- American debt and delinquencies are rising. Despite an apparently healthy economic picture, credit delinquencies in the U.S. are at their highest level in more than a decade, according to the New York Fed.
- Avoid providing specific advice. Effectively helping the workforce deal with economic stress includes steering clear of crossing the “fiduciary” line.
- Assess tools at your disposal. While small employers may more easily address specific employee financial management needs, larger employers typically rely on general means such as surveys as the basis for offering financial management education.
While the United States economy continues to be buoyed by overall positive news, new data recently released by the Federal Reserve Bank of New York showed household debt balances and payment delinquencies grew during the first quarter of 2024.
According to the report, the percentage of credit card balances in serious delinquency (90 days or more late) rose to its highest level since 2012 — revealing worsening financial distress among a portion of American workers.
Joelle Scally, regional economic principal within the Household and Public Policy Research Division at the New York Fed, added in a statement that, in Q1, credit card and auto loan transition rates categorized as “serious delinquency” continued to rise across all age groups.
With that economic environment as a backdrop, how can total rewards professionals offer resources to help employees who may be struggling with debt? And almost as importantly, how can those same total rewards pros achieve that objective without crossing the line of being classified as a fiduciary under an updated definition in the Department of Labor’s new final rule?
Speaking on the DOL rule change, Jon Karelitz, a partner at the Seyfarth law firm, explained the fiduciary clarification primarily affects retirement plan recordkeepers, trustees and IRA providers.
“While it’s true that the scope of a fiduciary who provides ‘investment advice’ is more expansive under the new rule, it’s unlikely that total rewards team members will cross the fiduciary threshold simply by directing plan participants to financial resources or explaining the available options under a retirement plan (e.g., the timing and form of distributions),” he said.
Karelitz added that, at a high level, the current definition of an investment advice fiduciary has been in effect since 1975. Among other things, it requires that a person be providing investment advice on a regular basis, pursuant to a mutual agreement/understanding that such advice will be provided, and that the advice will serve as the primary basis for investment plan decisions.
“This effectively served to carve out recordkeepers and custodians that made one-off recommendations to plan participants who call to discuss distributions,” he said.
Given that, he advised TR team members to:
- Focus on educating participants about available options and plan terms, and
- Avoid any recommendations about what participants should do — or what the TR team member would do in a similar position.
“The fiduciary standard won’t apply if the information being provided is solely educational in nature — without a recommendation,” Karelitz said.
Jay Kirschbaum, director of benefits compliance for World Insurance, stated that because of the Employee Retirement Income Security Act of 1974 (ERISA), the final rule focuses on giving investment advice for a fee. Since employers have generally avoided fiduciary entanglements with their employees, it’s unlikely the new rule would change that, he said.
“Employers generally suggest that employees get outside advice in their investment decisions precisely to avoid potential fiduciary entanglements,” Kirschbaum said. “That will likely continue with the new rules.”
Education and Other Total Rewards Offerings
While aspects of the fiduciary rule are mostly black and white, understanding workers’ general financial health may fall into more of a gray area for TR professionals. Kirschbaum said that while HR and TR teams within large employers may have an anecdotal understanding of their employees’ situations, they rarely have a thorough perception of an individual’s overall financial scenarios.
“Smaller employers are much more cognizant of those situations, as they come into contact more often and more directly with those employees,” he said. “Some large employers seek that information through surveys, but getting a good picture of those circumstances may not be fully possible in those formal inquiries.”
According to Kirschbaum, employers have traditionally relied on 401K, Roth IRA and HSA options as the main levers of offering financial well-being benefits. But, he added, the Consolidated Appropriations Act from the COVID-19 era temporarily loosened a rule for educational assistance plans that many employers offer. The legislation permits employers to pay up to $5,000 annually of student loan debt tax free through 2024. It is not yet clear how many employers took advantage of that provision.
Another option for employers includes emergency loan assistance, which can be tax free if structured appropriately.
“All of these tools need to include education to help employees manage their debt on an ongoing basis,” he said.
Seyfarth’s Karelitz recommended TR and HR staff take a holistic approach to employees’ needs, adding that survey data consistently shows competitive pay is unsurprisingly the biggest driver of employee requests.
Learn: Market Pricing—Conducting a Competitive Pay Analysis
“However, structuring additional options and education around long-term financial goals can help relieve some of the financial stress that employees feel,” he concluded. “That, in turn, helps employers retain employees over longer periods, as they won’t have the same need to seek a higher-paid position.”
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