FS Newsletter - Inflection Points Vol. 3

By Administrator at June 07, 2011 06:21
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      Inflection Points

                                                                Vol. 3 

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Empowering plan fiduciaries with a process for selecting an investment advice provider

Would anyone debate that selecting an investment advice provider is not a fiduciary act? We think not. What consultant would recommend funds solely based on their reputation? What fiduciary acquiesces only because another non-fiduciary happened to offer certain funds? Everyone knows that past performance is not a reliable predictor of future returns. In fact, we submit that the choice of an advice service, particularly one that has discretion over a participant's account, may be a more important action than selecting funds for the menu.

Consider the following: 


1. Few people dispute the fact that asset allocation is responsible for at least half of the return in a person's account. If that is the case, one asset allocation provider has, by definition, at least as much influence on a person's account as the performance of the entire menu.      

 

2. There is considerable empirical evidence that above average investment performance has less effect on retirement outcomes when compared with other actions that impact the amount of savings. Putnam pioneered these findings in 2006 and Principal refreshed the analysis last year [Pursuing "Retirement Plan Success" During Participants' Accumulation Years. Thought Capital, April, 2010].

 

3.Most of the components in an advice service provide for modeling a customized solution thereby empowering and facilitating the findings explained in point #2. The resource brings to life, in usable and actionable form, abstract ideas that most participants have great trouble grasping. Not insignificant is understanding how a particular allocation affects retirement planning and quantifying how using different allocations impacts other variables.

So why is it that the industry norm is to simply use the service marketed by the record keeper?  Few, if any, questions are asked. This reality is particularly troubling because many of the administration firms do not disclose compensation received from the advice provider. Perhaps part of the explanation is that a hand-full of vendors dominate this space. What makes this practice even easier to perpetuate is a couple of the names are ubiquitous, almost household, in nature. But is defaulting to commonly known firms adequate self-defense for a fiduciary if the action is challenged? What kind of process is that? As a fiduciary, the plan sponsor has a responsibility to implement the same type of process to evaluate their participant advice provider as they do to determine the effectiveness of all other aspects of their plan.

At Financial Soundings, one of the first tasks we completed was an RFP for interested parties to use in comparing participant advice service providers. Please have a look here. We continue to be surprised by how few plan sponsors conduct meaningful due diligence in selecting a participant investment advice resource.

If choosing an investment advice and retirement planning provider is so important, how should a plan sponsor go about engaging a vendor and monitoring the outcome? The plan's consultant is the logical source for facilitating the process. Some firms simply need a resource like our RFP and education about how to orchestrate the project.  If you are wondering if this is a service you should add to your practice, be sure to read next month's newsletter. 

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FS Newsletter - Inflection Points Vol.2

By Administrator at May 04, 2011 07:21
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      Inflection Points

                                                                Vol. 2  

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"If it can be measured it can be managed." -Peter Drucker

In 2006 one of our colleagues, Steve Lansing, wrote an article for the Journal of Pension Benefits titled A Syntheti(k) Pension Plan (click to download). Steve explained how a defined contribution plan could be designed and managed to look, taste and feel like a pension program without the negatives of arcane actuarial valuations and obtuse accounting standards. In a different light, this idea has renewed application and advantages to plan sponsors and their service providers.

A Pension of One

Many people probably think of a defined contribution plan as being an aggregation of individual savings accounts.  We feel this perspective is narrow and limits the creative management of the program and its outcomes. Instead, we believe a defined contribution plan could be viewed as a collection of single, one person, pension plans. There is nothing legal or regulatory to justify this concept. However, a simple thought experiment can show that this picture can easily be seen.

Everyone has their personal retirement "liability."  Based on an array of assumptions, this is the amount of money a person will need at retirement to reasonably expect an adequate standard of living for the remainder of their life. Indeed, our Insights report calculates this target for a person and also permits them to change most of the variables to customize the report outcome.

With a few more assumptions you can readily compute the "cost" necessary to fund the liability at retirement. This cost is the amount of contributions the person's account needs in order to pay for the liability at retirement. Of course, the source of contributions will come from the employee and the employer. In a few plans their generous associates who terminate early and leave forfeitures will ante for the cause, too.

The contributions have to be invested somewhere, and that is accomplished by developing an investment strategy by selecting funds from the menu. Think of this as the person's investment policy.

Pity the poor participant.  He or she must be a combination of an actuary, investment expert, accountant and economist. And not just for the defined contribution plan, but for personal assets, too, and perhaps spousal investments. Given the difficulty many of our nation's biggest pension plans have in getting this process correct, is there any wonder why most of the participants want help? Even more people need assistance but don't realize it.

