Power Up Your DC Plan The DCIIA Auto Features Slide Library April 2014 © 2014 DCIIA: Dedicated to Enhancing Retirement Security

Power Up Your DC Plan

The DCIIA Auto Features Slide Library

April 2014

© 2014 DCIIA: Dedicated to Enhancing Retirement Security

2


Introduction

DCIIA Auto Features Slide Library

This following, albeit lengthy composite, powerpoint slides include:

• Research

• Talking points

• Worksheets

We have designed this library for you to pick and choose the slides or segments that can help you:

• Advocate for plan changes

• Educate stakeholders

• Affirm value of auto features

We have broken this library into modules based on major topics, so feel free to scroll through and explore the research, data and tools available to you.

We encourage you to use these slides for your own presentations.

*All we ask is that your properly source DCIIA and others who have provided the data to you in the following slides.

If you have questions about the DCIIA Automatic Features Slide Library, of if you would like to suggest changes or additions, please contact us at [email protected].

3


Table of Contents

Module 1: Building a Case for Automatic Features (slide 4)

Module 2: Trends in Automation (slide 30)

Module 3: The Participant Experience (slide 44)

Module 4: The Impact of Automation (slide 52)

Module 5: Evaluating, Prioritizing & Preparing for Plan Changes (slide 59)

Module 1:

Building a Case for Using

Automatic Features


4

5


DC Plans Can Deliver an Adequate Retirement Through Automation

What the DC Plan Needs to be Successful:• People need to enroll• Participants need to invest in qualified

diversified investment alternative• Participants need to save enough

What automation can do:• Get people enrolled• Enroll them in a diversified fund• Increase their savings rate

6


4 Reasons DC Plans Should Include Auto Features

1. Employees need to save in their DC plans. 2. Employees need to participate in their DC plans. 3. Auto Features promote benefits of diversification

and efficient portfolio construction.4. Auto Features strengthen retirement readiness

for employees.5. Auto Features enhance plan’s non-

discrimination testing.

7


1. The Truth About Savings

Aon Hewitt Survey:

• 7.3% average before-tax contribution rate increased slightly from the low of 7.2% in 2011.

• 6.0% average Roth contribution, was down from 6.4% in 2011.

• 72.5% of participants saved at or above the company’s match threshold up from 71.3% in 2011.

PSCA :

• Pre-tax deferrals range from average of 5.2 % for lower paid to 6.4% for higher paid.

• After tax deferrals ranges from 3.7% to 4.9%.

• 401(m) deferrals range from 2.5%to 2.8%.

Aon Hewitt’s 2013 Hot Topics in Retirement (based on all eligible employees, PSCA 55th Annual Survey 2012

8


Confidence Low…

Confidence in A 2007 2014

Very 27% 28%

Somewhat 43% 38%

Not too or not at all 29% 49%

69% decline!

Source: 2013 EBRI Retirement Confidence Survey

9


Are Employees Confident?

Confidence level 2013 2014

Very 13% 18%

Somewhat 38% 37%

Not too or not at all 49% 24%

Source: 2013 & 2014 EBRI Retirement Confidence Survey

10


Are Workers Prepared?

• Americans with <$10,000 saved for retirement (EBRI 2013).

46%

• American workers with <$1,000 saved for retirement (EBR 2014I).

29%

• Baby Boomers planning to work “until they drop” (AARP 2013).

40%

• Americans who say they don’t contribute anything for retirement (CNBC 2013).

36%

In fact, only 46% have even tried to calculate how much they will need to save for retirement!

(EBRI).

11


Why Aren’t Employees Confident About Their Ability to Retire?

I did not start saving early enough.

I did not have a high enough savings rate.

My company did not encourage me to save enough.

I was too busy to think about it.

I didn’t have the right tools to make the best decisions.

I didn’t really care about retirement savings enough.

Source: State Street Global Advisors Investor Survey 2011

12


Low Savings is Reflected in Employee Confidence

13


Benefits of Contribution Escalation

Contribution Rate

Before meeting with planner After 4 raises Increase

GROUP A

Willing to save more now

Not offered auto escalation

4.4% 8.6% +4.2%

GROUP B

Unwilling to save more now

Offered auto escalation

3.5% 13.6% +10.1%

Source: Thaler and Benartzi (2004); Utkus and Young (2004)

14


Plan Sponsors are Using Auto Features to Help Employees Save

How Plans Offer Automatic Contribution Escalation

As a default option (in conjuction with automatic enrollment)

As a default option (not in conjuction with automatic enrollment)

As an opt-in option (participants must elect it)

We don't offer automatic contribution escalation

15%

4%

27%

54%

19%

3%

25%

53%

2010 2012

Source: DCIIA: Plan Sponsor Survey 2012

15


Auto Escalation

None

More than 10%

10%

7%-9%

6%

5% or less

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

16.0%

14.0%

8.0%

0.0%

58.0%

4.0%

2.9%

2.9%

6.5%

2.9%

79.7%

5.1%

Auto Escalation Voluntary Escalation

Cap on Automatic Increases for All Plans That Automatically Increase Deferrals Over Time

Source: PSCA’s Annual Survey of Profit Sharing and 401(k) Plans, 2012

Note: 72% of Plans used a single-tier formula. Example: $0.50/dollar on 6% of pay.

