Download 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
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].
2
© 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)
3
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Module 1:
Building a
Case for Using
Automatic
Features
4
© 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
5
© 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 nondiscrimination testing.
6
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
1. The Truth About Savings
Aon Hewitt Survey:
PSCA :
• 7.3% average before-tax
contribution rate increased
slightly from the low of 7.2%
in 2011.
• Pre-tax deferrals range
from average of 5.2 % for
lower paid to 6.4% for
higher paid.
• 6.0% average Roth
contribution, was down from
6.4% in 2011.
• After tax deferrals ranges
from 3.7% to 4.9%.
• 401(m) deferrals range
from 2.5%to 2.8%.
• 72.5% of participants saved
at or above the company’s
match threshold up from
71.3% in 2011.
Aon Hewitt’s 2013 Hot Topics in Retirement (based on all eligible employees, PSCA 55th Annual Survey 2012
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
7
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
11
Low Savings is Reflected in Employee
Confidence
12
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Benefits of Contribution Escalation
Contribution Rate
Before meeting
with planner
After 4 raises
Increase
4.4%
8.6%
+4.2%
3.5%
13.6%
+10.1%
GROUP A
Willing to save more now
Not offered auto escalation
GROUP B
Unwilling to save more now
Offered auto escalation
Source: Thaler and Benartzi (2004); Utkus and Young (2004)
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
13
Plan Sponsors are Using Auto Features to
Help Employees Save
How Plans Offer Automatic Contribution Escalation
54%
2010
53%
2012
27%
25%
19%
15%
4%
As a default option (in conjuction with
automatic enrollment)
3%
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
Source: DCIIA: Plan Sponsor Survey 2012
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Auto Escalation
Cap on Automatic Increases for All Plans
That Automatically Increase Deferrals Over Time
5.1%
5% or less
4.0%
79.7%
6%
7%-9%
58.0%
2.9%
0.0%
Auto Escalation
Voluntary Escalation
6.5%
10%
8.0%
2.9%
More than 10%
14.0%
2.9%
None
16.0%
0%
10%
20%
30%
40%
50%
60%
70%
Note: 72% of Plans used a single-tier formula. Example: $0.50/dollar on 6% of pay.
Source: PSCA’s Annual Survey of Profit Sharing and 401(k) Plans, 2012
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
80%
90%
15
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
Need to engage employees
•
Newer employees
•
Younger employees
DC Participant Demographics are Revealing
Participation Rates
by Age (2012)
Participation Rates by
Length of Service (2012)
Years of Service
Percentage
Age
Percentage
<1
54%
< 25
43%
2-3
63%
25 – 34
62%
4-6
68%
35 - 44
68%
7-9
71%
45 - 54
73%
10+
77%
55 - 64
74%
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Source: Vanguard – How America Saves 2013
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Automatic Enrollment Works
100%
80%
60%
97% 100%
96% 97%
94% 97%
70%
75%
59%
40%
20%
0%
Tenure: 3 months
Tenure: 12 months
Tenure: 24 months
No Automatic enrollment
Automatic enrollment: 3%
Automatic enrollment: 6%
Source: Beshears, Choi, Laibson, and Madrian 2008
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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Automatic Enrollment Makes a Difference
100%
86%
86%
75%
75%
50%
100%
42%
50%
36%
25%
25%
0%
0%
Men
White
Women
100%
100%
75%
75%
50%
50%
25%
25%
0%
20-29
30-39
40-49
Before Automatic Enrollment
50-59
60-64
Black
Hispanic
Other
0%
$20- $30- $40- $50- $60- $70- $80K+
$30K $40K $50K $60K $70K $80K
After Automatic Enrollment
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Source: Madrian and Shea (2001)
© 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 SECURITY
Barbara A. Butrica and Nadia S. Karamcheva, Center for Retirement Research at Boston College
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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Automatic Enrollment Improves Participation
% 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.
Plans with Automatic Enrollment:
% of Plans Offering Various Deferral Rates
Deferral Rate
2007
2008
2009
2010
2011
2012
Automatic enrollment increases
participation but results in lower
average contribution rates
2011 Principal Financial Group Study
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
22
Source: Vanguard - How America Saves, 2013
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Contribution Rates & Automatic Enrollment
Fraction of participants
60
50
49
47
40
31
29
30
24
21 20
20
13 12
9
10
2
1
3
2
3
2
4
3
13
11
4
0
1-2%
3%
4%
5%
6%
7-10%
11-18%
Contribution Rate
Hired before automatic enrollment
Hired during automatic enrollment: 3% default
Hired during automatic enrollment: 4% default
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Source: Choi, Laibson, Madrian and Metrick (2006)
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Higher Defaults Equal Higher Savings
Fraction of Participants
Who Change Their
Contribution Rate
100%
80%
37
43
30
37
25
24
60%
40%
61
64
61
57
1
3
5
8
10
1%
2%
3%
4%
5%
56
60
20%
0%
16
6%
Automatic Enrollment Default Contribution Rate
Decrease
No Change
Increase
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.