Each participant needs, and indeed deserves, a tailored retirement plan evaluation. This can be achieved exquisitely well through our Insights report. It is constructed with the input of key service providers and fiduciaries, all professionals experienced in their specialties, and orchestrated by the plan's consultant. It is delivered in a user-friendly fashion - a printed report constructed with advanced software.  Our web site allows for an infinite number of "what if" modeling scenarios. The yearly expense of Insights is about equal to the fuel cost of a couple of days' work commutes.

A Simple Heuristic for Plan Success: an 80% Rule*

Until now, employers have been operating in the dark about whether or not their plan was effective.  Our definition of effectiveness relates to the depth and breadth of a person's diversification, the sufficiency of their contributions and the progress they make towards funding their retirement liability.

Instead of playing with the factors, a company can solve the equation; they can finally have an answer. The sponsors have the necessary data at their disposal. A committee can measure and manage the progress of the plan in delivering an acceptable income to the participants. Knowing this information the employer can finally bring resources to bear for treating illnesses, not just symptoms.

But what defines the health of a plan? Of course, each committee must reach its own conclusion. There are numerous approaches to answering the question. However, we suggest an effective starting point. Namely, adopt an objective of 80% of the participants with an 80% chance of receiving 80% of their income at a reasonable retirement age. There is nothing magical about this metric but it comes preciously close to what many people would define as reasonable and obtainable.

The devil is in the details, and this rule of thumb only makes sense if a broad suite of assumptions are, in aggregate, used in formalizing the analyses. And that topic will be good for numerous newsletters in the future.

 Contact us to learn more about the Insights program 

 

* The Pareto Efficiency: An economic system that is not Pareto efficient implies that a certain change in allocation of goods (for example) may result in some individuals being made "better off" with no individual being made worse off, and therefore can be made more Pareto efficient through a Pareto improvement. Here 'better off' is often interpreted as "put in a preferred position." It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies.  Wikipedia

 

 
 
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FS Newsletter - Inflection Points Vol.1

By Administrator at May 04, 2011 07:19
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      Inflection Points

                                                                Vol. 1 

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"However beautiful the strategy, you should occasionally look at the results."

           - Winston Churchill

 

We are excited to provide you with the inaugural issue of our monthly newsletter for consultants, Inflection Points. We will publish this electronically on the first Friday of every month.

 

Financial Soundings believes the defined contribution world is at a key juncture. Plan sponsors are increasingly turning their emphasis from governance, expense analysis and investment monitoring to holistically managing their plan. There is heightened appreciation for and awareness of measuring and monitoring participant behavior and outcomes.  Fiduciaries are tumbling to the fact that it is not enough to just design the plan. They must oversee the realities of how the employees are using the program and what that use means to people in terms of retirement income and a fulfilling retirement. To use a housing metaphor, having a completed blue print of your trophy home is wonderful, but your dreams won't come true until it is built, you have moved in, and are enjoying the fruits of your labor.

 

This month's edition of Inflection Points pertains to Deloitte's recent annual survey about retirement readiness. We have provided a link below to a pdf of the full report and have included our excerpts pointing you to key parts of the document.

 

Deloitte 2010 Retirement Readiness Survey - Full Report 

Deloitte Retirement Readiness Highlights  

 

Simply put, retirement readiness is a topic on which corporate America is focused. Indeed, it is one of the top subjects to be addressed this coming year by many businesses. The topic will not fade from view because, if for no other reason, sponsors know that the majority of employees are not prepared for retirement. This fact has profound implications for long-term corporate profitability and our country's social cohesion. Additionally, most companies are acknowledging that they have not assessed the retirement readiness of their workforce.

 

You will be asked to assist the benefit committee, and the stars are aligned for retirement readiness to be at the top of the agenda. Financial Soundings has unique resources for complimenting your practice with retirement readiness advice and counsel.

   

 
 
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Impact of Financial Well-being On Employee Engagement and Business Outcomes

By Administrator at May 03, 2011 13:07
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Virtually every employer in the U.S. is seeking to adapt to an increasingly challenging set of workforce dynamics.  With four distinct workforce generations (all possessing differing value sets), multiple ethnic groups, and the predominance of dual-income families, employers often struggle with offering a comprehensive employment proposition and programs that are effective with all segments of their workers – especially when it comes to driving higher levels of workforce retention and engagement.  An approach that works for one set of demographics usually is not very effective within others.  It is rare, yet extraordinarily valuable, when a single effort can have equal power and effectiveness across all workforce demographics.  What this paper will show is the impact employee personal financial well-being can have on workforce engagement and employee outcomes.

