must be based on accepted investment theories and all material facts and assumptions on which the models are based must be specified, and disclosures are mandated.

The fourth safe harbor of 96-1 allows interactive investment materials such as questionnaires, worksheets, software and similar materials that provide participants a means of estimating future retirement income needs, provided that requirements similar to those for asset allocation (above) are met.

Further, in IB 96-1, the DOL stated that there may be many other examples of information, materials and education services which, if furnished to participants would not constitute the provision of investment advice. Accordingly, the DOL advises no inferences should be drawn from the four graduated safe harbors with respect to whether the furnishing of information, materials or educational services not described therein could constitute the provision of investment advice. The DOL cautions that the determination as to whether the provision of any information, materials or educational services not described in 96-1 constitutes the rendering of investment advice must be made by reference to the criteria of Labor Reg. Sec. 2510.3-21(c)(1). That regulation establishes the criteria for deeming the rendering of investment advice to an employee benefit plan. Specifically, investment advice is rendered where recommendations are provide as to the advisability of investing in particular vehicles and whether the person has indirect or direct discretion to implement such advice. The Working Group believes that as the Baby Boom Generation moves on into the de-cumulation phase, i.e. asset accumulation demographically shifting toward income planning – IB 96-1 will need to be amended, updated and expanded in order to stay relevant within the regulatory construct viz a viz the innovative marketplace. By way of example, while ‘retirement calculators’ are ‘educational’ under 96-1, it should be contemplated and communicated that regulatory relief extend to advising plan participants concerning mandatory 20% tax withholding, early withdrawal 10% tax, guaranteed income for life, outliving income stream et. al.

The Working Group believes that the recommendations for clarity and relief are applicable not only to single-employer plans, but also to multiemployer plans.

Recommendation 4 – Coordinate and Bring Together Government Agencies, Private Sector, and the Academic World - Department of Labor, Securities Exchange Commission, Department of the Treasury, Administration on Aging, Federal Deposit Insurance Corporation, Department of Education, Federal Reserve Board, Federal Trade Commission are just a few of the federal agencies that deal with retirement savings, living in retirement and retirement in general…..The Securities Industry Association, American Bankers Association, Investment Company Institute, American Council on Life Insurance, Employee Benefit Research Institute, American Benefits Council, American Society of Pension Professionals and Actuaries, LIMRA, and The International Foundation of Employee Benefit Plans are all industry trade organizations concerned with plan participant financial literacy….Financial Institutions National Regulatory Association and the National Association of Insurance Commissioners are self-regulatory organizations that are concerned with plan participant financial literacy. Major universities have whole curriculums devoted to financial planning and education.

Efforts to improve the quality and increase the amount of useful information provided to plan participants have been in place by the above organizations for many years. What is new is the proliferation of programs. From the literature, the providers of financial literacy programs include the military, state cooperative extension services, community colleges, faith-based groups and community based organizations in addition to employers in private industry et. al.

Overall, from the literature and the testimony of witnesses to the Working Group, evidence concerning the benefits of financial literacy training is consistent with conventional wisdom – education can result in more-informed plan participants who make better financial decisions while mitigating the financial catastrophic decision.

In an ideal world, financial literacy could be customized to each plan participant’s learning needs and desires. However, such an interaction would be so time consuming, costly and resource intensive as to border on impossible. Therefore, by bringing together the above mentioned regulatory, trade and self-regulatory organizations on a regular basis for workshops is a first-step toward a ‘commonality of platform’ to analyze plan participant needs more effectively and deliver pertinent information more effectively. Trade organizations and self-regulatory organizations have the pulse of the marketplace. They are close to the day-to-day innovation that is taking place within our dynamic economy. Who better to speak on banking products and communicating advantages and disadvantages within regulatory boundaries than the FDIC and the Federal Reserve? The American Bankers Association could bring potential needs and problems to attention. Likewise with the SEC, ICI and SIA. Ditto for the Department of Labor, ASPPA and IFEBP. The NAIC and ACLI could frame the best methods for communicating regarding insurance and annuities.

In summary, the Working Group heard testimony and reviewed literature of disjointed groups. Given the resources now devoted to financial literacy training, a formal ‘commonality of platform’ that brings together government, regulation and the marketplace provides an opportune time to evaluate research, continue to identify best practices and consider public policy options that would further the goal of creating more financially savvy and literate plan participants.

The Working Group recommends that to the extent possible, the Department of Labor should initiate dialogue with other agencies to create formal meetings of experts for the purpose of producing an ongoing, dialogue that provides a “common platform” for dissemination of workable solutions in all areas of financial literacy for eventual use by the public.

Recommendation 5 – Encourage and Allow the Use of Income Replacement Formulas and Final Pay Multiples - Lack of plan knowledge and lack of financial knowledge were put forth by all witnesses as the main contributor toward non-participation in employer-sponsored retirement plans. Our academic witnesses all theorized (with support for their positions) that as people become better educated and gain more financial experience, they become more sophisticated in their financial behaviors. Every witness asserted that lower levels of financial literacy resulted in those participants being less likely to engage in positive financial behaviors, i.e. budgeting, using debt wisely, saving in and out of employer sponsored plans.

From a ‘behavioral perspective’ witnesses that chose to address this issue stated that choice overload (i.e. too many fund choices) discouraged participation or enhanced procrastination. Procrastination also manifests itself because individual participants are predictably irrational when it comes to money matters.