16


Higher Contribution Rates Have a Significant Impact on Ending Values

Putnam Institute for Research " Defined contribution plans: Missing the forest for the trees?

17


2. Getting Employees to Participate

78.0% participation rate hit an all-time high and increased about two percentage points higher than last year.

But eligibility is over 90% for most DC plans.

81.4% participation rate among those subject to automatic enrollment versus 63.5% of participants not subject to automatic enrollment.

Aon Hewitt’s 2013 Hot Topics in Retirement, PSCA 55th Annual Survey

18


Some Statistics on Demographics and Participation

DC Participant Demographics are Revealing

Need to engage employees• Newer employees

• Younger employees

Participation Rates by Length of Service (2012)

Years of Service Percentage

< 1 54%

2 - 3 63%

4 - 6 68%

7 - 9 71%

10+ 77%

Participation Rates by Age (2012)

Age Percentage

< 25 43%

25 – 34 62%

35 - 44 68%

45 - 54 73%

55 - 64 74%

Source: Vanguard – How America Saves 2013

19


Automatic Enrollment Works

5 9 %7 0 %

7 5 %

9 4 % 9 6 % 9 7 %9 7 % 9 7 % 1 0 0 %

0 %

2 0%

4 0%

6 0%

8 0%

1 00 %

T e n u re: 3 m o n th s T e n u re: 1 2 m o n th s T e n u re: 2 4 m o n th s

No Automatic enrollment

Automatic enrollment: 3%

Automatic enrollment: 6%

Source: Beshears, Choi, Laibson, and Madrian 2008

20


Automatic Enrollment Makes a Difference

4 2 % 3 6 %

8 6 % 8 6 %

0 %

2 5 %

5 0 %

7 5 %

1 0 0 %

M e n W o m e n0 %

2 5 %

5 0 %

7 5 %

1 0 0 %

W h ite B la c k H is p a n ic O th e r

0 %

2 5 %

5 0 %

7 5 %

1 0 0 %

2 0 -2 9 3 0 -3 9 4 0 -4 9 5 0 -5 9 6 0 -6 40 %

2 5 %

5 0 %

7 5 %

1 0 0 %

$ 2 0 -$ 3 0 K

$ 3 0 -$ 4 0 K

$ 4 0 -$ 5 0 K

$ 5 0 -$ 6 0 K

$ 6 0 -$ 7 0 K

$ 7 0 -$ 8 0 K

$ 8 0 K +

After Automatic EnrollmentBefore Automatic Enrollment

Source: Madrian and Shea (2001)

21


Automatic Enrollment Improves Participation

Adrian and Shea document a 48% increase in 401(k) participation among newly hired employees after the adoption of automatic enrollment.

Automatic enrollment has been particularly successful at increasing 401(k) participation among employees least likely to participate in retirement savings plans, namely those who are young, lower-paid, black, or Hispanic.

AUTOMATIC ENROLLMENT, EMPLOYEE COMPENSATION, AND RETIREMENT SECURITYBarbara A. Butrica and Nadia S. Karamcheva, Center for Retirement Research at Boston College

22


Automatic Enrollment Improves Participation

Plans with Automatic Enrollment:% of Plans Offering Various Deferral Rates

Deferral Rate 2007 2008 2009 2010 2011 2012

1% 3 2 3 2 2 2

2% 17 13 14 13 13 13

3% 56 60 56 57 55 53

4% 10 10 11 11 11 12

5% 7 7 7 7 8 8

6% or more 7 8 9 10 11 12

% of Plans Offering Auto Enrollment

2007 2008 2009 2010 2011 2012

15 20 24 27 29 32

In 2012, more than 50% of large plans had an automatic enrollment feature, compared with

about 40% in 2007.

