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Case Studies of Plan Success in a Holistic Fiduciary Solution
Dr. Gregory W. Kasten and Joseph Reese Unified Trust Company, N.A.
What We Will Cover
• Industry evolution• Review of case studies of plan success • Discuss how to improve participant
outcomes in a scalable advisory practice
2
The Early Years
Less Funds, Managed Accounts, Focus on OutcomesLess Funds, Managed Accounts, Focus on Outcomes
Open Architecture and 1,000s of FundsOpen Architecture and 1,000s of Funds
Participant Directed, Daily Valuation, Limited FundsParticipant Directed, Daily Valuation, Limited Funds
Trustee Directed, Balance ForwardTrustee Directed, Balance Forward
3
Ineffective SolutionsRetirement industry offers simple but ineffective solutions• Automatic Enrollment • Target Date Fund• Gap Report• Web Calculator• “Plan Health Reports”• Email Campaigns
4
FRONTLINE: “The Retirement Gamble”
“The Retirement Gamble”“I had no idea. I was so confused. I came out of that meeting, and I was, like, ‘oh, my God.’ It was just— it was overwhelming for me, the knowledge that you had to have in order to invest.”−Debbie Skoczynski, Computer Leasing Agent
FRONTLINE is a registered trademark of WGBH Educational Foundation, Copyright PBS
6
DetrimentalBehaviors
7
5 Detrimental Behaviors
1. Inertia2. Procrastination3. Choice Overload4. Endorsement Effect5. Framing
8
The GapBetween where participants are and
what they will need for retirement
Dr. Gregory Kasten• ERISA Fiduciary since 1985• 2013 Retirement Plan Advisor of the
Year• Over $4.2 billion of fiduciary assets
under management• Founder and CEO of Unified Trust
Company, NA• Board certified anesthesiologist• Work with advisors who share our
vision of fiduciary best practices to improve retirement success
10
What’s the Connection?
ERISA Studebaker
11
STUDEBAKER: The First ERISA Case Study
12
Studebaker Testimony
For 27 years, Ray Manzer worked on the truck line at the Studebaker auto plant in South Bend, earning $2.60 an hour and a pension that company officials promised he could look forward to in his old age.“I loved my job,” said Manzer, “I thought I was set for life.”
“Pensions: the Broken Promise” NBC News aired 9/12/1974
13
Studebaker Testimony
Then, in 1963, Manzer showed up for work and was told there was no more job. No more Studebaker. And no more pension.
The funds that had been promised to provide pensions for 4400 vested Studebaker employees were gone.
“Pensions: the Broken Promise” NBC News aired 9/12/1974
14
President Ford signs ERISA into law on Labor Day 1974
Protect the Participant
“It is hereby declared to be policy…to protect the interests of participants in employee benefit plans and their beneficiaries…”
29 U.S. Code § ERISA 1001 – Congressional Findings and Declaration of Policy
16
ERISA Protected Pensions
Early During ERISA things worked as planned.
In 1979 more than 84% of the workforce had a DB plan or a combined DB/DC plan that was professionally managed.
“Coming Up Short-The Challenge of 401(k) Plans”, pp 18-26, Munnell, A and Sunden, A. © 2004
17
The Market Evolved
Today most workers are on their own…and failing!In 2014 less than 15% of the private workforce had a pension plan as their primary retirement benefit.
“Coming Up Short-The Challenge of 401(k) Plans”, pp 18-26, Munnell, A and Sunden, A. © 2004
18
Today most workers are on their own…and failing!
By Robert SteyerSource: Pensions & InvestmentsDate: September 22, 2010
Three-quarters of defined contribution plan participants are projected to fall short of what they will need in retirement, said Christopher L. Jones, chief investment officer at Financial Engines.
Three In Four Fail:75% in Dc Plans Won’t Have Enough For Retirement, Survey Says
20
Where Did ERISA Go Wrong?
21
“Exclusive Authority”
Congress thought the trustee would be discretionary!“The House bill also provides that all plans must be in writing, that plan assets generally are to be held in trust, and that trustees generally are to have the exclusive authority to manage and control plan assets.”
US House of Rep Conference Report No. 93-1280 August 12, 1974
22
23
The number of times Directed Trustee is
mentioned.
