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Fiduciary Adviser a Holistic Solution ISCEBS Employee Benefit Symposium 2007 Don Atherton, CEBS, CFP® President, Integrated Benefits Solutions, Inc. (713) 706-3600 [email protected] E. Thomas Garman President, Personal Finance Employee Education Foundation (352) 347-1345 [email protected]

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Page 1: Fiduciary-Adviser-a-Holistic-Solution.ppt

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]

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Discussion Overview

• Today’s retirement savings realities

• Workplace financial literacy• How financial literacy and advice

programs can increase ROI• PPA fiduciary advisory models

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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

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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

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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

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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

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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%)

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Factors Correlated as Expected

Personal Financial:

Financial well-being

Financial satisfaction

Financial distress

Financial stressor events

Job Outcomes:Work satisfaction

Pay satisfaction

Absenteeism

Presenteeism

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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

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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

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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

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“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

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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?”

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“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”

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Time Lost At Work*(Average Number of Days)

* Note: Time spent not working for any reason

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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

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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

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Main Personal Financial Activities Done During Work Hours

Percent W

ho Engaged in This B

ehavior

Changes over the Past 18 Months.

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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!”

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What Does NOT Decrease Financial Distress?

• Salary increases• Bonuses• Attending 401(k) retirement

planning seminars and workshops• Pastoral counseling• Employee Assistance Programs

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Attainable Results

Lower financial distress Increased financial well-being Better health Adequate retirement preparation Improved family relationships Gains in job performance

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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

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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

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Recommended ActionsFinancial Literacy

1. Implement financial education program which emphasizes the basics of personal finance

2. Provide easy access to non-profit credit counseling

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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

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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%

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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

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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

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Types of Fiduciary Adviser

Conflicted• Typically Product provider• Varied compensation• Computer model adviceUn-Conflicted• Typically Independent Adviser• Level compensation• Personalized advice

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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

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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

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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

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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

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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

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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!”

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“The lack of financial literacy–spending plans, credit management, and

savings—is the major reason why employees

do not save for retirement”

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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

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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

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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.

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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.”

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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)

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Information/FootnotesDon Atherton, MBA, CEBS, CFP®, CLU, AIF®

Integrated Benefits Solutions, Inc.650 North Sam Houston Parkway East, Suite 553Houston, Texas [email protected]

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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.

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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.