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© 2013 Towers Watson. All rights reserved.
Employee Retirement Readiness –Measuring, Tracking and Improving in a DC World
Midwest Pension ConferenceSeptember 19, 2013
© 2013 Towers Watson. All rights reserved.2
Today’s discussion
It is getting harder for employees to determine if they have the resources to retire
Employers feel the
need to get their arms
around retirement readiness
They also have a vested
interest in helping their employees
prepare
This is having a more direct impact on employers’ ability to manage their business
Four case studies…
© 2013 Towers Watson. All rights reserved.3
Most retirement benefits are lump sums
6459 58
5347
37 33 2922 20
13
3641 42
4753
63 67 7178 80 83 87
0102030405060708090
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Traditional DB pension plansAccount-based plans(hybrid and DC)
n=100
40
60
36
64
17
6459 58
5347
37 33 2922 20
13
3641 42
4753
63 67 7178 80 83 87
0102030405060708090
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Traditional DB pension plansAccount-based plans(hybrid and DC)
n=100
40
60
36
64
17
Fortune 100 Retirement Plan Prevalence — Traditional DB Pensions versus Account Based Plans (For Newly Hired Employees)
© 2013 Towers Watson. All rights reserved. 4
Cost of health care coverage in retirement is high –and not well understood
Annual Total Premiums
Retiree Premium Share
Retiree-Only Family Retiree-Only Family
Retirees under age 65 $8,031 $19,275 51% 53%
Retirees age 65 and older $4,507 $11,000 46% 48%
l Retirees pay a considerably larger share of costs than active employees
l Total premiums for single-only coverage is about $3,000 higher for retirees than for active employees
Source: 2011 Towers Watson/NBGH Employer Survey on Purchasing Value in Health Care
© 2013 Towers Watson. All rights reserved.
Employees - and employers - face uncertainty in preparing for retirement
5
of companies expect older workers to delay retirement* 48%
*Towers Watson 2012 U.S. Defined Contribution Survey; ** Towers Watson Retirement Attitudes Survey, 2011.
42%21%
of companies state that providing an adequate retirement benefit at a reasonable age is the primary goal of their defined contribution program*74%
believe that employees make informed decisions about retirement savings*
of employees believe that they have enough retirement resources to last 25 years**
© 2013 Towers Watson. All rights reserved.
Retirement readiness
Measure and set goals
Track progress
Identify improvements
6
© 2013 Towers Watson. All rights reserved.
Case study – Measuring
7
Large food company with over 30,000 employee
Patchwork of pension benefits, due to phased-in changes and union agreements
DC plan is the “go-forward” plan – only retirement income plan for newer hires
Needed a basis for setting retirement plan objectives and progressNeeded a basis for setting retirement plan objectives and progress
© 2013 Towers Watson. All rights reserved.
A benchmark to measure retirement readiness
8
FiT Age is defined as the age when retirement resources exceed retirement needs
FiT Age includes:
l Retirement resources include all benefits: 401(k), pension, medical, Social Security
l Retirement needs are net take home pay increased for medical premiums
© 2013 Towers Watson. All rights reserved. 9
FiT Age illustrated
• All benefits – 401(k), pension, medical, Social Security• Individual tax calculations• Active and retiree health care costs
When the retirement resources bar exceeds the retirement needs lineyou have reached your Financial independence Target age
FiT Age = 70
© 2013 Towers Watson. All rights reserved.
Retirement readiness assessment
Total workforce
l 15% of career employees have FiT Ages above age 70, reasons include:l 60% of them do not currently save
l many of those who are saving started saving late in their careers
13556
4910
66687519 7820 7874
88058249
7821 77257006
57224940
42833518 3103
2520 2333 2350 22151546
1043566 267 122
< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >
FiT = Financial Independence Threshold
Hired Under 40 about 83% of workforce | average FiT=64
10
© 2013 Towers Watson. All rights reserved.
Retirement readiness assessmentVariation by benefit structure
6 8 15 15 24 2949
70
128
356382
270
223
317
364
297
209
155 144
95
40 28 172
25
< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >
FiT = Financial Independence Threshold
Hired Under 40, Salaried, DC Only about 2% of workforce | average FiT=69
5697
1636
2392 2479 26002927
33773573 3427
3081
2287
17321392
1154932 900 770 692 566 448 308 169 72 30 17
< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >
FiT = Financial Independence Threshold
Hired Under 40, Salaried, DB, No Retiree Medical about 29% of workforce | average FiT=63
11
© 2013 Towers Watson. All rights reserved.