24
25
The number of times named fiduciary is
mentioned.
26
27
The number of times “Trustee” (Discretionary)
is mentioned!
28
But most 401(k) corporate trustees are directed!
29
401(k) Corporate Trustees
Unified Trust data sampling of 255 proposed plans © 2015
98%
2%
Corporate Trustee(Directed)
Corporate Trustee(Discretionary)
Most 401(k) Corporate Trustees Today Are Directed
30
Where Did All The “Trustees” Go?(Discretionary)
31
Better for the Vendor
Directed Trustee Status is Better For The Vendor, Not The Participant!• Multiple sources of revenue (Hidden)• Exempt from most fiduciary prohibited
transactions• Little fiduciary compliance cost• Little risk (most risk remains with named plan
fiduciary)
32
The Directed Trustee
The directed trustee is “IMMUNE FROM JUDICIAL INQUIRY!”“As we have explained, a directed trustee is essentially "immune from judicial inquiry" because it lacks discretion, taking instructions from the plan fiduciary that it is required to follow.”
Renfro v. Unisys Corp., 671 F. 3d 314 - Court of Appeals, 3rd Circuit 2011
33
After Studebaker
The “Named Plan Fiduciary”• Functions as the plan’s “CEO”• “Most important fiduciary”• Generally named in plan document or sometimes
identified by specific procedure• Congressional intent was to focus responsibility for
proper plan management• Plan may have more than one named fiduciary and in
such cases the duties are allocated
ERISA Section 402(a)
34
How Does the Past Impact the Future?
35
Case Studies
Case Studies Summary
516: Total number of employees485: Total number accepting solution318: Before on track to achieve success480: After on track to achieve success162: Total number added for full success
37
What happens when all the right things are done
for the participant?
38
Success Happens!
39
High Acceptance RateSuccess requires a very high acceptance rate
83%
4% 2%
UnifiedPlan Opt In
Opt Out Using Managed Model
Opt Out Complete "Do It Myself"
40
There is no single answer to success!
41
Begins With Plan Design1. Recognize that five key behaviors make
effective use of web tools rare, and success unlikely
2. Fulfill original ERISA role for plan trustee3. Control plan fees4. Provide default retirement income
replacement goal5. Design adequate default savings rate6. Design automated escalators of savings7. Accurately measure of the cost of the goal
(liability)
8. Understand asset/ liability matching and investing
9. Build personalized actuarial solution before enrollment meeting
10. Design optimized portfolio based upon MPT standards
11. Define MPT participant risk limits in governing plan documents
12. Control participant risk exposure13. Build liability driven investment process14. Communicate simply with “YES” box
checked
The Success Solution
42
The Success SolutionImplement and Monitor1. Gather relevant data2. Recalculate retirement income
replacement goal3. Review savings rate4. Accurately re-measure of the cost of the
goal (liability)5. Calculate future value of assets6. Calculate asset/ liability matching portfolio
solution7. Allow for additional information to
personalize further8. Obtain MPT participant risk limits in
conjunction with governing plan documents
9. Test personalized actuarial solution10. Design optimized portfolio based upon
MPT standards11. Control participant risk exposure12. Implement new solution13. Confirm solution implemented correctly14. Communicate to participant15. Review plan for all FI360 Fiduciary Best
Practices16. Document all decisions and actions
…Quarterly Reviews
43
Fully Funded StatusThe process moves most to fully funded status.The number of participants on track for a fully funded retirement benefit jumped from 318 to 480; an extra 162 were successful!
44
Fraction of Participants on Track for Fully Funded
Retirement Benefit
After UnifiedPlan 93%
Before UnifiedPlan 62%
National Average 25%
“Fully Funded” means forecast Asset/Liability at least 1.00. Average from the 3 case study plans.National Average data from Pensions & Investments Sept 22, 2010
45
The Process Lowers The Cost Of Success
Before UnifiedPlan $1.00
After UnifiedPlan $0.47
The relative cost calculation shows that for every dollar previously spent to achieve a successful participant, it will now cost the plans only $0.47 a savings of 53%.
46
Investing is improved when done for the participant.
