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Power Up Your DC Plan
The DCIIA Auto Features Slide Library
April 2014
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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].
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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.
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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).
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Low Savings is Reflected in Employee Confidence
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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)
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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.
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Higher Contribution Rates Have a Significant Impact on Ending Values
Putnam Institute for Research " Defined contribution plans: Missing the forest for the trees?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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)
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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)
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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).
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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%)
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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%.
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
4. Auto Features Strengthen Retirement Readiness for Employees
Source: DCIIA and EBRI
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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.
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
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
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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%?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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)
?
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Combating Myths and Assumptions
Employers may be reluctant to embrace the fully automatic DC program.
Why?• Participant reactions• Fiduciary liability• Costs
46
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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.”
Top 2 Very favorable Somewhat favorable Indifferent Somewhat unfavorable Very unfavorable
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
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
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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
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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
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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.
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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.
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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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nta
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Po
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ea
se in
Su
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ss R
ela
tive
to A
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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
Your Plan Today Your Plan Tomorrow (2-3 years)
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
Your Plan Today Your Plan Tomorrow (2-3 years)
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
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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Communication: Current and Future State
Your Plan Today Your Plan Tomorrow (2-5 years)
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
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
Replacement rate objective(according to AON/Hewitt, 61% of sponsors likely to measure retirement adequacy in 2013)
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
Savings rate (default and/average)
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)
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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Goal and Priorities: Outlining the Roadmap
Priority Goal Requirements
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
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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Top Priorities
Priority Goal Requirements
Replacement rate objective(according to AON/Hewitt, 61% of sponsors likely to measure retirement adequacy in 2013)
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
Savings rate (default and/average)
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
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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Top Priorities
Priority Goal Requirements
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
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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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].