At a time when the markets are convulsed with volatility, the merits of a workforce that understands the long-term nature of investing for retirement

Transcription

1 Why Financial Education Matters More Than Ever At a time when the markets are convulsed with volatility, the merits of a workforce that understands the long-term nature of investing for retirement are becoming clear to plan sponsors. Indeed, many believe that the movement toward auto-enrollment should not diminish the importance of participant education; instead, it allows the defined contribution (DC) community to focus on making that education more effective. Transamerica Retirement Services ( Transamerica ) has long focused on participant education the firm has been rated a first-quartile provider in participant services in the PLANSPONSOR Defined Contribution (DC) Survey for four consecutive years and sees the present market turbulence as a validation of that approach, and as an opportunity for plan sponsors to keep their participants on the right track. Transamerica Retirement Services executives Stig Nybo, Chief Marketing Officer and National Sales Manager, and David Shute, Vice President and Director of Marketing, talked through the virtues of participant education with Chad Larsen, President of Moreton Retirement Partners, a National Retirement Partners member firm based in Denver, whose practice has long stressed the importance of education. Larsen was named Retirement Plan Adviser of the Year by PLANSPONSOR in Reprinted from PLANSPONSOR November 2008

2 PS: Participant education, once to the fore of the defined contribution business, seems to have lost its primacy. Is that a fair assessment? Nybo: There might be a tendency to look at it that way but, at Transamerica, we think that is precisely the opposite of what is and should be happening. There are so many tools available now to the average participant that were not available just a few years ago. So much is on line now at the average plan provider Web site. Transamerica and the industry in general have taken great pains to make sure that even a casual Web surfer will be pulled into the retirement calculators and asset allocation tools. Not that it needed to be reinforced, but this present environment exemplifies exactly why, as an industry, we need to recommit to the concept of financial literacy. Like it or not, in general, we ve graduated beyond traditional information channels. The average participants get much of their entire financial education through their connection with their company s retirement plan. If we take that away, we re essentially left with nothing. PS: In your view, are the need for continued financial education and the legislative and regulatory thrust toward auto-enrollment compatible? Nybo: Auto-enrollment shouldn t necessarily mean auto-pilot or decoupling the participant from the adviser, or even being comfortable with a financially uneducated workforce. Autoenrollment has considerable merit but, on its own, it will do little to help participants come to terms with the difficult or potentially uninformed financial decisions that they have to make at various stages of their lives. I think, recently, we ve seen the consequences of emotional decisionmaking or leaving important decisions to the man behind the curtain. There are so many ways some things can get off track. In the short term, education needs to be focused on boosting participation, of course. However, if we do that and just focus on participation, then we haven t served the participants long-term education needs. Refreshing tools like personalized employee statements that include or show whether you re on track for a comfortable retirement, even for nonparticipating employees, or expanding and promoting retirement seminars will help them see if they re on track to meet their goals. That being said, Transamerica is still a proponent of automatic enrollment with our own offering that incorporates PPA-related provisions such as automatic enrollment, automatic deferral increases, and automatic investment. Larsen: That s exactly right we can t afford to have financially illiterate American savers. Yet, I think the present These present times are a perfect example of the dangers of a financially illiterate participant this is exactly the time not to act on emotion and make investment decisions that will, in all likelihood, come back to haunt you. Chad Larsen, President of Moreton Retirement Partners, a National Retirement Partners member firm based in Denver direction that the Pension Protection Act is dictating gives us a real opportunity when it comes to participant education. The fact is that, for all the resources that have gone into education, what we have been focusing on is fund selection after all, that s what all these participants wanted to know. They wanted to be in the right fund at the right time but, with auto-enrollment and defaults into target-date funds, we have the opportunity to focus on the real issues: How much can and should I be saving? What should I do when the market is in turmoil? What should I do when I reach retirement? That s financial literacy, and that s our opportunity now. PS: So, even an adviser like you, whose reputation rests in no small part on participant education, likes the auto-everything trend? Larsen: I am a big believer in auto-enrollment and the autostrategies that follow from that, yes, and that s precisely because it allows us to focus our energy on the type of participant education that is truly valuable. These present times are a perfect