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Fiduciary Advisera Holistic Solution
ISCEBS Employee Benefit Symposium 2007
Don Atherton, CEBS, CFP®
President,Integrated Benefits
Solutions, Inc.
(713) [email protected]
E. Thomas GarmanPresident,
Personal Finance Employee Education
Foundation
(352) [email protected]
2
Discussion Overview
• Today’s retirement savings realities
• Workplace financial literacy• How financial literacy and advice
programs can increase ROI• PPA fiduciary advisory models
3
Today’s Retirement Realities
• A career represents the sum of multiple employer experiences
• 401(k) plans are the primary retirement savings vehicle
• Poor 401(k) plan participation• Inadequate salary deferral rates• Investment underperformance
4
Today’s Retirement Realities
• Longer life expectancy• Increasing financial insecurity• Greater need for long term care• Elimination of retiree medical
benefits• Retirement education alone has
failed• Employees want help and need
holistic personalized planning
5
Compounding Elements
• Negative consumer savings rate• Increasing consumer debt• Complex income and estate tax
laws• High cost to educate children• Potential need to financially assist
parents
6
Compounding Elements
• Complex health and welfare plans• Increasing cost of health care• Expansive voluntary benefit plans• 1 in 4 workers report they are in
serious financial distress
Financial Well-Being
5.46.9
8.29.2
14.5 14.2 13.812.2 11.4
4.2
0.02.04.06.08.0
10.012.014.016.0
1 2 3 4 5 6 7 8 9 10
Perc
enta
ge
Source: InCharge Education Foundation, National Norms on InCharge Financial Distress/Well-Being Scale© for General Adult Population. 1 Means “Overwhelming Financial Distress/Worst Financial Well-Being”; 10 Means “No Financial Distress/Excellent Financial Well-Being” ©Copyright by InCharge Education Foundation and E. Thomas Garman, 2004-2007. All rights reserved.
(1-4: 30%) (5-6: 28%) (7-10: 42%)
8
Factors Correlated as Expected
Personal Financial:
Financial well-being
Financial satisfaction
Financial distress
Financial stressor events
Job Outcomes:Work satisfaction
Pay satisfaction
Absenteeism
Presenteeism
9
Factors Correlated as Expected
Personal Finances: Financial behaviors
Job Outcomes:Personal matters interfering with work
Work time used to handle personal finances
Increased health plan cost
Credit card delinquencies
Credit card debt
10
Workplace Financial Literacy
• Millions of employees say they cannot afford to save for retirement; 1 in 4 say credit card debt is a reason
• Employees do not know what they don’t know
• Employers and employees do not understand the value of effective workplace financial programs
11
Successful Program Example
• Results from InCharge Education Foundation 18-Month Panel Study (2003-2005) of 7,000 credit counseling clients
• Credit counseling provides one-on-one money and credit management suggestions, a debt management program, and education
“Financial Stress Today”
2005: Data shown for “bottom 4” responses (the negative end,1-4 on a ten point scale) 2003: data shown for “bottom 2” responses (the negative end,1-2 on a five point scale)
“Severe” to
“Overw
helming”
“High” to
“Overw
helming”
Level of Financial Stress
Impact of Credit Counseling (on Health and Family Problems)
55% Agree
48% Agree
44%
46%
48%
50%
52%
54%
56%
2005
2005 48% 55%
Improved health Improved family relationships
Health Family
*Choices were “Yes” or ”No”. This chart is based on question 14 “Since you joined InCharge, has your health improved?” And question 15 “Since you joined InCharge, have your family relationships improved?”
“Feel That Concerns About Personal Finances Interfere With Work”
Based on Question 21 in the 2005 survey. This chart represents the percentage of responses from the bottom half of each scale (2003 and 2005).
2003 2005
Financial Concerns Interfere
“Som
etimes” to “V
ery Often”
Time Lost At Work*(Average Number of Days)
* Note: Time spent not working for any reason
Incidence of Spending Time at Work on Personal Finances
Based on question 22 in 2005, question 25 in 2003. Responses shown are the bottom half of the scales (sometimes to very often), 2003 and 2005.
2003 2005
Respondents R
eporting Time N
ot W
orking
Hours Per Month Spent on Personal Finances at Work
Note: In 2005, Q22 asked panelists to estimate Average Hours per month spent not working due to financial concerns.