Target Retirement Date/Lifecycle Fund (53.1%)
Target Risk/Lifestyle Fund (26.9%)
Balanced Fund (11.8%)
Professionally-Managed Account (3.3%)
Stable Value Fund (3.0%)
Money Market Fund (1.8%)
Source: Morningstar, Inc. Target Date series research paper, April 29, 2011
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
26
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%.
27
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
4. Auto Features Strengthen Retirement
Readiness for Employees
Source: DCIIA and EBRI
28
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
5. Auto Features Enhance Plan’s NonDiscrimination 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).
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
MODULE 2:
Trends in
Automation
30
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends: Plan Objectives
DCIIA’s 2012 Plan Sponsor Survey shows:
•
44% of plan sponsors want to increase savings
Primary Plan Objectives
26%
Increasing participant savings rates
Facilitating optimal retirement income replacement
15%
Improving investment line up
14%
19%
10%
9%
Primary Objective
Increasing participation rates
Improving asset allocation
Improving investment outcomes
Improving communication and education efforts
Minimizing leakage of assets from the plan
Source: DCIIA 2012 Plan Sponsor Survey
14%
12%
Secondary Objective
11%
9%
10%
16%
8%
21%
1% 3%
2012, n=118
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
31
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.
How do you offer this automatic enrollment feature?
We automatically enroll new hires
95%
85%
We implemented automatic enrollment, we did a one-time
sweep for existing employees
39%
23%
2010
Annually or periodically, we automatically enroll existing
employees who are not currently participating
2%
2012
11%
2%
Other
9%
Source: DCIIA 2012 Plan Sponsor Survey
Among those whose plan offers automatic enrollment: 2010, n=44; 2012, n=66
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
32
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.
•
•
Current Default
Contribution Rate
1%
2%
Optimal Savings Rates According to Sponsors
2010
37%
22%
6%
0% 0%
<4%
6%
8%
22%
19%
20%
10%
8% 7%
0%
4-5%
7%
5%
11%
6%
6%
9%
12%
8-9%
10-11%
12-13%
14-15%
2010
2012
2%
3%
0%
0%
9%
0%
0%
5%
0%
More than 15%
Other
2010, n=101; 2012, n=118
17%
8%
10%
6-7%
55%
47%
4%
7%
18%
5%
5%
3%
2012
17%
2%
2%
5%
9%
Among those whose plan offers automatic
enrollment: 2010, n=44; 2012, n=66
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
33
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.”
How is automatic contribution escalation offered in your plan?
2010
54%
2012
27%
15%
53%
25%
19%
4%
As a default option (in conjunction with automatic
enrollment)
3%
As a default option (not in conjunction with automatic
enrollment)
As an opt-in option (participants must elect it)
We don’t offer automatic contribution escalation
2010, n=101; 2012, n=118
34
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Automatic Contribution Escalation: Default Details
•
88% escalate contributions at 1% annually.
Reasons for Choosing Increase Rate
Annual Automatic Increase
89%
1%
42%
It is reasonable from a fiduciary standpoint
46%
88%
74%
It appeared palatable to participants (e.g., they wouldn’t
opt out)
11%
2%
38%
4%
It is consistent with best results from a retirement
income adequacy perspective
0%
16%
31%
3%
4%
42%
It was recommended by consultant or other expert
27%
0%
4%
0%
26%
To be consistent with the Qualified Automatic
Contribution Arrangement safe harbor that provides a
non-discrimination testing safe harbor
27%
0%
5%
0%
It was most prevalent among other defined contribution
plans
0%
2010
Other
2012
23%
16%
It is consistent with behavioral research
4%
2010
2012
15%
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
35
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 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 nondiscrimination testing safe harbor.
What is the default cap on annual automatic contribution
escalation rate increases?
11%
Less Than 6%
5%
47%
6%
41%
11%
7%-9%
9%
2010
2012
26%
10%
32%
5%
More Than 10%
14%
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
36
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.
•
Participant Attitudes Toward Automatic Auto Escalation
54%
48%
42%
39%
31%
23%
22%
17%
9%
4%
Top 2
Very favorable
Somewhat favorable
2010
Indifferent
Somewhat unfavorable
4%
0%
Very unfavorable
2012
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
37
Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends
Automatic enrollment
Trends
Trendsetters
57% of plans feature auto enrollment; more than a
16% increase from 2010 (Deloitte 2012 Annual
401(k) Benchmarking Survey)
See DCIIA Case Studies.
http://www.dciia.org/assets/Publications/2013/
dciia%20best%20practices%20when%20impl
ementing%20auto%20features%20in%20dc%
20plans%20%20june%202013.pdf
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)
Savings rate (default
and/average)
Average initial default rate: 3% (EBRI 2013 Issue
Brief 225: Pension Plan Participation)
Many plans have indicated increasing default
rate to 8%.