example of the dangers of a financially illiterate participant this is exactly the time not to act on emotion and make investment decisions that will, in all likelihood, come back to haunt you. PS: Stig, both you and Chad have talked about a more valuable and different type of participant education. How does that change what you actually deliver to the plan sponsor? Nybo: At Transamerica Retirement Services, we committed ourselves some time ago to a whole education process that wasn t focused just on equipping a participant to select between investment choices. Our whole approach to the defined contribution marketplace was adviser-centric we have always felt strongly that an adviser is an indispensable asset to both the participant and the plan sponsor in the small and mid-size plan market so, our education deliverables have been geared to helping those advisers get participants to a place where they provide ongoing guidance, objective information, and portfolio checkups to keep the investor on the right track. This means rethinking our deliverables we have been moving in what has turned out to be exactly the right direction these past few years, like offering a comprehensive guide for pre-retirees to prepare them for the many decisions that they will need to make. This requires being more proactive in putting the right tools in the hands of the advisers, like our Made Simple enrollment kits, 2. Reprinted from PLANSPONSOR November 2008

3 education materials, and seminars. Shute: I would add that it is important that the provider, adviser, and plan sponsor work together over the long-term to educate participants. It s not a one-time event it s a year-afteryear commitment. PS: The defined contribution market is fiercely competitive now, and there is a lot of focus on fees. From an adviser standpoint, is stressing participant education the best way to win a new client? Larsen: I don t necessarily lead with participant education. These days, the big concerns are fiduciary issues and plan design, but I find that clients always respond to participant education. It might not matter more than anything else, but clients and particularly the more committed plan sponsors recognize how much participant education matters to the financial health of their employees. PS: From your own standpoint, is participant education how you want to be spending your time when at the plan sponsor? Larsen: We re committed to it, yes, and we build it into our pricing. Of course, we rely heavily on the plan provider, like Transamerica Retirement Services, to give us effective material support, and that s where the focus of the recordkeeper becomes all-important. As we have said earlier, there s now an opportunity for a different kind of interaction with participants you are no longer spending 30 minutes of a 45-minute meeting going through 15 different fund options. Instead, you re spending 10 minutes on target-date funds and then 35 minutes on making sure that they don t cash out when they change jobs, or they don t flee an asset class because of volatility, and that they have a plan when it comes to retirement. That s what really matters, after all. Transamerica Center for Retirement Studies The Transamerica Center for Retirement Studies ( The Center ) is a non-profit corporation and private operating foundation dedicated to educating the American public on trends, issues, and opportunities related to saving and planning for retirement and achieving financial security in retirement. The Center s research focuses on how to educate and effect positive changes among the American public in achieving greater levels of financial security in retirement. Its research emphasizes savings trends among all Americans and segments within the population, trends of employer-sponsored retirement plans and their participating employees, and the implications of legislative and regulatory changes. The Center s outreach efforts include a Web site, publishing of research findings through media articles and interviews, and collaboration with industry groups and other organizations sharing an interest in this cause. The Center may be funded by contributions from Transamerica Life Insurance Company and its affiliates or other unaffiliated thirdparties. 1 Full-time workers in for-profit companies of 10 or more employees AMERICANS LOOK TO NEXT ADMINISTRATION FOR HELP IN ACHIEVING A FINANCIALLY SECURE RETIREMENT Americans confidence in their ability to retire comfortably has declined significantly over the past year, according to a special edition of the Transamerica Retirement Survey. In anticipation of the upcoming elections, the survey yielded insights into Americans top priorities for the next administration to help them achieve a financially secure retirement. According to the survey, 45% of adult Americans are less confident in their ability to achieve a financially secure retirement than they were 12 months ago. This is in stark contrast to only 14% who claim to be more confident. The majority of Americans (57%) cite just getting by or paying off debt as their greatest financial priority, while only 12% cite saving for retirement. Among survey respondents who identified themselves as full-time workers 1, only 54% claim to be confident in achieving a comfortable retirement, marking a decrease from 59% in the Ninth Annual Transamerica Retirement Survey, conducted nearly one year ago. Only 18% of full-time workers cite saving for retirement as their greatest financial priority right now, down from 27% in the Ninth Annual Survey. The fears faced by