2003 2005
Hours P
er Month
Main Personal Financial Activities Done During Work Hours
Percent W
ho Engaged in This B
ehavior
Changes over the Past 18 Months.
Estimated Costs of Ignoring Financial Illiteracy ©
1. Lost productivity $450a
2. Health care costs (poor health) 300b
Subtotal = $7503. Health care reimbursement (FICA) 92c
4. Dep care reimbursement (FICA) 382d
5. Traditional health plan choice 800e
TOTAL = $2,000+
© Personal Finance Employee Education Foundation, Inc. 2007.
“Annual Employer cost for not taking action can be $2,000+ per employee!”
20
What Does NOT Decrease Financial Distress?
• Salary increases• Bonuses• Attending 401(k) retirement
planning seminars and workshops• Pastoral counseling• Employee Assistance Programs
21
Attainable Results
Lower financial distress Increased financial well-being Better health Adequate retirement preparation Improved family relationships Gains in job performance
22
Financially Literate Employees are Engaged With Money Issues
Comparison shop (including healthcare)
Achieve short, medium and long term savings goals
Match product selections with savings goals
Enjoy average to above average financial well-being
23
Quality Financial Programs ResultsFor Employees
Lower financial distress
Increased financial well-being
Adequate retirement preparation
Improved family relationships
Gains in job performance
For EmployersHigher
productivityLower
absenteeismBetter
presenteeismLower turnoverBetter employee
healthMore profits
24
Recommended ActionsFinancial Literacy
1. Implement financial education program which emphasizes the basics of personal finance
2. Provide easy access to non-profit credit counseling
25
401(k) Plan Recommended Actions
1. Adopt 401(k) Plan automatic enrollment
2. Utilize Qualified Default Investment Alternative (QDIA)
3. Incorporate automatic annual deferral increases
4. Engage a “fiduciary adviser” to provide holistic financial planning
26
Automatic EnrollmentEffective January 1, 2008
• PPA preempts state laws• Allows for negative elections
– minimum of 3%– 90 day penalty fee reversal period
• Annual increase– 1% per year– maximum of 6%
27
PPA - 2006• Qualified Default Investment Alternatives
– Balance Fund– Lifecycle Fund– Managed Account
• Auto-enrollment safe harbor match– Formula
• 100% for the first one percent• 50% for the next five percent
– Vesting – two year cliff– Eliminates ADP and ACP testing
requirement
28
Participant Level Advice
Pre - PPA• Fiduciary• Level compensation• Sponsor liable for
investment advice
PPA• Co-fiduciary• Variable or level
Compensation• Sponsor not
liable for investment advice
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Sponsor Fiduciary Relief Gained by:• Prudently select Fiduciary Adviser• Use of eligible investment advice
arrangement• Providing employees notice of conflicts and
other key disclosures• Determining that compensation paid to the
fiduciary adviser or its’ affiliates is reasonable and as favorable to the plan as available in the market
• Performing independent annual audits
30
Types of Fiduciary Adviser
Conflicted• Typically Product provider• Varied compensation• Computer model adviceUn-Conflicted• Typically Independent Adviser• Level compensation• Personalized advice
31
Conflicted - Fiduciary Adviser
• Variable compensation dependent upon investment choices / transactions
• Advice exclusively driven by a computer model
• Interpretation provided by call center representatives
• Challenge to deliver holistic solution
32
Conflicted - Computer Model Valid and developed independently
• Based on generally accepted investment theories
• Uses relevant participant information• Applies objective criteria to define
appropriate asset allocation for investments under the plan
• Unbiased evaluation of all investment options offered by the fiduciary adviser or its related affiliates
33
Un-conflicted – Fiduciary Adviser
• Level compensation for all plan investments and transactions
• Personalized independent planning• Delivered in person or through a call
center• Supports holistic financial planning
– all employee benefit plans– personal savings, insurance, or other assets
34
Un-conflicted Fiduciary AdviserPrudent Selection
• Advisers’ regulatory history• Quality of results for existing
clients• Knowledge of the subject• Potential conflicts of interest• Clearly defined service to be
provided
35
Adviser FeesAt least as favorable as in the market
• Paid by the plan, the employee, from forfeitures, the employer or any combination
• Based on:– fixed cost per employee – basis points of all plan assets– basis points of employees’ account
balance of employees utilizing service– annual fee paid by employer
Estimated Costs of Ignoring Financial Illiteracy ©
1. Lost productivity $450a
2. Health care costs (poor health) 300b
Subtotal = $7503. Health care reimbursement (FICA) 92c
4. Dep care reimbursement (FICA) 382d
5. Traditional health plan choice 800e
TOTAL = $2,000+
© Personal Finance Employee Education Foundation, Inc. 2007.