36%
16% 14% 14%
100% 100% 100% 100%
0%
20%
40%
60%
80%
100%
Age Matched Funded Status Investment Theory Pass All 3 Tests
“Fully Funded” means forecast Asset/Liability at least 1.00. Average from the 3 case study plans.National Average data from Pensions & Investments Sept 22, 2010
47
Non UnifiedPlan Equity Asset Allocation is Not Related to Age
48
Ideal
Non UnifiedPlan Asset Allocation is Not Related to Funded Ratio
49
Ideal
Non UnifiedPlan Portfolio Risk is Not Related to Funded Ratio
50
Case Study One
51
Case Study One
Employees:13
Employees:13
Named plan fiduciary was
plan sponsor & single
individual trustee
Named plan fiduciary was
plan sponsor & single
individual trustee
Employee deferral rate: Increased
1.1% to 6.4%(Added safe harbor match
rate)
Employee deferral rate: Increased
1.1% to 6.4%(Added safe harbor match
rate)Number of employees receiving advice:
0
Number of employees receiving advice:
0Number of employees with a goal:
1 (8%)
Number of employees with a goal:
1 (8%)
Automatic features:None
(Automatic enrollment added,
still considering automatic escalation)
Automatic features:None
(Automatic enrollment added,
still considering automatic escalation) Old QDIA was
TDF, then UnifiedPlan via reenrollment
Old QDIA was TDF, then
UnifiedPlan via reenrollment
52
1. Recognize that five key behaviors make effective use of web tools rare, and success unlikely
2. Fulfill original ERISA role for plan trustee
3. Control plan fees4. Provide default retirement income
replacement goal5. Design adequate default savings rate6. Design automated escalators of
savings ✓7. Accurately measure of the cost of the
goal (liability)
8. Understand asset/ liability matching and investing
9. Build personalized actuarial solution before enrollment meeting
10. Design optimized portfolio based upon MPT standards
11. Define MPT participant risk limits in governing plan documents
12. Control participant risk exposure13. Build liability driven investment
process14. Communicate simply with “YES” box
checked
Critical Errors & Omissions
53
1. Gather relevant data2. Recalculate retirement income
replacement goal3. Review savings rate4. Accurately re-measure of the cost of
the goal (liability)5. Calculate future value of assets6. Calculate asset/ liability matching
portfolio solution7. Allow for additional information to
personalize further8. Obtain MPT participant risk limits in
conjunction with governing plan documents
9. Test personalized actuarial solution10. Design optimized portfolio based
upon MPT standards11. Control participant risk exposure12. Implement new solution13. Confirm solution implemented
correctly14. Communicate to participant15. Review plan for all FI360 Fiduciary
Best Practices16. Document all decisions and actions
…Quarterly Reviews ✓
Critical Errors & Omissions
54
Case Study Two
55
Case Study Two
Employees:21
Employees:21
Named plan fiduciary was plan sponsor,
and single individual as
trustee
Named plan fiduciary was plan sponsor,
and single individual as
trustee
Employee deferral rate: Increased
2.1% to 8.3% (Added safe harbor match
rate)
Employee deferral rate: Increased
2.1% to 8.3% (Added safe harbor match
rate)Number of employees receiving advice: 3 (15%)
Number of employees receiving advice: 3 (15%)
Number of employees with a goal:
2 (10%)
Number of employees with a goal:
2 (10%)
Automatic features:None
(Added automatic enrollment and
automatic escalator of savings (2%
annually))
Automatic features:None
(Added automatic enrollment and
automatic escalator of savings (2%
annually)) Old QDIA was TDF, then
UnifiedPlan via reenrollment
Old QDIA was TDF, then
UnifiedPlan via reenrollment
56
1. Recognize that five key behaviors make effective use of web tools rare, and success unlikely
2. Fulfill original ERISA role for plan trustee
3. Control plan fees ✓4. Provide default retirement income
replacement goal5. Design adequate default savings rate6. Design automated escalators of
savings7. Accurately measure of the cost of the
goal (liability)
8. Understand asset/ liability matching and investing
9. Build personalized actuarial solution before enrollment meeting
10. Design optimized portfolio based upon MPT standards
11. Define MPT participant risk limits in governing plan documents
12. Control participant risk exposure13. Build liability driven investment
process14. Communicate simply with “YES” box
checked
Critical Errors & Omissions
57
1. Gather relevant data2. Recalculate retirement income
replacement goal3. Review savings rate4. Accurately re-measure of the cost of
the goal (liability)5. Calculate future value of assets6. Calculate asset/ liability matching