The modern 401(k) plan is a participant active experience. What the Working Group heard time and again from its witnesses and it is confirmed in the literature as well - is that regardless of whether someone is making elective deferrals to the maximum allowed by law or whether someone is procrastinating from participation….both have absolutely no idea how much money will be required to provide an income stream at retirement without a significant change from their current standard of living.

Consequently, the Working Group recommends that the Department of Labor encourage, assist and facilitate the use of ‘retirement income replacement’ calculations and final pay multiples on a per participant basis for inclusion in as many participant disclosures as desired by a plan sponsor.

The Working Group recognizes with this recommendation that the best strategy to tackle inertia from procrastination or to change behavior is to sound the alarm to a plan participant that bad habits of non-saving can be hazardous to that participant’s future.

There was a significant amount of testimony that was presented to the Working Group that the following items are misunderstood by participants and those planning for retirement: life expectancies, investment returns and a host of other variables which must be taken into consideration to arrive at the proper retirement income replacement calculation. While these concepts are misunderstood by participants, they are essential for proper retirement planning. From a minimalist perspective, it is the view of the Working Group that a retirement age of 65 could be used, historical inflation rates could be used, historical 10 year rolling market averages could be used along with current contribution rates to arrive at a plan accumulation number. Using IRS annuitization rates, the replacement of final salary could be at least benchmarked.

It is further believed by the Working Group that this number expressed in dollar amount and as a percentage of projected final salary could be disclosed in participant disclosures such as the Summary Annual Report, Summary Plan Description, Employee Benefit Statement, et al.

The Working Group recognizes that under IB 96-1 retirement calculators are viewed generically and are viewed as ‘education’ and therefore not providing investment advice. The Working Group recommends that ‘generic customization’ as described in the preceding paragraphs still be viewed as educational in content.

Summaries of Witness Testimony

Ms. Melissa Kahn, Vice President, Metropolitan Life Insurance Company, New York, New York, testifying on behalf of the American Benefits Council, Washington, D.C.

Ms. Kahn is a vice president at MetLife. She represents the American Benefits Council as Chairperson of the Council’s Retirement Income Task Force.

She opened her remarks by noting the strong trend from defined benefit to defined contribution plans, which has made the issue of financial literacy all the more important. She views financial literacy as very broad in scope and all-encompassing as it relates to long-term financial planning.

Any attempts to address the issue should start with children. Basic fundamentals such as diversification and compound interest should be taught at the elementary school level. This will require coordination among different agencies as well as state and local governments.

Most professional financial advisors estimate that 75% or more of a worker’s current income will be needed annually in retirement. However, a majority of workers indicate that they will need less than 70% of income in retirement. Surveys indicate that most workers underestimate how long they will live. Ms. Kahn finds much of the feedback on employee surveys to be alarming and worrisome. She is surprised at widespread ignorance, especially as it relates to survey questions about longevity. Recent information generated and distributed by the Social Security Administration has been helpful. She views such information flow as a breakthrough, given the technological restraints of such government entities.

She believes that employers should be protected against fiduciary liability when providing financial literacy training, and that professional advisors, even those affiliated with the plan administrator or plan provider, should be allowed to provide financial education and advice, as long as certain safeguards are in place to avoid conflict of interest. Fiduciary liability protection for plan sponsors is critical; otherwise, most plan sponsors will not take action to address the financial literacy issue.

Educational programs should emphasize proper management of financial assets, throughout all retirement years, and should not merely focus on the accumulation phase. For too long, public policy has been overly focused on the accumulation phase. Government should specifically address topics such as long-term care, inflation risk and longevity risk, in relation to the post-accumulation phase, as people draw down their assets over their retirement years.

Government sources, like the DOL’s ERISA Advisory Council, have performed meaningful work in this area, but more help is needed. Government sources are viewed by the public as more objective than private sector sources, Ms. Kahn believes. Coordination between public and private sector sources is crucial, and such coordination must involve the Department of Education and must address children at an early age.

Third party education via the internet is not being widely used. People want one-on-one help from a person who they can trust. Employees generally do not have the confidence to implement advice provided to them via on-line tools.

Ms. Kahn’s colleague, Mr. Kent Mason, commented that he sees no legal barriers that would prevent employers from addressing financial literacy with their employees.

Dr. Sharon A. Burns, Executive Director, Association for Financial Counseling & Planning Education, Columbus, Ohio

Dr. Burns is the Executive Director of the Association for Financial Counseling & Planning Education, a national association dedicated to assisting individuals and families achieve financial stability.

Dr. Burns began her remarks by pointing out that a large portion of the U.S. population is nearing retirement with inadequate retirement plan funding. Dr. Burns offered her comments from the perspective of a counselor advising a worker at or near retirement.

Dr. Burns testified on the information and skill needs of retirees by providing the Advisory Council with a table displaying the most popular questions her firm’s counselors hear from employees at the point the employee encounters various retirement concerns (see Table 1 below). Dr. Burns pointed out that most of the decisions require a basic understanding of the concepts of the time value of money and life expectancy, skills that are easy to understand in principle but that require an overwhelming level of math skills to arrive at a specific answer. In this regard, Dr. Burns commented that she believed that a standardized set of counseling and/or instructional materials would benefit the retiring worker in making their decision.