“Annual Employer cost for no action can be $2,000+ per employee!”
37
“The lack of financial literacy–spending plans, credit management, and
savings—is the major reason why employees
do not save for retirement”
38
Conclusions on Financial Literacy and Workplace
Productivity1. Financially illiterate adults do notmanage their personal finances
very well and they do not saveand invest enough for a
financially successful retirement2. It is in the employer’s best
interest—more profits—to provideemployees easy access toquality financial programs
39
Personal Finance Employee Education Foundation
“PFEEF Advocates Best Practices” Provides employers no-cost-to-use
tools and expertise to detail the bottom-line benefits of quality financial programs
Identifies companies whose workplace programs genuinely improve employees’ personal financial behaviors and increase employer profits
40
Use PFW to Assess Employee Personal Financial Well-Being
1. Survey employees using the Personal Financial Well-Being (PFW) scale.
2. PFW is 8-item questionnaire that measures financial distress and financial well-being.
3. PFW is a peer-reviewed valid and reliable measure (over 20 years in development).
4. Use of PFW is free with permission.
41
In Closing
• We leave you with the immortal words of the great baseball player, Yogi Berra, of the New York Yankees, who often fractured the English language with his truisms like:
“If you don’t know where you are going, you will end
up somewhere else.”
42
Information/FootnotesE. Thomas Garman
President, Personal Finance Employee Education FoundationProfessor Emeritus and Fellow, Virginia Tech University9402 SE 174th Loop, Summerfield, FL 34491 USATele/Fax: 352-347-1345E-mail: [email protected]: www.personalfinancefoundation.org
To examine the PFW scale and read research articles about its use, see http://www.afcpe.org/pages/journal_abstract.cfm?journal_id=290&top_id=21 http://www.afcpe.org/pages/journal_abstract.cfm?journal_id=303&top_id=21
New Book: Delivering Financial Literacy Instruction to Adults, Garman & Gappinger, Heartland Institute for Financial Education (303-597-0197)
For permission to use the PFW scale, contact Dr. GarmanFootnotes:
a Based on reduced absenteeism and less work time dealing with personal financial concerns. See research and press releases at www.PersonalFinanceFoundation.org
b Conservative estimate; research underwayc $1,200 contribution to health reimbursement plan ($1,200 X 0.0765)d $5,000 contribution to dependent care reimbursement plan ($5,000 X
0.0765)e Employee stays in high-cost health plan instead of choosing less expensive
CDHC policy (consumer driven health care)
43
Information/FootnotesDon Atherton, MBA, CEBS, CFP®, CLU, AIF®
Integrated Benefits Solutions, Inc.650 North Sam Houston Parkway East, Suite 553Houston, Texas [email protected]
44
ABC Company Projected 1-Year Changes
1. Projected 1-year changes in work outcomes:– 12% will improve job performance rating– 16% fewer garnishments– 16% will have reduced absenteeism– 5% less turnover compared to average– 10% will spend less work-time spent on personal
finances– 8% less short-term disability– 9% lower health care costs– 21% will contribute to 125-plans– 5% fewer accidents/workplace violence– 5% fewer thefts– 10% fewer workers’ compensation claims– 14% increase in contributors to 401(k) plan
2. Next assign costs to each factor and estimate increases in work outcomes.
45
Summary of Projected 2.8 ROI
for ABC Company*1. Program offered to 28,000 employees2. Program impacts 30% of employees, 8,400, in
varying degrees of effectiveness resulting in improved financial behaviors and job outcomes for some
3. Total value of projected improved job outcomes $4,499,000
4. Projected cost of financial program = $1,600,0005. Projected ROI 2.8/1 ($4,499,000/$1,600,000)
*These calculations are reasonable estimates, not guarantees. Some numbers are very low estimates and ABC Company’s Human Resources Department has the most accurate cost data. Decreases in accidents, workplace violence, and theft, and reduced fiduciary liability are additional ROI values, and they are not part of this ROI calculation, although they should be included.