Automatic enrollment increases participation but results in lower

average contribution rates

2011 Principal Financial Group Study

Source: Vanguard - How America Saves, 2013

23


Contribution Rates & Automatic Enrollment

1-2% 3% 4% 5% 6% 7-10% 11-18%0

10

20

30

40

50

60

2

9

34

31

24

29

1

47

2 3

21

13 13

3 2

49

4

20

12 11

Contribution Rate

Fra

ctio

n o

f p

art

icip

an

ts

Hired before automatic enrollmentHired during automatic enrollment: 3% defaultHired during automatic enrollment: 4% default

Source: Choi, Laibson, Madrian and Metrick (2006)

24


Higher Defaults Equal Higher Savings

1% 2% 3% 4% 5% 6%0%

20%

40%

60%

80%

100%

1 3 5 8 10 16

5661 57

6164

60

4337 37

30 25 24

Decrease No Change Increase

Automatic Enrollment Default Contribution Rate

Fra

cti

on

of

Pa

rtic

ipa

nts

W

ho

Ch

an

ge

Th

eir

C

on

trib

uti

on

Ra

te

From Fidelity Perspectives: Evaluating Auto Solutions, Summer 2009

25


3. Auto Features Promote Benefits of Diversification & Efficient Portfolio Construction

Automatic enrollment offers a safe harbor for QDIA.

Use of QDIA provides portfolios that are diversified and efficient.

• A balanced fund

• Lifecycle or Target Date Fund

• Professionally managed account

Moves participants away from single investment funds, or extremely conservative mix (such as MMF or stable value ) or extremely aggressive risk ( company stock or all equity).

26


Target Date Funds are Still the Most Common Default Option

• Over $341 billion in assets in open ended funds, and another $34 billion in collective trust.

Source: Morningstar, Inc. Target Date series research paper, April 29, 2011

Balanced Fund (11.8%)

Money Market Fund (1.8%)

Professionally-Managed Account (3.3%)

Stable Value Fund (3.0%)

Target Retirement Date/Lifecycle Fund (53.1%)

Target Risk/Lifestyle Fund (26.9%)

27


Professionally Managed Allocations are Making a Difference

Research from Vanguard shows that any type of professionally managed allocation account – TDF, balanced fund, or managed accounts – have less dispersion of returns.

Looking at the chart we see that:• Dispersion for TDF is 2%.• Dispersion for Balanced fund is 2%.• Dispersion for managed accounts is

4%.• Dispersion for all others is much more

significant at 9%.

28


4. Auto Features Strengthen Retirement Readiness for Employees

Source: DCIIA and EBRI

29


5. Auto Features Enhance Plan’s Non-Discrimination Testing

Automatic Enrollment

• Easier for employers to pass nondiscrimination tests • Allows employers with auto enrollment to avoid nondiscrimination tests altogether.

To qualify for the PPA safe harbor, participants must contribute at least 3 percent of pay in their first year in the plan, increasing it by 1 percentage point annually up to 6 percent of pay.

However, higher contributions up to 10 percent of pay are permitted (Purcell 2007).

The PPA safe harbor also requires employers to provide a matching contribution of 100 percent on the first 1 percent of pay plus 50 percent of the next 5 percent of pay—for a maximum potential employer matching contribution of 3.5 percent of compensation (Purcell 2007; Patterson, Veal, and Wray 2006).

This lower match rate may also make automatic enrollment more attractive to employers (O’Hare and Amendola 2007).

MODULE 2:

Trends in Automation


30

31


Trends: Plan ObjectivesDCIIA’s 2012 Plan Sponsor Survey shows:

• 44% of plan sponsors want to increase savings

Increasing participant savings rates

Facilitating optimal retirement income replacement

Improving investment line up

Increasing participation rates

Improving asset allocation

Improving investment outcomes

Improving communication and education efforts

Minimizing leakage of assets from the plan

26%

15%

14%

14%

12%

10%

8%

1%

19%

10%

9%

11%

9%

16%

21%

3%

Primary Objective Secondary Objective

2012, n=118

Primary Plan Objectives

Source: DCIIA 2012 Plan Sponsor Survey

32


Automatic Enrollment Details

• 85% of plans typically enroll new hires only, down from 95%.• 69% have no intentions to change their plan’s automatic enrollment

structure within the next 12 months.

9%

11%

23%

85%

2%

2%

39%

95%

2010 2012

We automatically enroll new hires

We implemented automatic enrollment, we did a one-time sweep for existing employees

Annually or periodically, we automatically enroll existing employees who are not currently

participating

Other

How do you offer this automatic enrollment feature?

Among those whose plan offers automatic enrollment: 2010, n=44; 2012, n=66Source: DCIIA 2012 Plan Sponsor Survey

33


Automatic Enrollment Details

• The typical default contribution rate is 3%, despite 78% saying that the optimal savings rate is 10% or more.

• Still, plans appear to be gradually moving to a higher default rate since 2010.