Dr. Burns next provided a “wish list” of assistance that would benefit the typical retiring worker. Her list included: (1) a minimum of two one-to-one financial counseling sessions in the year prior to and after the date of one’s retirement, with strong incentives for participation by the retiree’s spouse; (2) mandatory one-to-one counseling before: (i) taking a lump-sum withdrawal that will not be rolled over, or (ii) electing a single-life annuity purchase from a plan; (3) one set of standardized forms to simplify the process for taking benefits from all plan types; (4) one standardized Frequently Asked Questions document to answer most general questions; and (5) a list of acceptable calculators meeting certain actuarial criteria set by the Society of Actuaries (or similar organizations) to help retirees make choices.

Dr. Burns next provided a list of important messages that should be imparted to employees in the five years prior to and just after retirement, including: (1) pay off your mortgage; (2) do not use credit cards during retirement; (3) jump into retirement slowly; and (4) maintain a diversified and balanced portfolio.

In terms of delivery of pre-retirement assistance, Dr. Burns noted that to be successful, pre-retirement counseling must be delivered “just-in-time,” when the employee needs to make a decision. Various delivery methods should be considered and in this regard, Dr. Burns supplied a chart that includes suggestions for delivery channels that would be appropriate for various decision points (see Table 2 below). Dr. Burns also recommended that employers should consider using third-party experts who specialize in educational and counseling services.

Dr. Burns next shared her views on the roles and responsibilities of the following entities:

  • Government – should lead the efforts to develop a system for delivering retirement assistance to all, including publicizing the availability of retirement assistance.
  • Employers – should recognize that they are primarily responsible for helping employees transition successfully from work to retirement. Specifically, employers would be responsible for delivering information specific to internal retirement processes and providing third-party resources for two optional one-hour, one-to-one counseling sessions.
  • Independent professional associations – should be appointed or requested by the government to set informational and counseling standards.
  • Plan administrators and financial institutions – should provide information and/or counseling through a set of standardized retirement transaction forms.
  • Employees – should understand that they need to take responsibility, including being responsible for obtaining one-to-one counseling prior to: (i) taking a lump-sum withdrawal that will not be rolled over, or (ii) choosing a single-life annuity.

Lastly, Dr. Burns concluded her testimony by noting that because cost will inhibit the provision of some services, creative solutions will be needed. In this regard, Dr. Burns identified the following as potential solutions: (1) developing a counseling force of retired professionals who can deliver assistance in a manner modeled after the S.C.O.R.E. Program for small business owners; (2) assessing a small “tax” on plan administrators and employers to support combining financial programming materials into one standardized set; and (3) employing one website to house combined retirement resources.

Table 1 – Knowledge and Skill Competencies

Topic

Decision Points

Knowledge

Skills

Retirement

Can I afford to retire?

Monthly and annual expenses Realistic return on investments

Taxation rules for various income types (more detail later)

Monthly budgeting Prepare a net worth statement Control spending Eliminate debt

Pay off mortgage

Social Security

When should I begin to take Social Security?

What happens to my benefit at death of a spouse?

Benefit levels at various ages Estimate life expectancy

Benefits for surviving spouse

Adjust spending or portfolio withdrawals

Defined Benefit Plans

Which distribution option to take?

Estimate life expectancies of both spouses

Understand tax ramifications of distribution options

Compare budgets with various options Calculate risk to surviving spouse

Manage investment portfolio, if lump sum distribution is chosen

Defined Contribution Plans

Should I rollover account or leave with company? When and how do I begin withdrawals? How do I calculate the minimum withdrawal? How can I minimize income taxes on withdrawal?

How do I transfer account to beneficiaries?

Advantages and disadvantages to each option Taxation issues if withdrawal is being considered Required Beginning Date rules Minimum Required Distribution rules Taking the minimum distribution required will minimize taxes

Understand estate planning basics and beneficiary options

Portfolio management Accessing and completing forms Calculate the Minimum Required Distribution Determine personal marginal tax rate

Complete a beneficiary form

Private Savings and Investments

Where do I invest these funds? When should I use these funds? How can I minimize income taxes on withdrawal?

How do I transfer to beneficiaries?

Basics of savings and investment vehicles including cash equivalents, stocks, bonds, mutual funds Taxation of interest, dividends and capital gains. Timing of investment sales and cash equivalent liquidation.

Understand estate planning basics and beneficiary options

Portfolio allocation, diversification Complete account applications Interpret financial institution statements Calculate capital gain and/or loss Calculate taxes due upon sale of liquidation.

Complete a beneficiary or transfer-on-death form

Work

Should I work?

Interaction with Social Security benefits

Assess net income from working

 

Table 2 – Type of Assistance and Delivery Channels Based on Decision Points

Topic

Decision Points

Assistance Type

Delivery Channel

Retirement

Can I afford to retire?

One-to-one counseling

On-site

Telephone supplemented with email follow-up  

Social Security

When should I begin to take Social Security?

What happens to my benefit at death of a spouse?

One-to-one counseling

Printed material

On-site

Telephone supplemented with email follow-up

Internet information

Defined Benefit Plans

Which distribution option to take?

One-to-one counseling and printed material

On-site

Telephone supplemented with email follow-up

Internet information

Defined Contribution Plans

Should I rollover account or leave with company?

When and how do I begin withdrawals?

How do I calculate the minimum withdrawal?

How can I minimize income taxes on withdrawal?