Case study – Tracking
12
Large food company with over 90,000 employees• Multiple company divisions and locations
Maintains multiple DB, DC and H&W plans
Uses FiT Age to set goals, monitor progress
Measures results on a quarterly basis
© 2013 Towers Watson. All rights reserved.
Benefit delivery – measuring effectiveness
13
3. Establish remedial plan
21
3
1. Establish/confirm plan objectives
Retirement Adequacy
Cost
Market Competiveness
2. Assess plan performance
Review savings and investment behavior
Review investment structure
Review investment and administrative fees
Determine the impact on retirement
adequacy
Plan and investment design
Communications and Education
© 2013 Towers Watson. All rights reserved.
Goals and results
Overall Participationl Participation slightly above
peer groupl Salaried employees (87%),
hourly employees (75%)
Plan Investmentsl Company stock is the largest fund
holding in the planl 27% of assets in target date funds
Deferral Ratel Overall plan deferral rate is 6.4%,
above the peer group l Deferral rates of 10% will improve
FiTAge by 3 years
FiTAge l FiTAge for salaried
employees is 70l FiTAge for hourly
employees is 71
2012 Goal 2015 Goal
69 66
80% total90% salaried77% hourly
85% total95% salaried80% hourly
6.5% 9.0% total
30% company stock
27% TDFs
15% company stock
35% TDFs
78%
76%
Plan
Peer Group
6.4
6.0
Plan
Peer Group
30% 27% 18% 25%
7 4 8 8 9 15 52 154276 338
491742
1,2891,212978
1,2051,0271,020
487
157 92 16 5 2221
< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >FIT = Financial Independence Threshold
Track retirement readiness
14
© 2013 Towers Watson. All rights reserved.
Don’t tell me…show me
Make it easy for me to do something15
Don’t teach me, entertain me
Creative retirement communications approaches
© 2013 Towers Watson. All rights reserved.
Opportunities to sustain engagement
l Provide bite-sized educational nuggetsl Leverage consumer approachesl Address what’s on their mindsl Show the long-term impactl Make it personall Make it compelling l Keep it simple
Whiteboard videos
Personalized statements
Interactive media16
© 2013 Towers Watson. All rights reserved.
Case study – Improving through design
17
Manufacturing company with approximately 12,000 employees
Has separate “deals” for union and non-union employees
Used the retirement readiness assessment to compare the two deals
Implementing new design features as a result of the assessment:• Auto-enroll everyone, increase default to 6%, auto-increase to 10%
© 2013 Towers Watson. All rights reserved.
“What if” scenario - overall results
18
Results Recommendations1. Participants on average defer 8% to the DC plans.
However, consider auto-enrolling all employees with an auto-increase feature that would require an opt-out, as this will improve the FiT by 2 years.
Average FiT Age Based on Expected Investment Returns
25th
Percentile(Poor
Scenario)
50th
Percentile(Average Scenario)
75th
Percentile(Good
Scenario)Current 73 70 67
Assumes all DC plan participants defer at least 10%
71 68 65
1. Approximately 2,200 participants would be projected to retire on or before age 65 (average scenario)
2. Approximately 6,000 participants would be projected to retire on or after age 70 (average scenario)
© 2013 Towers Watson. All rights reserved.
“What if” scenario - results for union employees
19
Results
Average FiT Age Based on Expected Investment Returns
25th Percentile(Poor
Scenario)
50th Percentile(Average Scenario)
75th Percentile(Good
Scenario)Union 70 68 66Union assuming all DC plan participants defer at least 10%
67 65 63
Union W RetMed 68 66 65Union W RetMed assuming all DC plan participants defer at least 10%
66 64 62
1. The FiT for those with Retiree Medical is 66 while those without this benefit have a FiT of 69 (average scenario)
2. Approximately 1,100 Union participants would be projected to retire on or after age 70 (average scenario)
3. Approximately 630 participants with Retiree Medical would be projected to retire on or after age 70 (average scenario)
Recommendations1. Participants on average defer 6.2% to the DC plans. Of
the 3,000 participants there are 400 non-savers and 550 who defer less than 5% (330 will eventually get there with auto-increases). Consider auto-enrolling all employees with an auto-increase feature that would require an opt-out, as this will improve the FiT by 3 years.
© 2013 Towers Watson. All rights reserved.
Case study – Improving through education
20
Large hi tech company
401(k) is the only retirement plan type they have ever sponsored
For the first time in company history, helping employees prepare and plan for retirement is a priority
Rolling out a retirement planning tool for employees, using FiT Age
© 2013 Towers Watson. All rights reserved. 21
© 2013 Towers Watson. All rights reserved.
Retirement readiness
Measure and set goals
Track progress
Identify improvements
22