• 8% will increase the default contribution rate in the next 12 months.

<4% 4-5% 6-7% 8-9% 10-11% 12-13% 14-15% More than 15%

0% 0%

6%8%

37%

10%

18%22%

0%

6%8% 7%

22%

17%19% 20%

2010 2012

Optimal Savings Rates According to Sponsors

2010, n=101; 2012, n=118

Other

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

9%

0%

0%

0%

3%

12%

6%

17%

47%

5%

2%

5%

5%

0%

0%

2%

9%

11%

7%

55%

5%

2%

2...

Current Default Contribution Rate

Among those whose plan offers automatic enrollment: 2010, n=44; 2012, n=66

Source: DCIIA 2010 and 2012 Plan Sponsor Survey

34


How Automatic Contribution Escalation is Offered

• 47% offer automatic contribution escalation (46% in 2010)• 40% who offer, do so as a default option (slight uptick from 2010).• “I don’t know why more plans don’t do this, particularly if they’re starting

people at 3%. All the data suggest that people aren’t going to get to the contribution rate they need on their own.”

As a default option (in conjunction with automatic enrollment)

As a default option (not in conjunction with au-tomatic enrollment)

As an opt-in option (participants must elect it) We don’t offer automatic contribution escalation

15%

4%

27%

54%

19%

3%

25%

53%2010 2012

How is automatic contribution escalation offered in your plan?

2010, n=101; 2012, n=118


35


Automatic Contribution Escalation: Default Details

• 88% escalate contributions at 1% annually.

1%

2%

3%

4%

5%

Other

89%

11%

0%

0%

0%

0%

88%

4%

4%

0%

0%

4%

2012 2010

Annual Automatic Increase Reasons for Choosing Increase Rate

It is reasonable from a fiduciary standpoint

It appeared palatable to participants (e.g., they wouldn’t opt out)

It is consistent with best results from a retirement income adequacy perspective

It was recommended by consultant or other expert

To be consistent with the Qualified Automatic Contribution Arrangement safe harbor that provides a non-discrimination testing safe harbor

It was most prevalent among other defined contribution plans

It is consistent with behavioral research

42%

74%

16%

42%

26%

16%

46%

38%

31%

27%

27%

23%

15%2012 2010

Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26


36


Automatic Contribution Escalation Default Cap

• The most common cap on annual rate increases is 6%; followed by 10%. • There is no required cap for plans that don’t adhere to the non-

discrimination testing safe harbor.


What is the default cap on annual automatic contribution escalation rate increases?

Less Than 6%

6%

7%-9%

10%

More Than 10%

11%

47%

11%

26%

5%

5%

41%

9%

32%

14%

2012 2010


37


Participant Impact

• The median annual opt-out rate for this service is 5%; as low as 0%; as high as 70%.

• More than half of plan sponsors describe the attitudes of participants as favorable about auto escalation.

Top 2 Very favorable Somewhat favorable Indifferent Somewhat unfavorable Very unfavorable

39%

17%22%

48%

9%4%

54%

23%

31%

42%

4%0%

2010 2012

Participant Attitudes Toward Automatic Auto Escalation



38


Trends

Trends Trendsetters

Automatic enrollment

57% of plans feature auto enrollment; more than a 16% increase from 2010 (Deloitte 2012 Annual 401(k) Benchmarking Survey)

85% of plans typically enroll new hires only, down from 95%. 69% have no intentions to change their plan’s automatic enrollment structure within the next 12 months. (DCIIA 2012 Plan Sponsor Survey)

Plans with auto enrollment have higher participation (82%) than those with voluntary enrollment (57%) (Vanguard’s “Plan Leakage can be Less of an Issue than Participation,” June, 2011)

Do we know any plans that recently added auto enroll and has a great story to tell?

Savings rate (default and/average)

Average initial default rate: 3% (EBRI 2013 Issue Brief 225: Pension Plan Participation)

Average contribution rate down from 2007 (7.3%): 7.1% (Vanguard, How America Saves, 2012)

The typical default contribution rate is 3%, despite 78% saying that the optimal savings rate is 10% or more. Still, plans appear to be gradually moving to a higher default rate since 2010. 8% will increase the default contribution rate in the next 12 months. (DCIIA Plan Sponsor Survey 2012)

Don’t we know of a large plan that defaults at 10%?

39


Trends

Trends Trendsetters

Match Contribution 22% of plan sponsors said it was likely they would restructure their matching contribution “In a manner to incent higher savings rate in order to get full match.” (DCIIA 2012 Plan Sponsor Survey)

67% of companies offered a match in 2012, up from 65% in 2011; The most common match formula is 50% of employee deferrals up to 6% of pay Deloitte 2012 & 2011 Annual 401(k) Benchmarking Surveys)

During the financial crisis a number of plans suspended or

terminated the match; 75% have since reinstated partial or full match. Of those 75%, 74% have reinstated to the original or higher levels (Towers Watson 2011 “A Look at Defined Contribution Match Reinstatements”)

Is anyone doing anything interesting with a match?

