TALLAHASSEE, Fla. - Executives at Financial Engines and Ernst & Young were so sure Florida's new defined contribution plan would be a big payday for them that they put their fees at risk.
Now, it appears they won't make as much money as they expected.
That's because their fees are based on how much employees learn - and retain - about investing. And so far, results of a survey show, they don't know much.
The education campaign costs Florida about two basis points. Ernst & Young LLC, New York, provides workshops and telephone assistance; Financial Engines, Palo Alto, Calif., online education and the paper copies of the education.
But the fees aren't the only expectations that won't be met. Originally, state officials had expected the new defined contribution plan would attract more than $13 billion; now, they've scaled that back to $4.58 billion.
Florida employees may remain in the state's $88.5 billion defined benefit plan, join the new defined contribution plan, or move to a hybrid option that combines both plans. So far, most are choosing to stay with the defined benefit plan.
Eligible employees are divided into two groups for the transition, based on when they were hired. Group one has until Aug. 31 to decide; group two has until Nov. 30. As of Aug. 9, 25,301 people out of the 158,839 in the first group had chosen the defined benefit plan; 3,406 people had opted for the defined contribution plan; and 58 people choose the hybrid plan. Of the 285,667 people in the second group, 10,994 already have opted for the defined benefit plan; 798 picked the defined contribution plan; and 12 chose the hybrid plan.
State employees in Florida are woefully uneducated about investing, based on results of an ongoing survey commissioned by the State Board of Administration, Tallahassee, which administers the retirement plans.
* While 90% say they are very knowledgeable about investing, 94% of the total aren't sure what a money market fund is.
* Some 38% say their ability to "beat the market" is important in choosing among the defined benefit, defined contribution and hybrid plans.
* Most do not closely manage their investments, with only 15% making more than five trades a year.
* More than half (57%) cite recent market performance as an important factor in deciding among the three types of plans.
* Some 68% do not know or would not answer what average rate of return a defined contribution participant should expect.
* Only 32% strongly agreed with the statement that the information provided to them is "easy to understand."
The focus of the education campaign has been on the choice, said Jeff Maggioncalda, president and chief executive officer of Financial Engines.
"Employees are given a side-by-side comparison of how much income they would have if they stayed in the defined benefit plan rather than switch to the defined contribution plan," Mr. Maggioncalda said. Employees also are shown the range of possibilities if they switch and the default values, he said.
"How our education is different is the concept of measuring knowledge transfer, not just after workshops, but ongoing," said Jim Francis, chief economist with the State Board of Administration.
Measure the changes
Kevin SigRist, Florida's chief of defined contribution programs, said that in three years, Florida officials will measure the changes in comprehension of employees. If comprehension has gone up, the vendors will get an incentive payment.
If comprehension declines, there would be a credit back to the plan. In addition, consumer satisfaction - whether employees use the resources and how useful they found them - will be figured into the compensation equation.
Meanwhile, officials are not surprised that Florida's state workers so far are choosing the defined benefit plan. Those who responded so far mainly are older employees, for whom the choice was a "no thinker," Mr. Francis said
Current events play a role as well. Some 59% of those deciding said the economy influenced their decision, 45% cited the Sept. 11 terrorist attacks and 53% stated that the Enron Corp. bankruptcy affected their decision.
"People are very concerned with recent performance of the stock market and they believe that the recent performance of the stock market is very important to their defined contribution decision," Mr. SigRist said.
"People are scared by the stock market and don't want to take on additional risk ... and want to sit tight in the defined benefit plan."