Americans as a result of the current economy are evident in our findings, said Catherine Collinson, President of the Transamerica Center for Retirement Studies, a non-profit corporation. It should be noted that the survey was fielded several weeks ago, before the historic storm that has struck the financial markets. Since then, Americans are without a doubt even less confident and have increased their expectations of the next president and Congress to address their concerns. Americans Seek Help from the New President and Congress When survey respondents were asked what top three priorities the new president and Congress should focus on to improve Americans ability to achieve a financially secure retirement, the majority of survey respondents (57%) cited fully funding Social Security in its current state to ensure Americans receive their guaranteed benefits. Thirty-four percent of the respondents cited educating Americans early by implementing financial literacy curricula in the schools. Other frequently cited responses include: Encourage 401(k) plans to offer to pay benefits in a form that guarantees retirees a set level of monthly income, regardless of how long they live. (28%) Provide tax credits to workers (earning up to $50,000 of annual income) who make contributions to an IRA or a 401(k) plan (or a similar plan, such as a 403(b) plan). (26%) Provide incentives for the purchase of long-term care insurance. (24%) Ensure that all workers have the ability to contribute to a 401(k) plan (or a similar type such as a 403(b) plan). (21%) 3. Reprinted from PLANSPONSOR November 2008

4 The financial adviser is the real keystone here. They re the ones holding it together for the participants. Stig Nybo, Chief Marketing Officer and National Sales Manager, Transamerica Retirement Services Ensure that all workers not covered by a 401(k) plan (or similar plan) have the ability to make regular IRA contributions at the workplace through payroll deduction. (20%) Privatize Social Security by creating individual savings accounts. (18%) Encourage financial education at the workplace through employer incentives and other reforms. (15%) Other (18%) Interestingly, among full-time workers 1, the second priority behind fully funding Social Security was to encourage 401(k) plans to pay benefits in a form that guarantees retirees a set level of monthly income, regardless of how long they live (34%). With the diminishing presence of traditional defined benefit plans in our society along with ongoing concerns about Social Security, workers have become aware of the need for guaranteed retirement income solutions that will help mitigate the risk of outliving their savings, said Collinson. Building a Financially Secure Retirement While the survey revealed a troubling loss of confidence among Americans, there are positive signs that many are staying on track with their retirement savings. The survey found that participation rates are holding steady among full-time workers who have access to a 401(k) or similar employer-sponsored plan, with 77% currently participating. Furthermore, 31% of participants have increased their contribution rates into their retirement plans in the last 12 months, compared to only 11% who have decreased their contribution rates or stopped contributing. Continued participation and increasing contribution rates are two very bright spots among an otherwise dark picture, says Collinson. Now, more than ever, Americans must stay focused on achieving future retirement security. Regardless of what a new president and Congress will do to help boost Americans confidence, the ability to achieve a financially secure retirement ultimately lies in the hands of the individual. About the Survey 2008: This Special Edition Transamerica Retirement Survey was conducted online within the United States by Harris Interactive on behalf of the Transamerica Center for Retirement Studies between September 5 and September 9, 2008, among 3,258 U.S. adults age 18 years and older, including 861 full-time workers of for-profit companies with 10 or more employees. Data were weighted using propensity score weighting to be representative of the total U.S. adult population on the basis of region, age within gender, education, household income, race/ ethnicity, and propensity to be online. 2007: The 9th Annual Transamerica Retirement Survey was conducted online within the United States by Harris Interactive on behalf of Transamerica Center for Retirement Studies between October 11 and November 21, 2007, among 2,011 full-time workers using the Harris online panel. Potential respondents were targeted based on job title and full-time status. Respondents met the following criteria: All U.S. residents, age 18 or older, fulltime workers in for-profit, and employer size of 10 or more. Results were weighted as needed for ensuring each quota group had a representative sample based on the number of employees at companies in each employee size range, and an omnibus phone survey was utilized to adjust for respondents propensity to be online versus the telephone as in the previous years waves of the survey. No estimates of theoretical sampling error can be calculated; a full methodology is available. About Transamerica Center for Retirement Studies The Transamerica Center for Retirement Studies ( The Center ) is a non-profit corporation and private operating foundation. The Center is funded by contributions from Transamerica Life Insurance Company and its affiliates. It may be funded by unaffiliated third parties. For more information about The Center, please refer to www. transamericacenter.org. The Center cannot give tax or legal advice. This material is presented for informational purposes only and should not be construed as advice. Interested parties must consult and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Although care has been taken in preparing this material, The Center disclaims any express or implied warranty as to its accuracy and any liability with respect to it. 4. Reprinted from PLANSPONSOR November 2008

