Plan sponsor groups take aim at financial literacy proposal

Financial education is not for everyone. That's the best way to sum up the reaction of plan sponsor groups and record keepers to a proposal aimed at tackling the issue of financial illiteracy among retirement plan participants.

"I always liked the idea of people knowing more about finances, but the question is how do you get them to do that?" said Diann Howland, vice president for legislative affairs at the American Benefits Council in Washington.

The proposal — written by researchers at the University of Pennsylvania Law School and George Washington University and posted on the SSRN academic website in May — recommends employers sponsoring retirement plans be required to offer financial education to their employees. In it, the authors urge the Department of Labor to play a central role by mandating workplace financial education programs and issuing a set of minimum program requirements.

The proposal is not intended to be just another "academic exercise," said co-author Annamaria Lusardi, the endowed chair of economics and accountancy at George Washington University School of Business and founder and academic director of the school's Global Financial Literacy Center in Washington.

"We want to make sure that it is indeed translated in practice," she said.

The 54-page paper outlines the challenges facing individuals it identifies as workplace-only investors, those whose only experience with investing is through their employer-provided retirement plans. Using data from the 2015 National Financial Capability Study, the authors found workplace-only investors have strikingly low levels of financial literacy, much lower than investors with experience making investment decisions outside of their retirement plans. Only 26%, for example, knew about basic bond pricing compared with 41% of active investors, the study said.

The researchers also found the percentage of workplace-only investors is not insignificant. Of the 8,784 investors surveyed, 28% were workplace-only.

"The level of financial literacy today is too low to confront all of the complex financial decisions that we all face, and in finance, ignorance is not bliss," Ms. Lusardi said.

While the authors acknowledge many employers already offer some form of financial education, they contend such programs vary substantially.

"There's a real mix in what employers do. It means that a number of employers offer substandard programs or do not provide any financial education at all," said co-author Jill E. Fisch, a professor of business law and co-director of the Institute of Law and Economics at the University of Pennsylvania Law School in Philadelphia.

Andrew Lehner, the Neenah, Wis.-based director of HR services at global electronic components manufacturer Plexus Corp., said that while he is not supportive of legislation that "puts specific requirements on employers offering defined contribution plans," he believes a mandate could inspire companies to change their approach to educating employees.

"I agree that workplace-only investors are very different from typical investors and require more focused content," Mr. Lehner said. The company provides one-on-one financial counseling sessions to its U.S. employees once annually and makes advisers available to them throughout the year via video or teleconference.

Critics of the proposal, however, argue financial illiteracy isn't limited to just investors in the workplace. Jack Towarnicky, the Columbus, Ohio-based executive director of the Plan Sponsor Council of America, criticized the proposal for taking a "shotgun approach" aimed at one target, where what is needed is something that reaches beyond employer-sponsored plans.

"The need for financial education is a much bigger issue than just this one little group of folks," Mr. Towarnicky said.

Chad Elliott, senior vice president of customer strategy and insights at Fidelity Investments in Boston, agreed. Both workplace and non-workplace customers, such as those with individual retirement accounts or brokerage accounts, have low financial literacy levels, Mr. Elliott said: "It's not a workplace-specific thing."

The authors countered that they also support mandatory financial education outside the workplace. They see their proposal supplementing — not replacing — calls for mandatory financial literacy courses at schools and universities. "We need to think also of employees out of school and college, not just young or future workers," Ms. Lusardi said.

Other skeptics noted the problem isn't access to financial education, but rather getting employees to use the programs that exist. Education programs, they claim, are widely available both within and outside the workplace, but the take-up on those programs is modest.

"There are populations that don't have the will or skill or interest in the topic and are less likely to take advantage of these types of programs when offered," Mr. Elliott said.

Mr. Elliott noted that almost all plan sponsors with which Fidelity works offer employees online and onsite workshops on financial topics, along with digital tools and access to licensed financial advisers free of charge to participants. Yet the use of the financial education services is not what Fidelity or its clients would like it to be. Less than half of employees engage in some form of financial education on an annual basis, with participation rates for employees fitting the profile of workplace-only investors dropping to as low as 30%, according to Mr. Elliott.

"I don't think mandating that everyone have access to an educational program would actually solve some of the pain points that they're pointing out for this population," Mr. Elliott said.

Others echoed that view. "I understand that they think education is a solution, but I'd like to see where it's been done and where it has succeeded and what that process looked like," Mr. Towarnicky said.

Many skeptics also pointed out remedies already are in place for the vulnerable population identified in the paper. Auto enrollment and auto escalation and other plan design features such as qualified default investment alternatives are helping less financially savvy participants in ways that education programs haven't been able to do, according to industry observers.

"The softer way, the gentler way to get people to save sometimes are these default mechanisms," said Ms. Howland of the ABC. Auto-design features have "turned out to be very powerful tools" in helping people learn about saving and good financial habits, she said.

Still, the authors insist that if participants are being automatically enrolled in retirement plans and defaulted into products such as target-date funds, they should at least have basic knowledge about their investments.

Ms. Lusardi is quick to remind critics that target-date funds are risky — even for those nearing retirement — as they are invested in the stock market. "The problem is that most people know little about these funds, the risk they carry, and the fees they charge as well. This is why it is useful to provide financial education so that people can make the most of their investments," she said.

Ms. Lusardi, Ms. Fisch and a third co-author — Andrea Hasler, an assistant research professor in financial literacy at the George Washington University School of Business — argued that to make workplace financial education effective, it needs to be mandated, even though the measure might seem extreme.

It would ensure that all employees, not only those working in big firms, would have access to financial education in the workplace, Ms. Lusardi said.

To be sure, mandating employer-provided financial education drew the loudest criticism among plan sponsor groups, with some noting that it would increase costs and have a chilling effect on the education programs now being provided.

"Once you put in a mandate, I think it scares people into doing only what the mandate entails," said Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington.

Ms. Howland shared that thinking. "As soon as you have the Labor Department requiring something, a lot of plan sponsors are going to be concerned about their liability and they'll only go up to that level," she said.

Ms. Howland said she views a mandate with caution because plan executives are always innovating and seeking ways to teach employees about a range of financial topics.

"We don't want to get stuck in a box where we only have one box and we have to do this one thing. We can't get out of the box because if we get out of the box, we're in trouble," Ms. Howland said.

Since the paper was posted online in May, the authors have focused on drawing attention to their work, which is slated to be published in the Cornell Law Review this year. As part of that effort, they are meeting with employers and plan an event at George Washington University in November to present their ideas and solicit feedback from industry stakeholders, Ms. Lusardi said.