portfolio solution7. Allow for additional information to
personalize further8. Obtain MPT participant risk limits in
conjunction with governing plan documents
9. Test personalized actuarial solution10. Design optimized portfolio based
upon MPT standards11. Control participant risk exposure12. Implement new solution13. Confirm solution implemented
correctly14. Communicate to participant15. Review plan for all FI360 Fiduciary
Best Practices16. Document all decisions and actions
…Quarterly Reviews ✓
Critical Errors & Omissions
58
Case Study Three
59
Case Study Three
Employees:21
Employees:21
Named plan fiduciary was plan sponsor,
and single individual as
trustee
Named plan fiduciary was plan sponsor,
and single individual as
trustee
Employee deferral rate: Increased
2.1% to 8.3% (Added safe harbor match
rate)
Employee deferral rate: Increased
2.1% to 8.3% (Added safe harbor match
rate)Number of employees receiving advice: 3 (15%)
Number of employees receiving advice: 3 (15%)
Number of employees with a goal:
2 (10%)
Number of employees with a goal:
2 (10%)
Automatic features:None
(Added automatic enrollment and
automatic escalator of savings (2%
annually))
Automatic features:None
(Added automatic enrollment and
automatic escalator of savings (2%
annually)) Old QDIA was TDF, then
UnifiedPlan via reenrollment
Old QDIA was TDF, then
UnifiedPlan via reenrollment
60
1. Recognize that five key behaviors make effective use of web tools rare, and success unlikely
2. Fulfill original ERISA role for plan trustee
3. Control plan fees ✓4. Provide default retirement income
replacement goal5. Design adequate default savings rate6. Design automated escalators of
savings ✓7. Accurately measure of the cost of the
goal (liability)
8. Understand asset/ liability matching and investing
9. Build personalized actuarial solution before enrollment meeting
10. Design optimized portfolio based upon MPT standards
11. Define MPT participant risk limits in governing plan documents
12. Control participant risk exposure13. Build liability driven investment
process14. Communicate simply with “YES” box
checked
Critical Errors & Omissions
61
1. Gather relevant data2. Recalculate retirement income
replacement goal3. Review savings rate4. Accurately re-measure of the cost of
the goal (liability)5. Calculate future value of assets6. Calculate asset/ liability matching
portfolio solution7. Allow for additional information to
personalize further8. Obtain MPT participant risk limits in
conjunction with governing plan documents
9. Test personalized actuarial solution10. Design optimized portfolio based
upon MPT standards11. Control participant risk exposure12. Implement new solution13. Confirm solution implemented
correctly14. Communicate to participant15. Review plan for all FI360 Fiduciary
Best Practices16. Document all decisions and actions
…Quarterly Reviews ✓
Critical Errors & Omissions
62
How is Success Achieved?
63
The “Pension” Answer
Determine a Personal goal for each participante.g. $2,500/month
82%
Measure Their ProgressQuarterly tests are preformed to determine if you are on track and statements of progress are provided.
Manage The InvestmentAutomatically select investments with the lowest possible risk required to achieve the goal.
64
It is much easier to say “yes” to the answer…
65
….Rather than to learn and implement
the methods
66
LIABILITY
Actuarial Management
LIABILITY: How much money will be needed to pay for retirement
ASSET : How much money the participant is on track to have saved when retirement starts
ASSET = 1.00 OR MORE
67
Actuarial Solution Matrix
$600,000
$650,000
$700,000
$750,000
$800,000
$850,000
$900,000
$950,000
$1,000,000
$1,050,000
SSNRA SSNRA +1 SSNRA +2 SSNRA +3
Actuarial Solution Matrix Finds the Equilibrium Spot Liability Conservative Asset Moderate Asset Aggressive Asset
SSNRA
SSNRA +1
SSNRA +2
SSNRA+3
CONSERVATIVE
0.700 0.822 0.965 1.132
MODERATE 0.728 0.863 1.022 1.211
AGGRESSIVE
0.757 0.905 1.082 1.294
SSNRA
SSNRA +1
SSNRA +2
SSNRA+3
CONSERVATIVE
0 C 1 C 2 C 3 C
MODERATE 0 M 1 M 2 M 3 M
AGGRESSIVE
0 A 1 A 2 A 3 A
68
Your retirement benefit statement helps you understand whether you are on course to achieve a successful retirement. Unified Trust Company estimates the "nest egg" savings required to meet your retirement spending goals. We regularly evaluate your progress and, if needed, we will make changes to help you. Your projection is based on information we currently have about you, provided to us by either your employer or you. Please visit our website at www.unifiedtrust.com/UnifiedPlan to add or update your Additional Retirement Information.