How do I transfer account to beneficiaries?

Printed materials or group education

Printed materials or group education

Printed materials or group education

Printed materials or group education

One-to-one counseling or group education

On-site Internet

On-site Internet

On-site Internet

On-site Internet

On-site Telephone Internet

Private Savings and Investments

Where do I invest these funds?

When should I use these funds?

How can I minimize income taxes on withdrawal?

How do I transfer to beneficiaries?

One-to-one counseling or group education

One-to-one counseling or group education

Printed materials or group education

One-to-one counseling or group education

On-site Telephone Internet

On-site Telephone Internet

On-site Internet

On-site Telephone Internet

Work

Should I work?

One-to-one counseling or group education

On-site Telephone Internet

Mr. Spencer Williams, President, Rollover Systems, Charlotte, North Carolina

Rollover Systems , Inc. has been in the business of supporting plan sponsor and plan participants for several years. Its stated business mission is “ To preserve Retirement Savings.” Rollover Systems executes its business model by working with Plan Advisors and Sponsors to design unique programs that meet the need of servicing terminated participants. Rollover Systems handles numerous money movements from qualified plans including roll-ins, rollovers to IRA’S and cash-outs. The business relies on multi-media to communicate with participants including call center, direct marketing, and the Web. While they focus on all 401-k plans, the most common client is terminated deferred participants.

Mr. Williams’s testimony was somewhat unique in that he presented a case study to walk the committee through the issues he encounters in his daily business. He provided an Employer Profile, Employer Issues, Terminated Employee Profile, Terminated Employee Actions and the Cost and Impact of leakage a participant faces. Mr. Williams took special care to work through the example, the problems it presents to Employers and Terminated Employees. Please note that in his remarks Mr. Williams took great care to identify that many of these employees were young and moving to new positions at different employers. Highly reflective of today’s workforce.

In his Summary of the case study Mr. Williams emphasized the challenges and complexity facing Plan Sponsors. He distinctly stated that he did not believe that the burden of Financial Literacy should be placed solely on the Plan Sponsor and felt that if it were, it would not produce a higher level of retirement readiness by participants. His case study pointed out the following key drivers for this conclusion: Velocity of participants changing jobs for their own well being, infinite variation in plan design, highly variable “ good “ plan sponsors, implementation and compliance and the disincentive that and additional burdens would place on plan sponsors.

In Mr. Williams' concluding remark he shared additional views regarding the complexity of Financial Literacy. He concluded the Issue of Financial Literacy is large varied and complex. It does not lend itself to a “one size fits all solution “

His personal experience is that for Financial Literacy/Participant education to be effective two conditions must be present: a fully engaged participant and the value of the participants account is material to them. In his final comments he suggested that he would like to see everything simplified , plug the leakage and if necessary not permit roll-outs and have every employer offer payroll deduction.

Dr. Annamaria Lusardi, Professor of Economics, Dartmouth College

Conclusions

  • Financial Illiteracy is widespread across demographic groups among workers, severe among sub-groups such as minorities, those with low education, and older workers. People lack basic understanding of financial concepts
  • Evaluation of Employer Programs is difficult-there is a lack of information and no published data.
  • Financial Literacy is a dynamic model that must be measured at a point in time because as participants learn more, the standard for financial literacy continues to evolve.
  • Financial Communications must be simple to be most valuable without addressing figures rates or probability. Communication must be made in manner in which people are very comfortable. One on One communication is the most effective but can not be the exclusive method.
  • Financial Literacy is for the Public Good and must be addressed by Employers, Educational Institutions and the Federal, State and Local Governments for the benefit of all workers.

Summary of Testimony

Professor Lusardi commenced her testimony by providing a general overview of the concept of financial literacy relative to workers. She testified that much of the work she and her colleagues have performed highlights the fact that there is substantial illiteracy in the US workforce. Furthermore illiteracy is widespread yet it varies across many demographic groups particularly those with low education, older workers and minority women. She stated that knowing the reasons for this illiteracy is important because it will enable the preparation of financial education programs to address the illiteracy issues. She indicated that there is relatively little data on this subject relative to financial concepts in general not just in the area of employee benefits. Because of this lack of data the surveyors looked at any surveys they could locate discussing financial concepts i.e., surveys regarding the concepts of comprehension of mortgages or the concept of compounding of interest. It appears that the limited data they can review may indicate a lack of interest on part of the survey participants to learn about financial investments. Their surveys have found that participants do not even know what kind of pensions they have nor on a broader basis do they understand the terms of financial contracts they have executed. She indicated that their survey gave them pretty strong indication that financial illiteracy exists and is pervasive in the workforce. Utilizing these findings they realized that they would need to review employer financial education programs. Their conclusion resulted in additional findings that there is very little available data on the makeup of the employer financial education programs because they are never examined or published. They further found that the programs are rarely ever evaluated as to success of the employer presentation or the knowledge which is gained. Their survey found that very often an employer presentation is a one size fits all program offered for about an hour on some financial topic She testified that such a program does very little to encourage savings or financial security for workers especially when the worker lacks the basic understanding of finance and economics. She further stated that there is a disconnect between the employer programs and the employee’s basic knowledge regarding financial concepts.

