Effective Retirement Plan Communications

My blog post entitled "Simplifying Retirement Planning Communications" resonated with readers. It's no surprise that there are still discussions about how best to improve the information provided to participants. Given the amount of litigation alleging lack of transparency, sponsors are wise to offer understandable documents that can be used by employees and retirees to make financial decisions. According to "Improved Retirement Plan Communication Can Boost Confidence" (Plan Sponsor, December 15, 2016), it's not just content but the delivery format as well. Companies are adding more retirement readiness tools to their websites, even if participants are sometimes slow to take advantage.

Financial literacy is another issue that challenges employers and participants alike. Even when adequate information is available, the recipient may be unable to digest product descriptions or performance reports. In his write-up entitled "401(k) Communication Challenges," Dr. Richard Glass bemoans the low rate of financial literacy and its negative impact on saving. His take is that defined contribution plan sponsors "have not recognized that the participants' sense of distrust and their lack of knowledge can easily create a mindset that is conducive to inaction." He uses target date fund disclosures to exemplify his view that more should be done to put participants at ease and thereby motivate them to better prepare for life after work. His suggestions include the following:

  • Don't sugar coat the issue of risk but instead make it known that no product is free of uncertainty;
  • Emphasize that calculations are based on assumptions;
  • Hold "educational sessions that explain to participants why arriving at the assumptions involves a lot of crystal ball gazing and why, in spite of that fact, assumptions still have to be made" for purposes of forecasting; and
  • Supply "gap analyses that show participants how many years they can expect to receive their targeted inflation-adjusted incomes at their current contribution rates."

I agree that strengthening financial literacy is essential although I am not particularly sanguine about getting everyone quickly up to speed on concepts such as diversification and risk measurement. That's not to say that employers should look the other way. To the contrary, they should act even though some organizations will have to do more work then others. As I explain in another blog post, grade 12 proficiency in reading and math is abysmally low in the United States. Anyone who gets hired with a poor grasp of such basics may struggle with learning even elementary investing ideas. See "Employers Worry About Skills Gap That Impacts Bottom Line" (January 7, 2017).

Despite the fact that companies spent nearly $71 billion in 2015 on training, chances are those expenses will increase. Realistically, shareholders and taxpayers may have little choice but to foot the bill for further education of anyone not yet able to understand what it means to save now for later on. The Aegon Retirement Readiness Survey 2016 finds that "[A]round the world, many workers are heavily reliant on government benefits and are not saving enough to adequately fund their retirement income needs." Obviously there is no time like the present to prioritize thrift and prudent investing.

Chief Retirement Officer Redux

Skittishness about an individual's financial ability to retire is one factor that I believe underlies continued ERISA litigation activity. As I suggested to Wall Street Journal reporter Anne Tergeson, "'There has been quite a focus on the retirement crisis which has created significant nervousness about this gigantic pool of' 401(k) money and whether it is being managed properly." See "Lawsuit Alleges Anthem 401(k) Plan Exposed Participants to Higher Fees," January 8, 2016. (As an aside, I am not involved in this litigation and did not comment on this case for the article.)

Perhaps these same jitters about retirement readiness explain why some might consider the installation of a Chief Retirement Officer. Senior ERISA attorney Stephen D. Rosenberg writes that this idea is "so simple...and so brilliant..." in his commentary entitled "What Can a Chief Retirement Officer Do for You?" (December 9, 2015). In my piece about the same topic, I countered that hiring this kind of C-level executive may still prevent ERISA puzzle pieces from snapping easily into place. In "Chief Retirement Officer and a Seat at the Table," I cite the challenges of finding someone knowledgeable enough to navigate complex issues that transcend law, corporate finance, human capital enhancement, governance and investment management. I further question whether a Chief Retirement Officer would help or hinder the work of a Chief Risk Officer if one exists.

Stirring the pot further, Dr. Richard Glass, president of Investment Horizons, shared with me his view that a Chief Collaboration Officer may be a smarter move. Such a person would have a "primary duty" "to break down corporate and consulting silos." His view is that "These silos prevent the successful implementation of talent management (including engagement efforts) and business strategies and thus the level of profitability." Coincidentally, I spent nearly an hour on the phone today in a lively discussion about how to adjust enterprise value to reflect defined benefit plan underfunding. Earnings, share price and overall corporate worth is impacted by ERISA plan economics.

A "silo mentality," as defined by BusinessDictionary.com, is "A mind-set present in some companies when certain departments or sectors do not wish to share information with others in the same company. This type of mentality will reduce the efficiency of the overall operation, reduce morale, and may contribute to the demise of a productive company culture." A reasonable person could quickly conclude that a failure to communicate across functions is fraught with problems. Using case studies and her knowledge of anthropology, prominent Financial Times editor Dr. Gillian Tett makes the case for getting rid of organizational walls in her 2015 book entitled The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers.

Fortunately, there is a solution as long as corporate management has the will to create a unifying vision and motivate management teams to work towards common goals. Forbes contributor and management consultant Brent Gleeson adds that people must be properly incentivized and that goals must be measurable. Read "The Silo Mentality: How to Break Down The Barriers" (October 2, 2013) for more of his insights.

Applied to ERISA plans, the temptation to hoard information is ill-advised. If true that corporate power grabs exist and impede the ability for investment fiduciaries to carry out their duties, a Chief Retirement Officer might not have the clout to coalesce competing interests. Unlike a Chief Risk Officer who reports to a corporate board to ensure her authority and independence, a Chief Retirement Officer would likely wear the hat of fiduciary and have to put participants' interests ahead of those of shareholders. (The plot thickens when plan participants are contemporaneously shareholders by virtue of investing in company stock as part of a 401(k) line-up.) I defer to ERISA attorneys to address the separation of fiduciary "church and state" but could see someone crying foul if a Chief Retirement Officer communicates too often with company directors. Interested readers can download "Pension risk, governance and CFO liability" by Dr. Susan Mangiero for comments about two-hat conflicts. (Note that my work affiliation is Fiduciary Leadership, LLC.)

One step in the right direction towards effective pension governance is to appoint fiduciaries who have different backgrounds and can therefore facilitate a thorough discussion of various and important topics around the unifying theme of duty and care. Other ingredients of a well-baked set-up include having sensible metrics in place to assess whether fiduciaries are doing a good job. Rewarding them when they step around silos to make better decisions is likewise needed.

Whether a Chief Retirement Officer can assist here is unclear. Surely more discussions about this role make sense.