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)
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
38
Trends
Match Contribution
Trends
Trendsetters
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)
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)
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”)
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
39
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends
Trends
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)
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)
Core Investment
Menu
Median number of funds: 18
Use collective trusts: 48%
Use separate accounts: 43%
Use a mix of active and passive: 81%
(2013 DC Trends Survey, Callan Investment Institute)
Trendsetters
Increased re-evaluation of real
asset and fixed income
offerings.
40
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends
Retirement Income
Solution
Trends
Trendsetters
Do not have an income/annuity solution: 74%
(2013 DC Trends Survey, Callan Investment Institute)
UTC was a first mover in a
default retirement income
solution.
40% expect to implement in the next 5 years
62% of those not likely to offer cite “solutions still evolving”
as the reason (DCIIA 2012 Plan Sponsor Survey)
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%
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)
41
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends
Cash outs
Trends
Trendsetters
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)
Some plans are using a
“cooling off period” to limit cash
outs.
42
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Trends
Trends
Communications
Trendsetters
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)
43
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
MODULE 3:
The Participant
Experience
44
© 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
45
© 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?
23%
Unnecessary (participation is already high)
27%
16%
Top 2
19%
Too paternalistic
30%
19%
18%
Inappropriate in the current economic environment
7%
12%
Very likely
Unclear/excessive potential fiduciary liability
13%
18%
Too costly from a company matching perspective
12%
2010
2%
2010
9%
10%
2012
Somewhat likely
2012
17%
7%
Haven’t really considered it
Too expensive to implement
8%
19%
12%
Somewhat unlikely
6%
21%
26%
Other (please specify)
Uncertain how to implement automatic enrollment
33%
0%
65%
Very unlikely
4%
48%
Among those whose plan does not offer automatic enrollment: 2010, n=57; 2012, n=52
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Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
47
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.”
•
•
•
Employee Attitudes Toward Automatic Enrollment
2010
2012
70%
57%
34%
33%
39%
36%
30%
24%
0%
Top 2
Very favorable
Somewhat favorable
Indifferent
2%
Somewhat unfavorable
0%
2%
Very unfavorable
Among those who offer automatic enrollment: 2010, n=44; 2012, n=66
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Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 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.
•
Participant Attitudes Toward Automatic Auto Escalation
54%
48%
42%
39%
31%
23%
22%
17%
9%
4%
Top 2
Very favorable
Somewhat favorable
2010
Indifferent
Somewhat unfavorable
4%
0%
Very unfavorable
2012
Among those who offer automatic contribution escalation as a default option: 2010, n=19; 2012, n=26
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Source: DCIIA 2010 and 2012 Plan Sponsor Survey
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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
© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
MODULE 4:
The Impact of
Automation
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Modifying Plan Design Increases Probability
of Success
Percentage Point Increase in Success Relative to All-pessimistic Scenario
Increase in Probability of Success* From Modifying Plan Design
Features of Automatic Escalation and Employee Behavior
Lowest-paid Quartile
Highest-paid Quartile
37
33.5
31.6
31.4
30.5
29
30.9
29.8
25.9 25.7
24.7
23
20.1
21.1
16.4
14.1
0.6
All Four
Increase Limit
Increase Limit
Increase Limit
and Autoand No Opt Out and No Opt Out
escalation and
and Autoand Remember
Remember Level
escalation
Level
Increase Limit
and Autoescalation
1.3
1.2
1.8
Increase Limit
Increase Limit Increase Limit on Increase Auto- Remembering
and Remember and No Opt Out
Employee
escalation
Level From Last
Level
Contributions
Job
0.4 0.8
No Opt Out
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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.
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
MODULE 5:
Evaluating,
Prioritizing and
Preparing for
Plan Changes
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
How Automation Influences 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
Automatic
Features
=
Better Outcomes
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Philosophy: Current and Future State
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Savings: Current and Future State
THIS 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 810%
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Investment: Current and Future State
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Communication: Current and Future State
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Goal and Priorities: Outlining the Roadmap
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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)
Replacement rate objective
(according to AON/Hewitt, 61% of sponsors likely
to measure retirement adequacy in 2013)
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Goal and Priorities: Outlining the Roadmap
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Top Priorities
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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
•
•
•
•
•
Replacement rate objective
(according to AON/Hewitt, 61% of sponsors likely
to measure retirement adequacy in 2013)
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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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Top Priorities
THIS IS AN EXAMPLE – FILL IN WITH YOUR OWN PLAN’S DATA
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
Timeline
THIS IS AN EXAMPLE – POPULATE WITH YOUR PRIORITIES
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
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
How to Fill the Retirement Adequacy Gap:
The Automatic Program
• Auto Enrollment
• For all
• Opt-out
• Annual revisit the optouts
• Start at a higher default
rate- 6%
•
•
•
•
Extend match formula
Control leakage
Illustrate lifetime income
Increase participant
engagement and advice
• Auto Increase
• Increases in 2%
increments
• Auto Invest
• Use QDIA investments
like TDF’s
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security
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].
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© 2014 DCIIA: Dedicated to Enhancing Retirement Security