Professor Lusardi continued her testimony stating that she is more knowledgeable when it comes to the barriers facing employees making savings and investment decisions. She indicated that employees also do not believe they have the requisite knowledge and determine that they are unsophisticated investors with little knowledge of financial instruments. This belief makes a savings decision difficult for employees. The decision is exacerbated when an individual must make an actual investment decision with respect to these savings because these people lack the financial knowledge they need to make such decision. This lack of knowledge and the difficulty in the decision creates inertia and may result, even when an employer makes them available, in an employee’s failure to participate in those education programs. This combination of the lack of knowledge and employees’ lack of attention and engagement may result in people close to retirement failing to change their behavior even when necessary. Consequently, because people lack the understanding of basic economics, i.e. the power of interest compounding, the workings of inflation and the basics of investment diversification, the people fail to appreciate the importance of saving early or having a well diversified portfolio.

Professor Lusardi addressed that their finding have both a negative and positive side. The negative being that with the shift to defined contribution plans, it will be expensive and difficult to educate older workers age 50 and above because the workers do not perceive the need or do not want to be educated especially when they dislike making financial decisions. On the other hand, the findings present an opportunity to design simple communications to stimulate and properly educate people. She stated that we need to ensure that the programs devised and the programs in place are very simple for workers to understand. For example at Dartmouth, they devised a simple one page form which took a long time to design to achieve the desired results yet had a significant effect on the subsequent group of workers who used the form. The participants who received the form actually went online and subscribed to a supplemental pension account. Thus, because the findings evidence the fact that workers are financially illiterate, employers and the government must design education programs with simple communication messages.

Professor Lusardi next addressed the preferred ways to deliver the message. She indicated that the current marketing of annuities is a good example of improper education Current ads discourages people from annuitizing there wealth which she believes is the best way to ensure that people will have enough resources until they die. The current message emphasizes that retirees are losing big sums of money with the promise of getting resources until they die. The ads should present the gain or advantage of having amounts for the future rather that emphasizing somehow we will get you there for your life.

She believes that the proper method of communicating the message is through a multi-channel communication approach. This approach considers that many people are different which impacts the patterns of savings behavior and their financial literacy. For example, people with high literacy and high education will consider and review documents regarding annuities while moist other employees wouldn’t read it. She advocates a multi-channel approach to education. The communications must be tailored to the specific people receiving the message and deliver a message to which they will understand and respond. Some groups will read the message, other want to listen to it, some want to hear testimonials and others want it delivered through one on one communications before they will trust or believe it. Thus, a website will not offer the same benefit that a one on one telephone conversation can, for a specific or detailed question, especially when dealing with older people. Older people generally have lower cognitive ability and desire a more hands on approach. Clearly, the one on one approach is the most expensive but also the most effective because it allows the interaction that people often desire.

Professor Lusardi in response to questions concerning studies relative to group meeting approaches versus individual sessions stated that there is not really any data supporting the value of one format over the other. However, from an education standpoint she indicated that there is nothing wrong with offering group meetings because the information to be given is going to be repeated over and over. It is her contention that group meetings are okay but must be targeted based on demographics to be more effective. By offering education for women only; education for older workers vs. younger workers, group meetings could be effective because they address different needs and different worries. She believes that offering generic programs cause workers to lose interest because they are not focused on specific issues relative to that specific group’s concerns.

Professor Lusardi next focused on the philosophical concept of financial literacy or illiteracy and its measurement. She identified that part of the problem is that the term financial literacy is not well defined. She further stated that if you reviewed the work of different economists that you would probably get different definitions of what is meant by financial literacy. She indicated that the initial question they asked in creating their surveys was; what is it that the workers have to know to make savings and investment decisions? She also stated that the definition is dynamic because what a worker needs to know now is different than required, five or ten years ago, or which will be required five years from now. They were unsure what questions needed to be asked to identify a level of financial sophistication of a worker; for example, the differences between stocks and bonds, or how do you price a bond or do you understand economics? She believes that the surveys and standards for financial literacy are still evolving and are not yet at the level that they should be.

She further stated that the results of their studies conclude at this point that financial literacy in the U.S. is better than the rest of the world. She believes that the US is more financial literate because people have more experience in financial transactions. She also stated that while in the past people didn’t need to have the knowledge regarding benefits because they were not earning much, had an employer provided pension or workers were completely dependent on receiving only Social Security benefits; however she believes that in today’s environment, financial literacy will be extremely important and will play a major role in the lives of workers in the future.

In response to a question from Chairman McCool, Professor Lusardi stated that things have changed and will continue to change quickly and workers and employers have not yet caught up to this change. High School children are now being confronted with financial decisions regarding college loans. Today, and in the future, there will be so many more incentives to have a greater financial education.

She testified that the financial education is for the Public Good. Having an educated population benefits everybody, including taxpayers with the result that the education initiative can not be left strictly to the individual or a single employer. She believes that a national campaign about financial education is in the best interest of everybody. The government should support the initiative because in the long run a national financial education program must be in a place where it can reach the most people. Professor Lusardi testified that her preferred way is to get education out through the high school or earlier because it is very important to give financial education to people before they engage in financial contracts. She stated that currently, employers are the only available means to educate today’s workforce but the government, federal, state and local should be involved She stated that the current auto enrollment and default program in pensions are a means to financial literacy and a good start, but, when there are other financial transactions in our lives where there are not defaults, i.e. mortgages, credit cards, college loans, etc, you need financial skills to make these decisions A mistake in another financial decision could impact their ability to address pension needs.