Automatic escalation 47% offer automatic contribution escalation (46% in 2010); 40% who offer, do so as a default option (slight uptick from 2010) (DCIIA 2012 Plan Sponsor Survey)

Of the companies that auto enroll, 70% use auto escalation Towers Watson, 2012 DC Sponsor Survey

Anyone being bold with auto escalate?

40


Trends

Trends Trendsetters

Re-Enrollment 18% of plan sponsors have engaged in a reenrollment; Of those sponsors that engaged, 93% report a positive reaction from participants. For the plan sponsors that did not re-enroll, the majority cited an anticipated negative reaction as a reason for not doing so (Blackrock 2012 Annual Retirement Survey)

Any reenrollment examples?

Default investment 74% of sponsors offering target date funds as default option Within the Callan DC IndexTM, 77% of flows went into target date funds.Use custom target date funds: 11% (2013 DC Trends Survey, Callan Investment Institute)

Any interesting default trends?

Core Investment Menu

Median number of funds: 18Use collective trusts: 48%Use separate accounts: 43%Use a mix of active and passive: 81%(2013 DC Trends Survey, Callan Investment Institute)

Any plans that just offer default and brokerage window? Or maybe talk about using same funds that are in target date for lineup?

41


Trends

Trends Trendsetters

Retirement Income Solution

Do not have an income/annuity solution: 74%(2013 DC Trends Survey, Callan Investment Institute)

40% expect to implement in the next 5 years62% of those not likely to offer cite “solutions still evolving” as the reason (DCIIA 2012 Plan Sponsor Survey)

Maybe call out UTC here?

Company Stock Offer company stock as an investment option: 44%Don’t plan to make changes to the co stock offering: 78%Limit employees investment in company stock: 23%

Any interesting data for this note? Around automation

Advice Any advice data?

Loans 21% of 401(k) participants had loans outstanding at the end of 2011 (EBRI Issue Brief No. 380, December 2012 The average outstanding loan balance was $7,126 (Wells Fargo, Increase in Participants Taking Loans from their 401(k) 89% of 401(k) plans offer loans that generally allow participants to borrow up to 50% of their vested account balance (up to $50,000) with an average interest rate of 1% plus the prime rate (Bloomberg.com – Senate Bill Would Limit Savers Using 401(k)s as Rainy-Day Funds, by Margaret Collins, May 18)

Any loan info that is interesting?

42


Trends

Trends Trendsetters

Cash outs Participants with balances less than $5k cash-out 55% of the time while participants with over $50k cash-out less than 15% of the time. Only 10-15% of participants will move their 401k balances to a new employers plan (GAO). (Boston Research Group – Eliminating Friction and Leaks in America’s Defined Contribution System, April 2013)

?

43


Trends

Trends Trendsetters

Communications 78% of plan sponsors report their biggest challenge is engaging employees year round, yet only 10% actually communicate year round. Of the companies that communicate year-round, 84% met all or nearly all their goals. Only 10% of companies report using social media for benefits communications, even though Forester Research reports that 4 out of 5 adults use social media. Only 38% give employees access to their benefits info on a site outside the firewall. (Benz Communications 2012 Survey)

Participants say these features would help them:• Having small steps that are easy to accomplish — 94%• Getting constant reminders — 62%• Automatically making me do something, but letting me

opt out or make a different decisions — 74%• Showing me how people like me are successful with

savings and investments — 84%• Giving me a computer tool that will guide me through

the choices – 93%(SSgA The Participant Magazine, Winter/Spring 2012)

KIVA info insert here

Education Does anyone know where we can get info on education?

MODULE 3:

The Participant Experience


44

45


Combating Myths and Assumptions

Employers may be reluctant to embrace the fully automatic DC program.

Why?• Participant reactions• Fiduciary liability• Costs

46


Automatic Enrollment: Reasons for Not Offering and Future Intent to Add

Why do you not offer automatic enrollment? How likely are you to add automatic enrollment in the next 12 months?

