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- Financial Literacy: Why Employer Support Is So Critical
“With great power comes great responsibility.” This solemn quote, originally uttered in a Spider Man comic, seems apropos to the duties employers must fulfill as retirement plan fiduciaries. As it implies, fiduciary responsibility should not be taken lightly.
So what, exactly, is fiduciary responsibility? In short, it’s the duty plan sponsors and fiduciaries have to protect the best interests of retirement plan participants, retirees, and their beneficiaries.
Historically, retirement plan sponsors, advisors and recordkeepers have assessed plan health based on fundamental metrics such as participation and deferral rates. While these are significant on their own merits, they don’t reveal anything about “retirement readiness” — that is, how financially prepared an organization’s workforce is for retirement. After all, the key purpose of a workplace retirement plan is to provide employees an opportunity to set aside a portion of their earnings to build financial security for their so-called “golden years.”
The emergence of plan health data and tools that intuitively communicate critical plan and aggregated participant metrics continues to be the most prominent trend within the digital plan sponsor arena. At the start of 2017, 40% of firms within the Retirement Plan Monitor – Institutional coverage set offered some sort of plan health tool.
To date, the defined contribution (DC) retirement plan industry has looked to default solutions as a panacea. Automatic enrollment, default investment programs and automatic contribution escalation have been the prescribed “answers” to combat inertia and motivate an under-saved workforce to build their retirement nest egg.
While every investment practitioner knows (or should know) how to derive an efficient frontier under Modern Portfolio Theory (MPT), ask the next investment professional you meet how to select the most appropriate portfolio from the frontier. Chances are they won’t remember. The answer, of course, is to select the one that maximizes expected utility.
What the heck does “maximize expected utility” mean?
In recent years, the steady increase in investment-related litigation in the defined contribution (DC) retirement plan space (and the resulting headlines) has brought to light key questions about fiduciary responsibility. Namely, who is a fiduciary? If you’re a fiduciary, what is your role? How do you make sure you’re fulfilling your duties under the law? What are your liabilities? Is there any way to limit those liabilities?
Actions speak louder than words. So someone might tell you one thing, but look at how they behave and you might see the exact opposite. For example, ask someone if they think about retirement as much as their parents did and they’ll likely say that they do. But all you have to do is take a quick glance at the numbers and you can see that people today don’t save like the generations before them. The percentage of workers at risk of having inadequate funds to maintain their lifestyle through retirement is estimated to have increased from 31% to 53% between 1983 to 2010. It’s this disconnect between what people say and what they do that drove us to incorporate behavioral finance into our methodology and interface.
To GuidedChoice, asking a client questions about their lifestyle and personality is silly and irrelevant. We don’t need to know that their dog is named Atlas, that they’re afraid of fire extinguishers, or whether they’re financially conservative or aggressive. Instead, we get to know their current financial situation and extrapolate that to showcase the consequences of their actions, or inaction, in the form of their projected wealth and income at retirement. We prefer to present a range because we want the client to understand that retirement planning is uncertain, and best done on a recurring basis.
To date, traditional off-the-shelf Target Date Funds (TDFs) have become the most popular qualified default investment alternative (QDIA) offering in employer-sponsored retirement plans. However, that doesn’t mean they’re the best. TDFs are generally seen as an easy way to help participants put retirement investing on autopilot. And it’s this hands-off nature that appeals to plan sponsors who are responsible for QDIA selection, despite the fact that traditional TDFs have an overly simplistic strategy that falls short in several areas.
The current retirement landscape is broken. The three-legged stool that’s been put in place is wobbly at best. 10,000 people are turning 65 per day and Social Security can’t keep up, pension plans have all but disappeared with only 44,869 in 2014 (down from 175,143 in 1983), and our personal savings rate in September 2017 fell to a near decade-low 3.1%. And as financial professionals, we can do our part to help better the lives of those we serve. But first, let’s take a quick look at how we got to this point.
Whether you’re a plan advisor or plan sponsor, you have the same goal: improving participants’ financial wellness. An essential facet of reaching this goal is helping them plan for retirement.
Qualified default investment alternatives can protect you from fiduciary liability if your participants’ investments suffer losses. To receive this protection, you must take specific steps in selecting the best QDIA for your plan. This guide will walk you through the selection process and how to ensure you receive the safe harbor protection a properly-selected QDIA can provide.
In 2016, the Department of Labor (DOL) released new rules that require increased levels of fiduciary responsibility affecting employer-sponsored retirement plans as of 2017. In a
Financial Literacy is a buzzword in the workplace today. Financial literacy is a big part of this wellness trend. With the retirement crises and other related issues, there is a push to improve the financial literacy of Americans of all ages. Many 401(k) plan sponsors have joined this movement and view it as a good business move for a number of reasons.
Have you ever wondered why so many products have an absurd “sticker price” that nobody ever pays? It turns out that even when you know these are meaningless, they can be effective anyway.
