ERISA Worki ERISA Worki ERISA Worki ERISA Worki ERISA Working Group on Fi ng Group on Fi ng Group on Fi ng Group on Fi ng Group on Financi nanci nanci nanci nancia a a a al l l l l Li Li Li Li Lit t t t te e e e eracy and t racy and t racy and t racy and t racy and th h h h he Rol e Rol e Rol e Rol e Role e e e e of of of of of t t t t th h h h he Empl e Empl e Empl e Empl e Employer oyer oyer oyer oyer • • Most em The fact that over a third of new retirees depend ployers want most workers to retire at “norm entirely al” retirem on Social Security, and ent age so they Inherent w Are programs in place now ithin “advice” provided to participants is the specter of adequate for sound decision making? do not have a strong incentive to do the above for m two-thirds get a majority of their income from Social Security, provides clear ost of their workers at this fiduciary responsibility. Can “education” be provided without There are programs and tools available today that would provide the basis for sound It is a pleasure to meet with you today to discuss the important topic of worker financial late point in their careers. evidence of these patterns. fiduciary responsibility and still deliver effective information for decision-making. But the reality is that most plan sponsors do not provide them, many literacy and the role of the employer. You have appropriately set out a scope that goes • That is why we need to find ways to make it happen early. The most preferred ERISA Advisory Council financial planners do not provide them retirement decision-making regarding finances and health care? , and even when they are made available most beyond issues of retirement and the plan participant, since many workers may be with an way to deliver all of this is with one-on-one financial planning sessions by truly individuals do not take advantage of them . employer for some time before either participating in a plan or paying attention to their independent advisors. Should the plan sponsor receive any incentives to provide this • DOL guidance would suggest that the answer to this question is yes, as would participation. ® education? We have sponsored the EBRI Retirem PPA (and, I will assume, the eventual DOL guidance to be issued on PPA). ent Confidence Survey (RCS) for 17 years. We have always asked questions about what employers provide (a great deal), what • PPA would suggest that this is particularly true if a computer model can provide • I assume that by “incentives” you mean m ore than the ability to deduct the cost as Several decades ago a number of corporations joined together to create the National In addition to management of retirement savings, what are the three employees actually use (not much), and whether use has led to self-reported changes in the “advice.” EBRI research suggests that a comprehensive Monte Carlo model a business expense and possibly assist in meeting ERISA requirements. No, I do Council on Economic Education ( www.ncee.net ) to build courses and materials to aid in Working Group on main financial issues facing retirees? behavior (for a small number). Other research has taken the step of testing for results, that includes a calculation of annuity optimization can accomplish this goal for not believe direct incentives would be useful or substantially increase worker student financial literacy education, based on the premise that their future employees with follow-up on whether individuals actually do what they say they will do in response purposes of finances: The model output can be deemed to be the advice. Ideally, needed financial knowledge. That group and m take-up rates. As described above, the prim any others which focus on our youth ary problem is worker behavior (or • Based upon both RCS and U.S. Census Bureau data, one would have to say that Financial Literacy and the Role of the Employer to education; results have shown that a small fraction actually implement their intentions. a third party would assist the individual in understanding the output. (such as lack thereof), not em m www.jum anagement of retirem pstartcoalition.org ployer behavior. ent savings is not the prim ) depend for their financial support on large ary issue faced by most retirees, Much of the impetus for changes in PPA was attributed to such research. • Reports and tools and models now available can provide most if not all of what an retirem • ent plan sponsors and service firm W since m orkers m ost have very lim ight be offered a cash paym ited retirem s, as well as on financial institutions. ent savings. ent or an extra contribution as is individual would need to determine whether or not they should actually retire, increasingly being done in the health plan area to get workers to engage in • First, living on a limited fixed income (that is an “inadequate” fraction of pre- Why or w relative to finances and health care, short of selection of the final policy or hy not? The U.S. Labor Departm wellness and prevention behavior. ent joined with EBRI and many other public and private retirement disposable income for most retirees), for more years than most planned provider. Whether or not the individual (or an advisor for that matter) would organizations in 1995 to launch the American Savings Education Council • to live. Thus, the inability to cover basic living expenses during their rem I personally believe that all plan sponsors have stronger long-term incentives than aining • The tools that provide for full Monte Carlo analysis of life expectancy, inflation, choose to implement all that the model suggested is another question, including (www.asec.org). This organization brings together many individuals and organizations m lifetim any realize or act upon: es is the single biggest issue. wage growth, investment returns by class, and annuity optim September 19, 2007 ization have only what percentage probability of success the individual is willing to accept. with a dedication to encourage financial education, retirement plan sponsorship, and o The incentive to have workers who have full financial literacy so that they • Second, paying for medical expenses that are no longer covered by work-based recently become available. Washington, D.C. • Education cannot always tell the individual enough to know from whom they participant and beneficiary education for the entire population, regardless of age, are more likely to remain in good financial health, which has been shown benefit programs and are only partially covered by Medicare. A companion to • Most financial planners are still using partial programs, and many still use static should purchase a retirement product. employment status, etc., but with a heavy focus on plan sponsors and their workers. The to improve job performance, attitude, etc. this increasingly will be the payment of Medicare premiums, which will rise programs that do not even allow adjustment for long lives. ® Choose to Save • Available evidence suggests that m program of educational