Top 2

Very likely

Somewhat likely

Somewhat unlikely

Very unlikely

16%

7%

9%

19%

65%

30%

13%

17%

21%

48%

2012

2010

Among those whose plan does not offer automatic enrollment: 2010, n=57; 2012, n=52

Unnecessary (participation is already high)

Too paternalistic

Inappropriate in the current economic environment

Too costly from a company matching perspective

Unclear/excessive potential fiduciary liability

Haven’t really considered it

Too expensive to implement

Other (please specify)

Uncertain how to implement automatic enrollment

23%

19%

18%

18%

2%

7%

12%

26%

0%

27%

19%

12%

12%

10%

8%

6%

33%

4%

2012

2010


47


Automation Reaction

The Concern: Will my employees react negatively to automation?

The Observations:• 75% of American workers would rather be auto enrolled.• 63% want auto increases for their savings.• 98% “glad company offers auto-enrollment” and did not

opt out.• 79% who did opt out of the savings plan also “glad

company offers auto-enrollment”.• 85% report started to save for retirement earlier than

planned.Source: Prudential Insurance Report; Harris Interactive Poll 2007

48© 2014 DCIIA: Dedicated to Enhancing Retirement Security

Employee Impact

• More than half of respondents describe their employees’ attitude toward automatic enrollment as very or somewhat favorable.

• Participation rates increased by approximately 20% post implementation (average 81%).

• The average opt-out rate is less than 10%; as low as 0%; as high as 75%. • “We have a default rate of 6%, and that maximizes the company match. It’s an

attractive enough program that it’s pretty unusual for people to opt out.”


70%

34% 36%30%

0% 0%

57%

33%

24%

39%

2% 2%

2010 2012

Among those who offer automatic enrollment: 2010, n=44; 2012, n=66

Employee Attitudes Toward Automatic Enrollment


49


Participant Impact

• The median annual opt-out rate for this service is 5%; as low as 0%; as high as 70%.

• More than half of plan sponsors describe the attitudes of participants as favorable about auto escalation.


39%

17%22%

48%

9%4%

54%

23%

31%

42%

4%0%

2010 2012

Participant Attitudes Toward Automatic Auto Escalation



50


What is Helpful?

How helpful would each of the following be in encouraging you to save and invest for retirement?

Receiving information that scares me.

Having small steps that are easy to accomplish.

Getting constant reminders.

Automatically making me do something, but letting me opt out or make a

different decision.

Showing me how people like me are successful with savings and

investments.

Giving me a computer tool that will guide me through the choices.

Source: State Street Global Advisors 2011 DC Investor Survey

51


Use Automation

At about what percentage of your salary do you think you would discontinue an automatic increase of 1% a year that included the ability to opt out at any time?

Source: State Street Global Advisors April 2012 DC Investor Survey

MODULE 4:

The Impact of Automation


52

53


What are the Levers to Improving Outcomes with Auto Features?

• Increase the automatic enrollment contribution rate cap (e.g., from 6% to 9%, 12% or 15%).

• Successfully encourage workers not to opt out of their 401(k) plan.

• Ensure that employees remember and implement deferral levels from their prior 401(k) plan instead of remaining at the automatic enrollment default.

• Increase the annual automatic contribution escalation rate from 1% to 2%.

EBRI/DCIIA study shows that when all four design elements and behaviors are optimized, the probability of success increases 33.5 to 37 percentage points depending on income quartile.

54


What are the Levers to Improving Outcomes with Auto Features?

• Increase the automatic enrollment contribution rate cap (e.g., from 6% to 9%, 12% or 15%).

• Successfully encourage workers not to opt out of their 401(k) plan.

• Ensure that employees remember and implement deferral levels from their prior 401(k) plan instead of remaining at the automatic enrollment default.

• Increase the annual automatic contribution escalation rate from 1% to 2%.

EBRI/DCIIA study shows that when all four design elements and behaviors are optimized, the probability of success increases 33.5 to 37 percentage points depending on income quartile.

55


Modifying Plan Design Increases Probability of Success

0.7999999999999981.81.3

16.4

24.7

21.1

25.7

30.929.8

29

33.5

0.3999999999999991.20.600000000000002

14.1

23

20.1

25.9

31.630.5

31.4

37

Increase in Probability of Success* From Modifying Plan DesignFeatures of Automatic Escalation and Employee Behavior

Lowest-paid Quartile Highest-paid Quartile

Pe

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Po

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ss R

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ari

o

Source: EBRI/ERF Retirement Security Projection Model, versions 100810a1–100810a16.* "Success" is defined as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations combined as defined in the text. The population simulated consists of workers currently ages 25–29 who will have more than 30 years of simulated eligibility for participation in a 401(k) plan. Workers are assumed to retire at age 65 and all 401(k) balances are converted into a real annuity at an annuity purchase price of 18.62.