5 PS: From Transamerica s standpoint, do you view your best-inclass participant education program as a key differentiator to winning business? Nybo: We do view many of our award-winning participant education tools (page 53) as clear market differentiators. No one plan is the same, of course, so there is no one-size-fitsall. We believe that the majority of plan sponsors recognize the need for participant education, and the auto-everything phenomenon does nothing to diminish that need. Shute: That is an area that we have really focused on at Transamerica Retirement Services. Every participant has different stages in his financial life, and approaching retirement is one segment that deserves a lot of attention. You need a multipronged approach some people will respond best to seminars, some to print, and some to DVDs, Webcasts, or other electronic media. For instance, we have our own in-house studio that lets us customize interactive and video messages on behalf of the sponsor or the adviser for the participant. Across all those avenues, the approach needs to be integrated and consistent. The challenge is the same to get participants to react intelligently and not emotionally in each segment of their financial life. Nybo: As I noted before, no matter how committed the adviser and the plan provider are, you have to have a commensurate level of commitment from the plan sponsor. The workplace is the best place maybe the only place where this can be done. There are three parties that can make this happen: the adviser, of course, who is incredibly instrumental, and the plan provider, who has the tools like Transamerica s participation program, Plus 15 SM, (above right) designed to increase participation by 15%, and the resources to make this happen. But, without the employer s understanding and commitment to financial literacy, you won t achieve what you need to achieve. Employers have to take on more responsibility in this regard. It s part of the social responsibility that all three parties plan provider, plan sponsor, and adviser need to recognize. PS: Some of the leading advisers in the retirement space, Chad, have tended to keep their focus on the plan itself, and not link their services to participants who retire or leave the plan. Where does Moreton stand in that regard? Larsen: Historically, we have chosen not to handle individual accounts, but more and more of our plan sponsors are showing concern about what happens to their participants when they exit the plan, and there is increasing concern about leaving those participants to their own devices at that stage. So, we re reevaluating our stance on that, and we might well open a Plus 15 SM Participation Guarantee Transamerica s Plus 15 SM participation program endeavors to increase plan participation by 15% by the end of the first full quarter after plan entry date or first-quarter administrative fees will be waived.* In order to educate employees and boost enrollment, Transamerica uses a host of educational materials including enrollment seminars and account management tools for participants. In order to participate, the plan sponsors can add a safe harbor provision, or can choose a minimum of four key recommended drivers of participation, such as adding target retirement or asset allocation investment choices to their plan. *Plan sponsors must meet all eligibility rules to participate in Plus 15. SM Plan participation is defined as the number of employees actively contributing and/or receiving employer safe harbor contributions under Internal Revenue Code section 401(k)(12). Plus 15 SM participation is assessed in comparison with the status of the plan participation data of the current plan immediately prior to transitioning to Transamerica. The Plus 15 SM Participation Guarantee applies only to new takeover plans approved by Transamerica Retirement Services and is subject to change and termination at any time. wealth management practice to handle the individuals who are exiting a plan. Our first priority, of course, is the plan itself, and if more and more plan sponsors are looking for us to do this, then we will. The fact is, participants really need help when it comes to approaching their retirement much of the progress we have made in the defined contribution industry is limited to participation and accumulation. Individuals have absolutely no idea what these often large account balances mean in terms of monthly income at retirement. Shute: The data certainly would seem to indicate that the need for participant education is, if anything, growing. Recent studies show that, despite our best efforts, many Americans still lack confidence in their ability to retire comfortably. For instance, 45% of Americans are less confident than they were 12 months ago, while only 14% are more confident. Also, the recent market volatility has raised concerns about early withdrawals. Just a year ago September, surveys showed that 18% of workers were taking loans from their retirement up significantly from the previous year and less than a third use professional advisers. Startling, when you think about it. There is still a vast challenge to be met in education. I would add that it is important the provider, adviser, and plan sponsor work together over the long-term to educate participants. It s not a one-time event it s a year-after-year commitment. David Shute, Vice President and Director of Marketing Transamerica Retirement Services 5. Reprinted from PLANSPONSOR November 2008