public service announcem ost individuals are willing to accept an average ents, videos, Internet o The incentive to have retirees have lifetime supplementation of Social faster than annual Social Security benefit increases. • Most individuals wait until ages at which it is often too late to make sufficient site, and m (50 percent) probability of success, based upon behavior, but they m aterials was created as a direct result of the efforts of DOL, with ay not know Security so that they have the capacity to consume, and therefore assist the • Third, avoiding debt and loss of income and assets through fraud. spending and saving course adjustments before they become willing to allocate Submission of Dallas L. Salisbury encouragem that is what they are doing. ent from this Advisory Council. economy, as long as they live, which is in the interest of all plan sponsors. time to financial planning. The RCS consistently finds that less than half report www.ebri.org and www.choosetosave.org Data show that, as retirees age, the proportion of their income that comes What potential disruptions to retirement income stability exist for ever having made even a guess at what would be needed in retirement, and fewer T-149 from Social Security continues on a steady climb until death because the retirees? than 1 in 4 reports ever having done a serious calculation. Less than half of those individual has not chosen to put savings into an inflation-indexed life Should the prohibited transaction exemption (PTE) provided for Does the plan sponsor have any responsibility for educating participants report taking action, and research suggests that over half of these did not actually income annuity. • This question could be answered with multiple dissertations. I will limit my list about their decisions at retirement? investment advice contained within PPA be expanded to allow other take the action. Dallas L. Salisbury to just the personal experiences of my own retired family members: forms of financial advice, e.g. insurance, health care choices? If so, • Organizations and individuals are driven by the short term President and CEO —whether it be profit ERISA Sec. 404c, and implementing regulations, would seem to suggest that employers o Unexpected years of life. what safeguards w cycles, pay periods, or credit card paym ould you recommend for satisfactory regulatory Employee Benefit Research Institute ent cycles, the short term dominates over that want to treat plans as being self-directed must provide substantial financial o Unexpected health expenses. What specific message should participants receive at retirement? What intermediate- or long-term planning. oversight of such expanded PTE? education. Since most sponsors make the declaration of being 404c compliant, they seem o Lower interest rates than anticipated on savings. are the preferred w ays to deliver the message? • When it comes to employee benefits, this has shown up consistently in the EBRI to answer your first question themselves: Yes, the plan sponsor does have a o Lower equity returns or larger equity losses than anticipated. ® • Until all of the final regulations and interpretations are out, I will leave this to Value of Benefits Survey. More than 80 percent of workers say health insurance responsibility to educate participants about their decisions at retirement—and, I would • It should be at the time workers say they are planning to retire?or before if the o Higher home maintenance expenses than anticipated. those more technical than I. is their top benefits priority; over one-third say more health insurance is their add, during all of their years of participation. Those who do not suggest they are 404c employer can get their attention?and it should be two questions: o Selling property ahead of high periods of appreciation in value. second priority; one-third say a savings plan is their second priority; and less than compliant might well benefit from doing so, but would not appear to have the same o First, do you understand how long you may actually live? Most will say o Selling property after unanticipated decline in value. Thank you for the opportunity to appear today. All of our work since 1978 can be found 15 percent rank a pension plan as either first or second. Individuals focus on their ERISA responsibility. no. Follow with an exercise with a life expectancy calculator. o Greater support needs by children and other family members than ® on our Websites, and I encourage you?and everyone?to make use of it. current needs. The EBRI Health Confidence Survey finds that nearly two-thirds o Second, have you clearly set out what all of your expenses and income anticipated. report increases in their annual health costs, and over three-fifths of this group say The Pension Protection Act of 2006 would seem directly relevant to the work of this o will be for the rest of your life and satisfied yourself that you can actually Inability of children to assist financially with unexpected expenses. ### they covered the increase by either reducing savings or borrowing on a credit card group. Testimony which encouraged its enactment by plan sponsors, and others, afford to retire? Most will say no, they have never had any kind of o Higher interest rates than anticipated on home equity line of credit and no or against their home. contended that employers were not doing as much participant financial education as was budget. Why should they start now? Follow with an exercise that works assets to pay off the line of credit without selling the property (at a point • For a substantial proportion of workers, EBRI surveys indicate that these needed, and when provided, it did not seem to be leading to desired behaviors. Many them through expenses and incom e and assets and liabilities and then feed 15 years later than you thought you would be dead, but many years before pressures and preferences are still in place as they reach “normal” retirement ages. behavioral finance researchers urged the explicit legislative approval of automatic it all into a Monte Carlo comprehensive model so that they will see you may still actually die?“At 91 you begin to think you might never This underlines why they would not take advantage of financial planning features in plans that sponsors had been reluctant to adopt based only upon agency exactly how much risk they are taking on and how well off or how far die”). programs when available. guidance. PPA accomplished that goal, and even added provisions to allow auto- Any and all views expressed are short they are. those of Mr. Salisbury alone, enrollment, auto default and reallocation, and auto contribution escalation. since he alone wrote and reviewed this submission. Dal Dal Dal Dal Dall l l l la a a a as s s s s Sal Sal Sal Sal Sali i i i is s s s sb b b b bu u u u ur r r r ry, EBR y, EBR y, EBR y, EBR y, EBRI/ I/ I/ I/ I/AS AS AS AS ASE E E E EC C C C C Sept Sept Sept Sept Sept. 17, 2007 . 17, 2007 . 17, 2007 . 17, 2007 . 17, 2007 5 4 3 2 6