5 Reasons You Need an Education Policy Statement


An article was recently written for Planadviser.com that seem to give a number of reasons that education policy statements are not catching on or shown by professionals in the qualified plans arena. Many valid concerns were voiced, but the article seemed to miss a counterpoint illustrating why it makes sense to have education guidelines (or an education policy statement). Here is a quick list of 5 reasons why this strategy is more appropriate than the article may suggest:

Fail to plan; plan to fail. This is the time of year that the retirement plan industry is in a frenzy trying to convert prospects to clients for the coming year. A culmination of closing sales funnels; this is the time of finalist presentations. Having been a part of hundreds of these presentations, I frequently heard, “We will increase participation/deferral rate”. And I always wondered, “And how exactly do you plan to drive that increase?” Without a plan for educating participants on how the plan works, why it makes sense, or other financial literacy topics, how can you realistically expect to drive those results? Or how can you demonstrate that any increase was a result of your work (reasonableness of fees?) instead of some outside factor. Doctors have plans for treatment to drive outcomes. Accountants have strategies for lowering tax liability. Teachers have plans for educating their students. Builders have blueprints. Why would you not have a plan in place for organizing education?

3:1 ROI. In the article, one of the quotes addressed presenting the business case for financial education. The individual correctly said that you would have to show an ROI that made business sense. Interestingly enough, I have sold cases using this strategy. Dr. E. Thomas Garman has done several studies on financial education and the benefits that it has to the employer. His studies found an ROI of 3:1 for financial education. He further found that the benefit to the employer was about $2,000 per employee per year. Included in that number is savings of employer paid health care costs of about $450/employee/year and increased productivity of about $350/employee/year. I have sold cases simply by passing the CFO a calculator and having him run the simple math of $2,000 x number of employees, then asking if he wanted to learn about how we could provide increase output and decreased employer costs with a target of those numbers. Guess how many told me no? None that I can recall. Because employers hate increases that come with health care renewals. And they want efficiency to maintain/improve margins. In fact, the Kansas City Fed issued a piece several years ago that had similar finds about financial education. They found increased participation, decreased use of loans, among other benefits. The business case exists.

Real Retirement Readiness. The industry is all abuzz over retirement readiness. Providers tout improvements like increasing replacement income percentages, increasing account balances, minimizing leakage, etc. The financial services industry focuses on getting participants to retirement with a pot of money that should be able to last them through retirement. That makes sense. But a quick look at lottery winners and former professional athletes reveal how short sighted that approach is. A look at those two demographics finds a staggering rate of bankruptcy. Why? Because it turns out that when you turn people loose with more money than they have ever had but no additional education on how to make it work or last, they blow through it. The GAO has most recently explored the topic here. This trend is not surprising as financial education is not widely taught in school. Very few states require that a personal finance class be offered as part of a high school curriculum-let alone be required. Let’s try an analogy: the current system is working to give keys to a Ferrari to a kid who hasn’t had driver’s education yet. He’s not even ready for keys to a Toyota Camry. I ask wouldn’t our energy be better spent making safer drivers?

Redefine Value in the Face of Auto-Everything or Face Obsolescence. As technology continues its march forward, the traditional value proposition of a financial adviser specializing in qualified plans is changing. If his value is “picking funds”, why couldn’t a plan simply purchase the fi360 software for less than it pays its adviser? If participants are automatically enrolled, or automatically escalated, or only have target date funds as a choice, what does the adviser do? It makes me think of a scene from Office Space about serving as an intermediary between customers and engineers. All of these developments have a profound impact on the traditional value proposition. In short, we are seeing a commoditization of the services provided by an adviser. Now, the Department of Labor is looking at making everyone a fiduciary (oversimplification, I know; but we all know where it is headed). There is another reason that an adviser is not as unique as he once was. And the market movements of late have another reason to redefine the adviser’s value proposition. If the markets are going to move regardless of how well you can pick funds/investments, why wouldn’t you disconnect yourself from an aspect over which you have no control?

Be on the Cutting Edge. One part of the article made me chuckle. “When’s the last time you heard a DOL auditor asking to see the education policy statement?” There was some concern in the article that an education guideline or policy statement has been around and hasn’t been embraced. True. It isn’t a new concept. But until recently, the technology has not been available to help make it as efficient or flexible as the market would like. Digital photography was around for decades before technological advances finally made it a viable alternative, and we all know how that worked out for Kodak (who owned the rights, failed to pivot, missed the opportunity, and went bankrupt). Let’s also think about how long the Investment Policy Statement was around before it was broadly requested by the DOL during an audit. Final thought on this: millennials are changing the way markets work. Continuing to sell to them the way that you sold/engaged boomers seems to be a recipe for disaster. Studies continue to show that they embrace planning more than boomers do and that they want to understand why a solution works. Some firms are starting to tailor their marketing around this fact.

As I said at the start, there are some legitimate concerns expressed in the article. But there is another side to the argument.