UNIFIEDPLAN QUARTERLY PARTICIPANT REPORT AS OF JUNE 30, 2012[Plan Name]
$5,346
YOUR MONTHLY RETIREMENTINCOME SURPLUS
$4,000 $1,346
YOUR PROJECTED RETIREMENT BENEFIT STATEMENT
FOR [Part icipant Name]
YOUR MONTHLY PROJECTEDRETIREMENT INCOME
YOUR MONTHLY RETIREMENTINCOME NEED
$4,000
YOUR MONTHLY RETIREMENTINCOME NEED
YOUR MONTHLY RETIREMENTINCOME SURPLUS
$1,346$5,346
YOUR MONTHLY PROJECTEDRETIREMENT INCOME
69
Putting the Case Studies into Perspective:
Creating a sustainable advisor model for improving outcomes…
The DOL is Moving Forward on New Fiduciary Standards
What Does the Proposed DOL Rule Mean for Advisors
Today?
72
Non-FiduciaryNew DutiesHigher RisksChanging (Reduced) CompensationLost Business from Compliance Dept.
73
FiduciaryDifferentiation LossValue PropositionLost Business from New Competition
74
New Competitors?
The further erosion of the value proposition…
75
How Much Time Can an Advisor
Spend with a Participant?
76
Quantify Your Time
$4.0 Million Plan / 150 Participants40 BPS = $12,000 Advisor Revenue
Plan Level Services = 20 hours• Quarterly trustee meetings; 1 annual employee meeting; on-demand
consulting; prep and drive time
20 hours x $200/hour (time value plus overhead) = $4,000
Goal: Meet with 70% of the participants$8,000/105 participants @ 200/hour • = 22 minutes per participant per year• = 5.5 minutes per quarter
77
Is5.5 minutes
per quarter enough?
78
5.5 Minutes1. Gather relevant data2. Recalculate retirement income
replacement goal3. Review savings rate4. Accurately re-measure of the cost of
the goal (liability)5. Calculate future value of assets6. Calculate asset/ liability matching
portfolio solution7. Allow for additional information to
personalize further8. Obtain MPT participant risk limits in
conjunction with governing plan documents
9. Test personalized actuarial solution10. Design optimized portfolio based
upon MPT standards11. Control participant risk exposure12. Implement new solution13. Confirm solution implemented
correctly14. Communicate to participant15. Review plan for all FI360 Fiduciary
Best Practices16. Document all decisions and actions
…Quarterly Reviews
79
Off Course ParticipantsTarget off course participants!
81
Your UnifiedPlan Success Rate
77%
Plan Level Success Data
82
Quantifying Results
“When going through the specifics of how the plan and the participants’ situations have improved over the past 12 months, it is vital for advisers to show plan sponsors how they drove those changes.”
planadvisor July/August 2015
83
Unique Value Proposition
1. A holistic retirement model that works for most employees—personalized for all
2. Demonstrated improvement in outcomes3. Trustee services that completely fulfill the
original Congressional intent of ERISA4. Named plan fiduciary status5. The most complete fiduciary liability risk
transference possible
84
What’s In It For…..• The Participant: They have the answer! A
retirement goal and a plan that’s easy and doesn’t require them to change their behavior.
• The Plan Sponsor: They have a plan that has improved employee satisfaction and retention while at the same time reduced their fiduciary risk.
• The Plan Advisor: You now have a scalable and deliverable service model that drives quantifiable results.