Dr. Lusardi concluded her testimony stating that there are a lot advantages for an employer to have a financial education program. Additionally, she stated that there is now a great deal of responsibility on the employees yet most employees are not fully aware of those responsibilities or choose not to take action because of lack of confidence or inertia. Consequently, until something else occurs to achieve an employee’s financial literacy, it falls back on the employers to accept the challenge to motivate them though an effective education program.

Mr. Ted Benna, Malvern Benefits, Malvern, Pennsylvania

Ted Benna, President of the 401(k) Association of America and CEO, Malvern Benefits Corporation appeared before the Council Working Group on July 10, 2007. Mr. Benna is known to many as the “Father of the 401(k)” for having created and being the first to gain IRS approval of the first 401(k) savings plan. He is a nationally recognized expert on retirement issues, the author of four books and the recipient of numerous awards for his contributions to the field.

Mr. Benna addressed the group from the perspective of his experience working within his third party administration business, as a consultant to several large corporations and his work with an internet based advisory service. Based on that experience, he stated that in his opinion, participant education has a limited impact on changing employee behavior. Instead, he opined that the best way to change behavior is through purposeful design and intent.

Consistent with that position, Mr. Benna applauded the recent actions by Congress in adopting the automatic enrollment provisions of the Pension Protection Act of 2006 (PPA) as one means of influencing participant behavior, but expressed his continued concerns over investment management and leakage as areas which continue to drain savings from participants retirement savings. Mr. Benna also noted that the evolution of 401(k) plans has “grossly over complicated” the system by introducing an ever-expanding array of investment options, making it more and more complex for the average employee to comprehend and manage.

He suggested that one approach to making the system more manageable was through the use of “Target Maturity Funds”. These funds will simplify participants’ investment decisions, provide for automatic rebalancing of their asset allocations and help reduce risk, especially as they approach the point where resources would be withdrawn. He described a situation where the plan he was working with was completely restructured to require all investments to be moved to such funds. He said that by doing so, participants could reduce costs, improve performance, simplify the plan for participants and employers and reduce employers’ liability exposure.

With respect to the question of leakage, he noted that in his opinion, a legislative solution (perhaps in the form of guidance for employers to assist employees in the rollover process) may be necessary in order to stem the pattern of employees cashing out rather than rolling over account balances when changing jobs.

In response to a questions from Mr. Rouse, Mr. Benna noted that he believed that participants could realize between one and two percent greater returns by moving to a target maturity fund because that was the difference between actual performance and the performance achieved by the target funds over the past few years. In responding to a follow-up question from Mr. Rouse, he also commented that, based on his experience with well qualified professionals who have tried to influence behavior through education, an investment of one to two percent in education would not have produced similar results.

Mr. Benna responded to a question by Ms. Brambley that, in his opinion, employers have not done enough to encourage employees to roll over their account balances and cited examples of instances where his firm had issued substantial checks to individuals that remained uncashed for many months because of a sense that these decisions are overwhelming for many individuals.

He continued to reinforce his earlier point about the need to change the default decisions as the best way to modify behavior in his response to a question from Mr. Swartz who inquired as to whether better informed participants would still have cash allocations in the twenty-five percent range (as cited in an example by Mr. Benna). Mr. Benna cited examples of when the results remained much the same, even when providers have invested substantial effort in education. He also expressed skepticism as to the success of the investment advice provisions of the PPA and repeated that he believed the movement to target maturity funds will become much more significant than investment advice as time goes on, estimating that as much as seventy-five percent of all plan assets may end up in these vehicles over the next five years.

In response to a question from Mr. Simmons regarding the matter of leakage, Mr. Benna noted the employers’ requirements to provide terminated participants with the same kinds of information required to be provided to active employees and the costs associated with these requirements as a possible incentive for employers to become more active in the process of helping former employees move their assets.

Mr. Benna observed that when employees have only defined benefit plans, it will become increasingly more important for them to preserve the “multiple pockets” of money accumulated along the way, even if that required a legislative solution to blocking their ability to cash out small sums. In response to a question from Mr. DeFrehn he noted that he believed that such a prohibition would not result in fewer of these new entrants from electing to participate in the first place, especially when an employer match is involved.

Mr. McCool observed that many of the issues Mr. Benna had mentioned could be described as mere consequences of not having a financially literate society and asked what could be promoted to change that circumstance. Mr. Benna once again revisited from an historical context the manner in which education was originally conducted; that is, focusing more on the need to save for retirement than on the vehicles for savings. He noted that this involves a much broader discussion of financial literacy than simply retirement savings, including reduction of credit card debt, improving one’s credit rating and a host of other financial considerations.

Mr. McCool also asked Mr. Benna to comment on what we as a society can do to assist the fifty percent of people who do not participate in a pension or 401(k) plan of any kind, improve their financial literacy. Mr. Benna replied that he believed that the population who comprise that segment may contain individuals with less of a need for retirement savings and that perhaps this group may be overemphasized. These may include working students, those who are already retired but continue working in some other capacity, spouses working as second income earners and small business owners whose retirements are being funded in other ways.

In closing, Mr. Benna responded to Mr. McCool’s final question regarding whether employers are willing to continue financial education for employees after retirement. He noted that this is a big problem for employees and for employers; especially for large employers whose retiree rolls and the human resources required to service them have grown significantly in recent years.