For purposes of this article, a thoroughly engaged employee is defined as one who:

  • Is excited and enthused
  • Forgets about time
  • Identifies with the task
  • Thinks about the “question” outside of work hours (e.g., when driving home)
  • Resists distractions
  • Invites others into the work and engages others (emotional contagion)
  • Expends discretionary effort, i.e. the manifestation of:
    • Insight            
    • Originality
    • Intuition                     
    • Judgment
    • Humor            
    • Inspiration
    • Leadership     
    • Friendship

The issue of dis-engagement is that employers often do not see it.  Dis-engaged employees tend to “fly under the radar.” Their goal is to get by, not rock the boat, and hang on.  In addition to the obvious organizational impacts of dis-engagement is the cost of lost recruits, employees, and customers.[i]

The Detrimental Impact of Personal Financial Dissatisfaction/Distress on Employers

Very recent national research reveals that, in any workforce, on any given day, a significant portion of that workforce will be dealing which personal financial issues so critical that they severely and negatively impact both their personal and professional lives.  For employers, this has very significant cost, operations and quality implications. 

Another major portion of any workforce may not be in severe financial distress – but are working multiple jobs and/or extra shifts, just to make ends meet.  They may be “getting by” financially, but both their personal and professional capacity is limited.  On the personal front, this group feels like they’re missing out on family time, experience and presence that cannot be recovered.  This is such a prevalent issue that the most significant request of two-wage earner families is “how to become a single wage earning family!”

Still others in any workforce may feel like they have their current finances under control, but have no idea how to go about planning for their financial future.  With almost no financial education in our schools, families and houses of worship, people enter their adult lives with no roadmap for preparing for both today and tomorrow…whether it’s planning for a child’s future, or knowing how and when to start preparing for longer term financial goals.  The result, a major segment of any worker population will tell you that they are dealing with matters related to their personal finances to the extent that their sense of personal well-being (both at work and at home) is diminished. 

In a culture where (rightly or wrongly) people are defined by what they earn and what they own, there is often a stigma associated with talking openly about personal financial issues.  This is why many employers and their leaders are often surprised by the information regarding the prevalence of personal financial dissatisfaction or distress in their workforce.  In reality, personal financial issues are actually the number one cause of stress and is the most prevalent need presenting to Employee Assistance Programs across the U.S.

The impact of this reality is seen within organizations in the following areas:

  • Increased Attendance, Tardiness, and Overtime
  • Higher Turnover
  • Higher Costs of Healthcare, Sick and Disability Claims
  • Lower Employee Engagement and Productivity

The Strong Correlation between Employee Engagement and Business Outcomes

In view of the above (especially the negative impact that financial distress and dissatisfaction has on employee engagement), the lost opportunity to employers is significant.  Towers Perrin, an international human resources research and consulting firm who just recently merged with Watson Wyatt produced two case studies[ii] that do a very good job at connecting the dots between employee engagement and key desired business outcomes, as illustrated below:

 

 

 


The Surprising Power Financial Well-being has on Workforce Engagement

In a 10,000 employee group, the Pathways Financial model was fully implemented and measured through an employee survey with a contiguous financial well-being assessment tool.  Shortly after program implementation, the leaders of that organization were surprised to see the prevalence and depth of personal financial reality on their employees’ personal and professional lives.  In this survey, the employees indicated that their personal financial acumen, disciple and situation were negatively impacting their job and their family.  On a four-point scale where 1 was the most negative impact and 4 was the most favorable, the average score was 1.2 – the lowest scoring segment of the entire financial well-being assessment.  Interestingly, this result was consistent across all income and education levels!  

Fast forward two years.  Not only did the survey reveal improvements in personal financial awareness and well-being – an indication of improved financial behaviors – a more powerful result was revealed.  Using a statistical method called factor analysis to discern the drivers of workforce engagement, basic financial well-being proved to be the 4th most powerful driver of engagement out of the 18 factors in the combined employee survey and financial well-being assessment tool.  What impressed that organization’s leadership was that financial well-being (which was costing virtually nothing through the Pathways Financial delivery model) scored ahead of areas that they were investing huge organizational resources (e.g. Compensation & Benefits, Manager Effectiveness, Staffing and Resources).  The conclusion, the ROI and effectiveness of the Pathways Financial model are, in fact, “low hanging fruit” – and is consistently effective across all workforce demographics! 

[i] The Concours Group:  Re.sults Project EMP: Excelling at Employee Engagement

[ii] Talent Report: New Realities in Today’s Workforce – Towers Perrin

 

 

 

 

 

 

 

 

About the author

Financial Soundings (FS) has developed a unique plan evaluation tool and employee investment education and advice program, Retirement Planning Insights, to specifically address the industry issue of inadequate retirement readiness.  Through the Insights program, FS provides plan sponsors with an evaluation of the current retirement plan utilization by their employees and then proactively provides every eligible employee with individualized investment direction to enhance the utilization of the retirement plan and improve each employee’s probability of achieving a successful retirement.

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