85
Participants Don’t Want to KnowHow to Build a Watch…
86
They Just Want to Know the Time!
87
QUESTIONS?Greg KastenChief Executive OfficerUnified Trust [email protected]
Joe ReeseInstitutional Retirement ConsultantUnified Trust [email protected]
88
Disclosures1. The UnifiedPlan reporting tool helps investors understand whether they are on course to achieve a successful retirement. The UnifiedPlan uses “asset liability” matching. The asset is the money forecast to be accumulated and the liability is the amount of money needed to pay for the retirement. For investors who are planning for retirement, the tool estimates the amount of funds required to meet their retirement spending goals and provides alternatives such as delaying retirement or lowering retirement spending for those who may not be able to save the required amount.2. For investors who are already retired, the tool estimates the confidence that their portfolio will be able to sustain their desired spending throughout retirement. The tool uses a combination of deterministic methods and Monte Carlo simulation that consider factors that include saving and spending levels, long-term market expectations associated with the risk profile selected, pre- and in-retirement time horizons, and other sources of outside income.3. The UnifiedPlan limitations relate to the large number of assumptions used in the analysis. The accuracy of these assumptions directly impacts the quality of the tool's assessment. Potential problems may include, but are not limited to, the use of inaccurate financial data by the investor, the selection of a risk tolerance by the investor that does not represent how their portfolio is actually invested, long term market expectations of risk, return, and inflation that are not achieved in the modeled time frame, the inclusion future income that is never received, and unforeseen life emergencies that require decreased saving before retirement, force an earlier retirement, or increase spending needs during retirement.4. The UnifiedPlan is highly dependent upon assumptions of annual income and annual savings. Any variances or changes in the figures used should be reported immediately by the plan participant. Unified Trust is not responsible for any discrepancies in the data, or output from the UnifiedPlan tool.5. All mutual fund and collective investment fund data was gathered from publicly available sources of information such as Standard & Poor’s, Morningstar, Zephyr or vendors’ own websites. We take reasonable care in collecting the data, and believe the data are accurate, but reserve the right to correct any errors. Individual mutual fund or collective fund performance data throughout the document are net of underlying fund expense ratios but gross of add-on expenses such as Trustee fees, administration fees, or advisory fees. The performance histories reported are simply dollar-weighted historical returns for the proposed funds and do not reflect the effects of rebalancing or fund replacements.
Disclosures6. Any past performance information for the illustrated investment selections is not indicative of future returns but is merely a snapshot of historical performance. Past performance is not a guarantee of future performance. The investments are not FDIC insured.7. Differences will probably exist between prospective and your actual results because events and circumstances frequently do not occur as expected, and those differences may be material, especially when making estimates over extended time periods. All figures are shown in current (inflation adjusted) dollars. The estimated inflation rate used in this analysis may vary over time.8. The UnifiedPlan portfolio changes and time line changes for each participant are governed by the Plan Document, the Investment Policy Statement and the Benefit Policy Statement for their Plan.9. The calculated 70% income replacement goal includes the estimated Social Security benefit. The actual Social Security benefit may be different from the estimated value.10. Compensation in excess of the IRC 415 limit is excluded. All figures reported in current (inflation-adjusted) real dollars.11. The projections or other information generated by the tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Projected growth of assets is based Unified Trust Company's Projected Future Modeled Returns and the asset allocation of your portfolio for this goal. The graphical representations are an approximation taken from the direct path between the pertinent events tied to your goal. Indices are unmanaged, do not incur management fees or expenses, and cannot be invested in directly. 12. Neither the Plan Sponsor nor Unified Trust can guarantee that any participant will achieve a successful retirement. The UnifiedPlan reporting tool helps investors understand whether they are on course to achieve a successful retirement. The UnifiedPlan uses “asset liability” matching. The asset is the money forecast to be accumulated and the liability is the amount of money needed to pay for the retirement. For investors who are planning for retirement, the tool estimates the amount of funds required to meet their retirement spending goals and provides alternatives such as delaying retirement or lowering retirement spending for those who may not be able to save the required amount.13. Projections are made based upon expected asset transfers. Actual transfer amounts may be different and may require a new retirement solution.
90