Ms. Jane White, Founder and President, Retirement Solutions Foundation, Madison, New Jersey

Jane White is the founder and President of the Retirement Solutions Foundation located in New Jersey. The goals of the foundation are to increase savings rates among 401(k) participants, increase coverage among small employers and help retirees protect their retirement assets.

Ms. White addressed two primary Questions presented to witnesses on Financial Literacy. Her comments focused entirely on these two questions and raised several critical points related to each.

The first question she addressed was whether new skills development is required among 401-K participants and whether such items are necessary to attain new competencies. Ms White indicated “a seismic shift that’s occurred in America’s pension system over the last 30 years.” She was placing significant emphasis on the shift from traditional defined benefit to defined contribution pension plans. No minimum contribution rate is associated with a defined contribution plan and as such many Americans will be facing an “empty nest egg” due to this shift and the realities of core differences between DB and DC plans. She stressed the point by offering an actuarial perspective on each. In a traditional DB plan actuaries estimate as a rule of thumb 10-12 times annual salary just prior to retirement (final pay). Defined Contribution participants on the other hand receive no information related to what they need to save now in order to achieve their goal.

Surveys, including data from a Vanguard study, show clearly that the account balance and the median salary for 401k participants are well short of providing any realistic retirement security. Some have other savings to supplement retirement such as personal IRA and traditional DB components in addition to Social Security. While 401k balances are light they may have enough. The critical point is the prospect of no Social Security in addition to DB plans – now only covering 17 percent of Americans – and it will spell financial uncertainty for many Americans. Her point was to stress that participants need additional Financial Literacy (Financial Literacy 101) to understand the impact of saving on a realistic retirement balance.

Ms. White then focused on whether such programs exist to provide the necessary skills. Online tools, while widely available, are both flawed and not available to all participants beyond the largest Fortune 500 firms. Vanguard's study reflected that as many as 50 of all participants never contact Vanguard. More deeply disturbing information from Vanguard suggests that education features are only accessed for 7 percent of the total web page hits.

The PPA attempt to address the retirement savings crisis through auto enrollment, however, is flawed in that it does not provide specific savings requirements and at a rate of 3 percent fails the vast majority of Americans who postpone saving for retirement. She also cited a second disadvantage with PPA Auto Enrollment, in that it fails the majority of people who change jobs with some frequency, constantly resetting a default rate for employees at 3 percent regardless of age.

The conclusion offered was the best way to tackle the problem was to sound the alarm bell, drive the message home at each and every opportunity and reinforce investment facts that show examples of how much individuals need to save and the hazard of not saving. Define the nest egg and the necessary contribution rate.

Ms. Mary Swanson, Client Manager, Retirement Research, Life Insurance Marketing Research Association (“LIMRA”) International, Windsor, Connecticut

Mary Swanson is responsible for delivery of member benefits to LIMRA member companies in the retirement business. In this role, she ensures the proper dissemination of LIMRA research, market information, current trends and practices, and products and services to these member companies and oversees strategic marketing consultation provided to them.

Ms. Swanson started off by stating that employers are often used as a source of education for retirement planning purposes. In particular, decisions involving retirement benefits – such as distributions from 401(k) plans – would seem to necessarily involve discussions with employers, if only for informational or administrative purposes.

She then went on to say that LIMRA’s research indicates that in terms of general retirement planning, other LIMRA research studies support the notion that employers are an important source. Sixty-four percent of retirees indicate that they rely on employers as advisors to help plan their retirements. We have also found that employer materials, such as booklets, worksheets, and guides, are widely used for retirement planning purposes. For example, 62 percent of retirees used booklets provided by their employers that described their retirement benefits. She concluded by stating that LIMRA did not have direct evidence to suggest that retirees believe their employers to have an obligation to educate them regarding retirement decisions. However, 73 percent of retirees expressed interest in having a financial professional conduct seminars at their former employer’s worksite to help them plan for the retirement phase of their life.

Ms. Swanson spent time focusing on ‘how’ education and advice is delivered. She maintains that ideally, people entering retirement will receive these messages from a variety of sources. Research shows that people have preferences for receiving retirement planning advice, including from their employer either in one-on-one meetings or in group settings. Of those that express a preference for one specific source, less wealthy retirees and pre-retirees report a preference for advice and planning assistance from their employer. Some retirees will need to consult with trained financial professionals for specific questions and guidance. Multiple modalities should be used to account for individual learning styles. For example, written materials, seminars, and websites can all serve to reinforce the messages.

Ms. Swanson provided that in delivering effective information about retirement decision-making fiduciary responsibility need not be incurred by the plan sponsor. In order for education to be effective, it needs to be repeated and reinforced. One brochure, one seminar, one conversation may not provide learning. To be effective, the education needs to be comprehensive.

Swanson maintains that when pre-retirees and retirees undertake a number of different retirement planning activities they are more likely to report that they are confident that their financial resources will meet their needs. Specifically, pre-retirees who have done retirement planning are almost three times as likely to say that they are very confident their resources will meet their needs as those who have done little or no planning activities. So education and planning activities – without “advice” - appear to make a difference.

Ms. Anna Rappaport, Anna Rappaport Consulting, Chicago, Illinois

Anna Rappaport, in addition to consulting with large organizations, has served as President of the Society of Actuaries in 1997-98, is a member of the Board for WISER, the Pension Research Council and the National Academy of Social Insurance. She is also a Senior Fellow on Pensions and Retirement for The Conference Board.

