Spring 2011

Participant Fees: Meeting the Communications Challenge Head On
Provided by the Employees Retirement System of Texas

Each year, Employees Retirement System of Texas (ERS) undertakes a communications challenge that isn’t very glamorous but is vitally important to participant education: fee disclosure. Timely and effective fee disclosure is so important that it is highlighted in the Plan communication strategy.
 
The primary tool in this annual effort is the Understanding Fees flier mailed to every Texa$aver 401(k)/457 Program participant with their fourth quarter statements. This method of delivery is vital to reaching a broader audience than if it was just posted on the website. Even though the Texa$aver Program isn’t subject to ERISA regulations, ERS chooses to follow the ERISA guidelines for fee disclosure to ensure fees are communicated as clearly as possible. Because fees can be a challenging topic for participants, the flier clearly discloses the following in an easy-to-understand format:
 
  • How much participants pay in fees – For administrative fees, participants can see what they pay on a monthly and annual basis. 
  • The different types of fees – The flier covers the full range of fees a participant may see on his or her statement, including fees for plan administration, optional services (such as managed account participation and loans), and investment-management.

To complement and reinforce the information in the flier, we also offer the following web tools:

·         Fee Calculator: This interactive online calculator helps participants see the amount and types of fees deducted from their accounts on a monthly basis.
·         News Bulletin: Located on the login home page, the news bulletin echoes the information provided in the hard-copy flier and encourages participants to use the fee calculator after they log in.
·         Fee Frequently Asked Questions (FAQ): The FAQ addresses the most commonly asked participant questions on fees and provides a detailed breakdown of the Program’s fee structure.
Fees are often an overlooked topic, but they have a direct effect on participant account balances and future retirement income. ERS believes that it’s important to remind participants each year about the impact of fees and to highlight how the Texa$aver Program’s fees are highly competitive with the other options available to them in the commercial market.
Informed participants make smarter decisions. The better our participants understand the Texa$aver Program’s fee structure and what they get in return for those fees, the more likely they are to make the Program an important part of their long-term financial plan.
 
A Process for Planning Retirement Income in the Mid-Market
In focus groups of retiree spending and investing jointly sponsored by the Society of Actuaries and LIMRA,[1] the participating retirees described what is, in essence, a five-step approach to determining how much money is needed to maintain a retirement lifestyle. We can think of this as the “laymen’s approach” to retirement spending. Their informal five-step approach is:
1.       Calculate average monthly expenses
2.       Add up any lifetime monthly income sources (such as Social Security and defined benefit income)
3.       Subtract the monthly income from the monthly expenses to determine any gap that needs to be filled
4.       Add up any financial assets (savings accounts, retirement plans, etc.) and multiply that total by roughly a 6% expected return, and then divide that result by 12 to determine a monthly investment income stream
5.       If the expected income stream fills the gap, the retiree can afford to retire.
 
While there is a certain amount of logic to following an approach like this, there are clearly also potential problems that non-professionals would not be expected to foresee. Accordingly, in 2003 the Insured Retirement Institute (IRI) and International Foundation for Retirement Education (InFRE) worked in conjunction with the InFRE® Retirement Resource Center to develop a professional retirement income management process geared toward servicing middle-market Americans that is both broader in scope and deeper in understanding than the “do-it-yourself” approach identified in the retiree spending study, because this population segment is most at risk of running out of money during retirement. Our purpose in this article is to provide you with an overview of our approach to managing retirement income on a professional basis.

[1] Society of Actuaries and LIMRA International, Spending and Investing in Retirement: Is There a Strategy? 2006.