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Plan Sponsor Take-Aways

The “Nudge” Factor: • A plan sponsor will always make plan design

decisions—whether intentionally or not. • We see this in everything from menu selection to

opt-in versus opt-out features.• Given the impact that auto features have on

retirement income, plan sponsors should adopt designs that lead to better outcomes while still giving individuals the opportunity to make their own choices.

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Moving the Dial on Participant Behavior

Reducing participant opt-outs to auto contribution escalation through:• Design. Use the match formula to influence results by

increasing the level of contributions to which the match will be made. • This can be done in a cost-neutral way. For example, instead of matching

50% on the first 6% of contributions, match 25% on the first 12% of contributions.

• Research shows that any match at all encourages 401(k) savings, and that the structure of the match largely determines the level at which individuals save.

• Communication. • Provide participants with on-track reporting tools that reinforce the

importance of increased savings rates to meet retirement goals.

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Moving the Dial on Participant Behavior

Encouraging use of prior contribution levels through: • Simply using higher starting default rates.

• Research shows that when automatic enrollment contribution defaults are as high as 6%, opt out rates are no higher across demographic groups than when they are as low as 3%.

• Showing participants the downside of failing to save at robust levels through state of the art communication.

MODULE 5:

Evaluating, Prioritizing and Preparing for Plan Changes


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Evaluate, Prioritize and Plan Changes

We created the following framework and worksheets to help you build a roadmap to using automatic features to support a stronger DC plan.

The framework takes you through a three-step process to help you develop a holistic picture of your plan, how it measures up against the industry, and a roadmap to plan improvements. These tools are designed to help you balance the complexity of the decision-making process.

1. Knowing Your DC Plan• Map out current and future state• Provides perspective on where you are and where you want to go• Guides goal and priority setting

2. Building the Roadmap to a Stronger Plan• Prioritize plan goals and improvements

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How Automation Influences Outcomes

Automatic

Features

=

Better Outcomes

Savings

Auto enroll

Default savings rate

Auto escalate

Match structure

Investing

Default investment

Asset Allocation

Retirement Income Solutions

Communications

Easy Enrollment

“Take Action” easy communications

Social media

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Step 1: Knowing Your Plan

The following sample worksheets provide you the opportunity to examine your plan from many different angles.

Use the samples to fill in your own data about your plan. Use that data to provide you and your decision-makers and stakeholders with a holistic view of your plan.

• Philosophy – this can heavily influence how changes are approached, achieved and integrated.

• Savings Features – automation can be heavily influenced from this angle.

• Investment Features – the use of default investments and the growing interest in retirement income is an auto feature for examination.

• Communications – how you frame and guide participants through automation and areas of choice can significantly influence outcomes.

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Philosophy: Current and Future State

Your Plan Today Your Plan Tomorrow (2-3 years)

Primary Objective Froze our DB plan 4 years ago. Current DC plan is adequately acting as a supplemental plan but needs to do more

Want to see higher savings and explore investments that can deliver returns

Replacement rate objective(according to AON/Hewitt, 61% of sponsors likely to measure retirement adequacy in 2013)

Haven’t defined replacement rate formally Get to agreed rate of about 70%

Philosophy Mostly paternalistic, but gentle in nudges due to fears of negativity; conservative investment approach

Want to get more comfortable with interventions that improve outcomes

Demographic Considerations Almost half participants are in retirement; our younger employees are invested too conservatively

Focus on our employees; understand what our retirees need from us and

Cost Reduced reduced investment menu and fees Reduce fees more; look at cost of match; improve efficiency and reduce waste with communications

THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA

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Savings: Current and Future StateTHIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA


Participation & Eligibility 89% (all employees after 6 mos.) 99% (all employees at hire)

Automatic enrollment Yes, but only new employees Partial re-enrollments to increase participation

Savings rate (default and/average) Default is 3%, average is 5% We want to see if we can get employees up to 8-10%

Match Contribution Yes, 50% on the first 3% Not sure what to do with match; considering flat match

Automatic escalation No Consider adding but only 1% per year

Re-enrollment Only enrolling new employees Might consider a spot re-enrollment of participants not enrolled and those in outlier allocations

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Investment: Current and Future State


Default investment Target date fund Explore benefits of custom target date

Core Investment Menu We have 10 funds in the core; half index and half active; no inflation protection

We need to reevaluate when we do the custom project and see what makes sense for core

Retirement Income Solution Not considering now Explore options, including embedding into custom solution

Company Stock We recommend limits on ownership at 10% We are exploring an automatic rebalance feature to ensure allocation is at 10% or less.

Advice We have advice through our RK Not sure what to do here and what has impact

Loans Yes, we allow up to 3 loans We want to just allow 1 loan at a time

Cash outs Low No need to focus


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Communication: Current and Future State


Communications Mediocre. We want to find new ways to engage employees and potentially consider social media.