6 PS: The market has been profoundly volatile of late. When you look at your participants, Chad, are they reacting emotionally? Larsen: This is a key test. Most participants can withstand two to three negative quarterly statements, but then the questions really begin. What I like to see are questions where people are looking for reinforcement: Is this really a buying opportunity? If those are the questions you are getting, then you ve successfully educated participants, and they understand the long-term nature of their retirement plan. While there are exceptions, we haven t seen a lot of panic in our plans there is no rush from equities, for example. I d like to think some of that is due to good education, but some of it also will be due to the greater investment in target-date funds, which should be holding up better in these markets. However, even those participants Transamerica Award-Winning Enrollment and Educational Tools Transamerica Retirement Services has been rated a first-quartile provider in participant services in the PLANSPONSOR Defined Contribution (DC) Survey for four consecutive years. Educational Tools Transamerica provides a number of employee communication materials designed to help clients create awareness, generate interest, and improve employees financial literacy. Enrollment Kit Provides a simple, five-step enrollment process that includes a risk-tolerance questionnaire, savings tables, and sample asset allocations. e-tips Customized, high-impact multimedia presentations that help educate employees on the benefits of retirement planning delivered to emplo yees via or client intranet site. Educational Brochures and Flyers Introduces concepts such as market volatility and investment basics to participants and nonparticipants. Web Calculators Intuitive online planning tools that help participants determine their retirement goals and find out if they are setting aside enough money for retirement. Investment Guidance through Advice Solutions SM Online, interactive portfolio optimizer that provides beginning, intermediate, and advanced investors with customized investment recommendations and strategies at no extra cost to participants. Personalized Retirement Planning Assessment Offers suggestions and Transamerica Retirement Services ( Transamerica ), a marketing unit of Transamerica Financial Life Insurance Company ( TFLIC ), 4 Manhattanville Road, Purchase, New York 10577, and Transamerica Life Insurance Company ( TLIC ), 4333 Edgewood Road NE, Cedar Rapids, Iowa 52499, and other TFLIC and TLIC affiliates, specializes in the promotion of retirement plan products and services. TFLIC is not authorized and does not do business in the following jurisdictions: Guam, Puerto Rico, and the U.S. Virgin Islands. TLIC is not authorized in New York and does not do business in New York. Chad Larson offers securities through NRP Financial, Inc., member FINRA/SIPC, and advisory services by NRP Advisors, Inc. in target-date funds, and perhaps especially those that were defaulted into target-date funds, are going to exit those funds if they see negative returns too often on their quarterly statements unless they understand why they are in those funds in the first place. Nybo: The financial adviser is the real keystone here. They re the ones holding it all together for the participants. They re in the trenches every day with the sponsors, keeping the participants on track and building confidence for their successful retirement, but that s not the end of the story. A participant needs the appropriate education and financial literacy on the way to retirement and through retirement. It s tough work, but you know that, at some point in the future maybe way in the future those participants are going to say to themselves, Gee, I m glad I stuck with it. customized retirement information to help motivate participants and non-participants to target retirement savings goals. Participant Web Site Provides participants with account management, personalized investment choice information, and powerful planning calculators 24/7. Workshops and Seminars Comprehensive enrollment Made Simple workshops are available online, on site, via DVD/video, or conference call. Participant Newsletter Worth A Look is published quarterly and provides quarterly education on the markets, economy, and investing. Eddy Award (Awarded by Pension & Investments Magazine) Transamerica Retirement Services redesigned enrollment kit received a first place Eddy Award from Pensions & Investments magazine (Issue date: March 17, 2008) for participant education in the Initial Education Generic category. Award-Winning Communications Transamerica Retirement Services communication materials have received awards from various organizations, including the Awards for Publications Excellence (APEX) in ; Communicator Awards ; DALBAR, Inc., in ; Hermes Creative Award in 2007 and 2008; and the Insurance and Financial Communicators Association (IFCA) in Asset International, Inc. All Rights Reserved. No reproduction or redistribution without prior authorization. For information, call (203) or reprints@ plansponsor.com. 6. Reprinted from PLANSPONSOR November 2008