Ms. Rappaport structured her to focus on how financial literacy in the post-employment period.

With respect to how individuals think about retirement, Ms. Rappaport’s key observation was that there is a continued focus on investments rather than risk transfer. The ideal approach balances both. Most individuals consider a relatively short time horizon and take an intuitive approach to planning. There is a widespread lack of understanding regarding longevity. As a result, products that are available to transfer longevity risk and annuitize accounts have a poor image. Most people try to address the risk of longevity by spending less. When individuals do seek assistance, they are more likely to hire investment advisors vs. broad based planners. There are many risks facing Americans in old age. Pool-able / transferable risks include longevity, cost of disability, cost of acute health care, economic loss due to death of a spouse, and investment / interest rate risk. The other risks, which can not be transferred, include inability to find a job, premature retirement risk, family member in need of care and some inflation risks.

Next, Ms. Rappaport reviewed the types of planning software available to assist people seeking to make decisions about the post-retirement period. She reported that based upon a joint study produced by the SOA, LIMRA, and INFRE, that much of the available software did not handle the post-employment period well. There were major results gaps among the various software available, and lack of quality control. The tools were better for accumulation of assets prior to retirement. The study will be repeated in 2008.

Ms. Rappaport went on to talk about custom and structure in current employer sponsored plans. While DB plans typically pay annuities form the plan, with no annuity purchase required, DC plans typically pay lump sums. There are currently complexities for DC plan sponsors who wish to offer annuities, and employees rarely take them. Looking forward, new distribution options that focus on phased retirement and risk management would best benefit participants, but will require changes to the current law.

Ms. Rappaport then discussed the role of the employer. From a design standpoint, employers can provide benefits automatically (e.g. automatic enrollment) and provide better default options in plans. The employer can act as a purchasing agent, enabling employees to obtain risk transfer options at group rates. Finally, the employer can provide information, advice and education and facilitate retiree networks. When employees retire, Ms. Rappaport testified that there a several important messages that should be provided – importance of planning horizon, impact of earlier vs. later retirement, potential lifespan, how to translate lump-sums into regular income and how to effect that conversion, survivor issues, long-term care and the pros/cons of risk pooling. The employer, specifically, can support this by providing information about its plans, in addition to the basic information described above. Finally, employers can help employees by providing information regarding the considerations when choosing planning software / advisors.

Finally, Ms. Rappaport had some overall recommendations:

  1. The DOL might partner with not-for-profits / other agencies to put forth information to inform plan sponsors / retirees about the issues of the post-employment period
  2. Continued support of Social Security, as a safety net for America’s retirees
  3. Continue research to advance our knowledge of behavioral economics and the realities of retirement
  4. Continued development of risk protection products
  5. Development of software to council employees regarding the post-retirement period, covering off the gaps that had been identified in earlier research.

Ms. Dorann Cafaro, The Cafaro Group, Little Silver, New Jersey

Ms. Cafaro is president of the The Cafaro Group LLC, an organization providing retirement plan consulting services to plan sponsors. She answered questions from the Working Group on Financial Literacy regarding the role of employers in enhancing the financial well-being of participants in retirement.

In responding to whether plan sponsors have responsibility to educate participants about their decisions at retirement, Ms. Cafaro focused on education at the time of retirement. She noted that defined benefit plan sponsors presently take responsibility to educate participants about decisions at retirement because defined benefit plans generally maintain control of participant money at the time of retirement. In contrast, defined contribution plan sponsors generally do not take the same responsibility for education at the time of retirement because the participant generally controls his or her account balance. Defined contribution plan sponsors focus instead on education regarding retirement decisions at times prior to retirement. Regarding defined contribution plans, Ms. Cafaro stated that adequate programs for sound decision making at the time of retirement are generally lacking, and that such programs would be impractical in the defined contribution plan setting where account portability and limitation of plan sponsor liability are key components of plan design and prevalent in the marketplace.

Focusing on the time of retirement, Ms. Cafaro asserted that plan sponsors should not receive incentives to provide education to participants at retirement. Instead, Ms. Cafaro offered that retirement and financial services vendors may be in the best position to offer “at retirement” programs to participants – potentially an umbrella-type program for participants, available for the consolidation of employee assets from multiple prior employer plans and the removal of terminated employee accounts from individual employer-sponsored plans to a pooled status to achieve savings in administrative fees and time.

Ms. Cafaro recommended that the specific message that participants receive at retirement should be the personal impact of retirement savings, and suggested that the message should include a participant acknowledgment section where participants state that they understand their income options at retirement and the consequences of spending such income before retirement. Ms. Cafaro sees the main financial issues facing retirees as being increased fixed costs and debt burdens, as well as use of retirement income without understanding the long-term effects of such expenditures.

In addition, Ms. Cafaro testified that she did not believe financial education could be provided without incurring fiduciary responsibility and offered that participants should receive an annual financial health report showing current retirement income replacement and showing the impact of debt in retirement. Lastly, Ms. Cafaro stated that the prohibited transaction exemption for investment advice (as added by the Pension Protection Act of 2006) should not be expanded to include other forms of financial advice such as health care choices and insurance. Instead, she offered that health care and insurance vendors should take on an expanded role in educating the public regarding decisions at retirement.