Over the past century or so, literacy has expanded from something of an elite skill to a near-universal one. 86% of adults worldwide are now literate, according to the United Nations, with rates above 99% even in places like Kazakhstan and Tonga.
Last week, healthcare giant Anthem was hit with a massive lawsuit, charging that the company’s 401(k) plan charged excessive fees to employees who invest through the plan. The suit might as well have been directed at Vanguard Group, the firm that provides both administrative services and most of the plan’s funds, although they’re not officially named.
We’ve had a lot to say lately about Social Security, and we’ve had a lot of responses. The subject – from annual benefit (non)increases to obscure filing strategies – is top of mind for many Americans of a certain age. But younger people? Not so much.
This week the Treasury Department announced the long-awaited national rollout of a new program designed to make retirement saving easier: the “MyRA.”
Terrorists. Horrifying diseases. Climate change disasters. Political brinksmanship around the globe. Take a look through virtually any day’s headlines, and most of what you’ll see is one crisis after another.
What’s completely painless, relatively easy, scientifically proven, highly cost-effective, potentially almost lifesaving – and yet less appealing than a trip to the dentist?
This newsletter is a milestone: our 100th edition of GuidePost. When we saw that number coming up, we were curious to look back at the first few issues to see what’s changed and what hasn’t. Apart from the inevitable evolution of graphics and hairstyles, we found that the retirement investing landscape looked very different nearly ten years ago. But it was reassuring to see that our fundamental concerns and goals were much the same then as they are today.
For decades now, almost everyone from the federal government to the proverbial guy at the water cooler has been an advocate for investing in a qualified retirement plan. Even our elderly mother, enjoying a comfortable income generated by her 401(k), has become something of an evangelist. So it’s rather shocking to read an article warning that you might want to ignore your company plan entirely and invest the money after taxes instead.
How would you feel if you visited a fine restaurant with excellent reviews, ordered a complete prix-fixe meal, and when it arrived you needed a research project just to figure out what ingredients were in the dishes? Or whether they were healthy, or local, or even edible? Worse, what if you had no real idea what this spread was costing you – not when you order it, or ever?!
Last month we considered how 401(k) and Social Security add up to a two-wheeled replacement for the traditional three-legged stool. The idea is that both are proportionally more important, and should be optimized with care. There’s another interpretation, however, based on the first thing anyone learns about riding a bike: if you stop moving, it falls over. Retirees can no longer count on these programs to keep them upright without a lot of steady pedaling. Self-directed investing means that both the steering and the driving are up to you.
What’s bigger than South Korea, but smaller than the United Kingdom? Answer: the 57-million-strong population of Americans who go to work every day but don’t have access to an employer-sponsored retirement plan. (Technically it could also be Italy or Burma, but bear with us.)
Remember the "three-legged stool" of retirement security that was once supported by Social Security, private pensions, and personal savings? With the demise of pensions we're down to two. There's no such thing as a two-legged stool, of course. So instead we're tempted to think of modern retirement planning as a bicycle.
What’s more fun than an organic, gluten-free, ancient-grains, salted-caramel holiday cookie? Quite a lot of things, actually. That’s often the case with trends: often they’re either novelties for the sake of novelty, or ongoing, long-term shifts that have recently gained the spotlight.
What do people in the Netherlands practice openly that’s almost inconceivable here? Eating frites with mayonnaise, of course. Safe and universal bike transit also comes to mind. Oh, and one other thing: big-picture thinking about what retirement planning should be all about.
Lightning never strikes twice in the same place. Feed a cold, starve a fever. What happens in Vegas, stays in Vegas. Like much conventional wisdom, all of these maxims are wrong. All are also examples of cognitive biases, which behavioral scientists suggest may outnumber rational thoughts in our complex and mysterious minds.
From the coffee shop to the cable provider, we deal with a lot of customer service in our daily lives, both good and bad. Usually we know the difference right away. With the worst kind, we don’t find out until later, when we discover we’ve been lured into making a poor decision. Consider how costly and annoying that moment can be for, say, a phone contract. Then consider the same thing happening with your life savings!
Donald Rumsfeld famously parsed the myriad uncertainties of the world into two types: “known unknowns” and “unknown unknowns.” The former, he implied, are more manageable. While we might not have the answers, at least we know what questions to ask. The latter are more deeply troubling because we don’t even know yet that we should be worried about them.
Sometimes the smartest people do perplexing things. We’re all too familiar with stories of retirement plan participants making poor investment decisions. But we were surprised when a colleague’s spouse – a globe-trotting consultant with a Ph.D. in a quantitative field, no less – confessed to a basic investment mistake. He keeps much of his retirement plan assets in an appropriate target date fund, but spreads the rest of it around among other investment options. “At some level I know that’s wrong,” he explains, “but I just don’t trust target date funds to deliver the results I want.”