Education We have an online education program. It’s not really used

Is there a way to use our education budget more effectively?

Other Considering bringing together all benefits under one umbrella and communicating around financial and physical wellness


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Step 2: Building the Roadmap

The following worksheets outlines the opportunities for you to articulate plan goals and then prioritize and rational your roadmap to strengthening your DC plan.

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Goal and Priorities: Outlining the Roadmap

Priority Goal Requirements


1 Use replacement rate objective as our lead driver of all other changes…)

• Clearly define a replacement rate objective (about 75%?) – estimated at about 75%and get clear on what influences that number (savings, returns, etc.

• Have consultant do analysis• Educate committee on how this will help us stay aligned on

changes/objectives

Cost 5 Did cost evaluation last year and reduced fees and consolidated some investments

• Measure progress to date

Participation & Eligibility 4 Evaluate where participation and eligibility could be influencing strength of plan

• Have HR run data on participation & eligibility and make recommendations

Automatic enrollment 5 Already in place • Have HR run data on participation & eligibility and make recommendations


1 Move default from 4% to 6% • Complete analysis of both cost to bottom line and impact on replacement rate objective

• Survey employees to test acceptance (see also auto escalate)• Explore creative communications to clearly demonstrate value• Educate committee on impact and show research on opt outs (DCIIA

slides)


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Goal and Priorities: Outlining the Roadmap


Match Contribution 1 Go from % to flat contribution per year at end of year

• Simplifies accounting• Simplifies employee mental accounting• Makes it easier to adjust based on profitability

Automatic escalation 2 Consider doing a 2% per year auto escalation

• Complete analysis of cost to bottom line and impact on replacement rate objective

• Include as part of survey to test willingness• Educate committee on how this will help us stay aligned on

changes/objectives • Show research on how people want to save more, low opt outs• Consider framing opt out in different ways (go down from 2% to 1%,

etc.)

Re-enrollment 4 Looking at re-enrolling employees who have been out of the plan for more than 2 years

• HR is evaluating data• Talk with other plan sponsors on approach, communication, results• Educate committee on industry trends and expected experience/cost


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Top Priorities



1 Use replacement rate objective as our lead driver of all other changes…)

• Clearly define a replacement rate objective (about 75%?) – estimated at about 75%and get clear on what influences that number (savings, returns, etc.

• Have consultant do analysis• Educate committee on how this will help us stay aligned on

changes/objectives


1 Move default from 4% to 6% • Complete analysis of both cost to bottom line and impact on replacement rate objective

• Survey employees to test acceptance (see also auto escalate)• Explore creative communications to clearly demonstrate value• Educate committee on impact and show research on opt outs (DCIIA

slides)

Match Contribution 1 Go from % to flat contribution per year at end of year

• Simplifies accounting• Simplifies employee mental accounting• Makes it easier to adjust based on profitability

Communications 1 Revamping communications strategy to align with brand and drive higher engagement

• HR working on strategy for 2014 into 2015• Exploring use of social media• Evaluating where costs can be minimized (ROI) based on value• Working with brand team to support design• Working with RK to support delivery


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Top Priorities


Automatic escalation 2 Consider doing a 2% per year auto escalation

• Complete analysis of cost to bottom line and impact on replacement rate objective

• Include as part of survey to test willingness• Educate committee on how this will help us stay aligned on

changes/objectives • Show research on how people want to save more, low opt outs• Consider framing opt out in different ways (go down from 2% to

1%, etc.)

Advice 2 Exploring a supplement to RK system to provide more guidance

• Connect with peer group on current landscape• Work with consultant on clear articulation of landscape and

platform issues


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Timeline

Q1

• Finalize replacement rate objective

Q2

• Get agreement on savings features – default and escalation

Q3

• Launch new communications campaign

Q4

• Evaluate and prepare for the next year

THIS IS AN EXAMPLE – POPULATE WITH YOUR PRIORITIES

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How to Fill the Retirement Adequacy Gap: The Automatic Program

• Auto Enrollment• For all • Opt-out• Annual revisit the opt-

outs• Start at a higher default

rate- 6%• Auto Increase

• Increases in 2% increments

• Auto Invest• Use QDIA investments

like TDF’s

• Extend match formula• Control leakage• Illustrate lifetime

income• Increase participant

engagement and advice

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Thank you

• Please use these slides as you need. • Please provide us with feedback or additional

ideas on how to build out this library.• Feedback? Contact us at [email protected].

mailto:[email protected]

Documents

Power Up Your DC Plan The DCIIA Auto Features Slide Library April 2014 © 2014 DCIIA: Dedicated to Enhancing Retirement Security