Global Best Practices for DC Plans—A Global Perspective

Partner Conference 2014


Best Practice DC Plans -A Global Perspective

Barry S. KublinPresident, BPAS

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AGENDARetirement Income Readiness: an Assessment of the US DC

Plan EffectivenessThe Politics of Retirement Income Readiness SolutionsA Global View of DC PlansAutomatic Enrollment Plans in the U.S.Overcoming Employer Resistance to Auto PlansDifferentiating Service Models for Auto Plans


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Retirement Income Readiness in the US"There are three kinds of lies:

— lies, damned lies, and statistics.”“There are three degrees of falsehood:

— the first is a fib, the second is a lie, and then comes statistics”Data Sources:

National Institute on Retirement Security Center for Retirement Research at Boston College American Society of Pension Professionals and Actuaries (ASPPA) Vanguard


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38.3 mm working households (45%) do not own retirement account assets—53% of all households age 25-34 9.9 mm—48% of all households age 35-44 10.2 mm—40% of all households age 45-54 9.9 mm—40% of all households age 55-64 8.3 mm

Retirement Income Readiness in the US


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Including households without retirement savings, the median retirement account accumulation is $3k and $12k for near-retirement households.

Median working-age household earnings:—With retirement accounts $71,156—Without retirement accounts $25,413



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In 2011, 52% of private sector EEs age 25-64 had access to a retirement plan on the job— Among full-time employees, 44% (35.2 mm) had no access— Small businesses account for 2/3 of workers that lack access to

a retirement planEarnings levels are correlated to availability



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Amongst Private- Sector EEs 1979 1999 2011

EEs with access to workplace retirement plan

57.8% 61.9% 52.0%

EEs w/o access 42.2% 38.1% 48.0%



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Retirement Savings Targets (multiple of current income to produce 85% replacement ratio)

Age Fidelity Aon Hewitt

25 0x

30 ,5x

35 1x

40 2x

45 3x

50 4x

55 5x

60 6x

65 7x 11x

67 8x



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Account balances—Age 55-64 account-owning households : $100,000—Age 55-64 all households: $12,000

Account balances as % of working household income (10x goal)Age 0% >0 < 1 x 1 < 4 x 4 x +

45-54 34.9% 39.4% 22.6% 3.2%

55-64 31.8% 31.8% 28.1% 8.3%

All 40.1% 40.3% 16.7% 2.9%



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Age-specific benchmarks:— Share of working households below target— Measured by retirement account balanced (RAB)— Measured by net worth (retirement savings, DB benefit, other

savings, real estate less debt)

% below target for their age Total PV shortfall $

Total retirement assets

89.8% $11.6 T

Total net worth 65.1% $6.8 T



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The bottom 40 % of the income distribution ends up almost entirely dependent on Social Security


• The substantial pension gap between higher-and lower-income individuals is driven primarily by the lower-income group’s lower employment rate and the smaller probability of working for an employer that offers pensions


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When lower-income workers do have a pension plan at work, their eligibility and opt-out rates are nearly equivalent to higher-income workers

Solutions for this group involve working for organizations that offer retirement benefits, satisfying the eligibility requirements (1,000 hours), and automatic enrollment (prevalence amongst smaller ERs)



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A recent study from the Social Security Administration shows:


- 68% of private-sector workers have access to a retirement plan at work- 78% of full-time workers

- 80% of eligible private-sector workers with access to a plan participate- 84% participation rate for full-time workers

W-2 Data

W-2 Data


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37% of part-time private-sector workers have a retirement plan available at work and 54% of those participate

70% of workers earning from $30k to $50k participate in ER plans when available (EBRI)

A recent study from the Social Security Administration shows:

W-2 Data

W-2 Data


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“The current system is working very well for millions of working Americans. Expanding availability of workplace savings is the key to improving the system.” (ASPPA testimony, Senate Finance Committee, February, 2014)


49% of private-sector EEs who work for ERs with less than 100 EEs have a plan available at work, with a 69% participation rate

68% of U.S. households have an

IRA or ER- sponsored retirement plan


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Which “Statistics?”

Political Environment

Problem definition

Global best practices

Opportunities for improvement


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The Politics of Retirement Income Readiness Issues in the US

What America Worries About Most (Gallop, Personal Financial Survey (April, 2013)

Financial Concerns 18-29 30-49 50-64 65+Not enough money for retirement 52% 68% 72% 42%Not paying serious illness medical bills 52% 63% 63% 50%Not maintaining standard of living 46% 51% 61% 42%Not paying normal monthly bills 40% 42% 44% 31%Not paying for children’s college 42% 59% 29% 7%Not paying rent or mortgage 38% 39% 39% 19%Not paying credit card bills 16% 21% 22% 14%


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StormsState-based Initiatives to: increase retirement savings

coverage and rates “reduce fees” “Obama care II” Federal Budget Pressures CBO cost of retirement savings

“expensive benefit for the rich”

Down the Road



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State Initiatives to Address Retirement Income Readiness Concerns: www.pensionrights.org/issues/legislation/state-based-retirement-plans-private-sector


http://www.pensionrights.org/issues/legislation/state-based-retirement-plans-private-sector




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CaliforniaSecure Choice Retirement Savings Trust Act, signed Sept.

2012, to address 6.3 mm workers w/o access to workplace retirement plans

Mandatory payroll deduction plans for ERs w/5+ EEs who do not sponsor retirement plan

Auto-enroll at 3% w/opt-out Investment Board currently conducting market research

to develop final regulations/infrastructure Implementation requires subsequent legislation



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Connecticut Act Promoting Retirement Savings, submitted to

Governor May, 2014 Establishes CT Retirement Security Board to study and

create public retirement program ERs w/5+ EEs who do not sponsor retirement plan Auto-enroll (min TBD w/ER option to increase) Form of benefit – lifetime annuity w/lump sum option



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AARP Connecticut released the following statement from State Director Nora Duncan regarding passage of the CT SFY 2014 Budget and Implementer Bill:

“We’re thrilled that our elected officials understood that when it came to retirement security, Connecticut had to act. If older adults do not have enough money for a secure retirement, they will rely more heavily on public assistance. By investing up front in the design of a state retirement savings plan, Connecticut will allow more of its citizens the opportunity to save for their future, and the state will ultimately save money. -



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Massachusetts In March 2012, Massachusetts passed an Act Providing

Retirement Options for Nonprofit OrganizationsState Treasurer to sponsor a plan for EEs at small non-

profit organizationsTax-qualified, participant directed, ER and EE contributionsPlan is pending before IRS for final authorizationFor non-profit ERs with <21 EEs



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A number of insurance industry groups opposed the bill. Adam Sachs, government relations chair for the National Association of Insurance and Financial Advisors of MA, said, “This bill puts the Commonwealth in direct competition with MA companies that are already providing retirement plans to employers of all sizes in MA … This is not filling a void, or correcting a market failure—it is simply an effort to take business away from MA taxpayers.”



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Illinois• IL Secure Choice Savings

Program• Senate passage April

2014, awaiting House action

• 3% auto-enroll, opt-out• Participant directed,

target date default• Assets managed by IL

Treasurer/Board

Maryland• MD Secure Choice

Retirement Program & Trust, Introduced Jan 2014

• 5+ EEs, would require IRS tax-qualification and ERISA exemption

Other Initiatives • MN, OR, WA, WI• Obama myRA• $5,500/year, $15k

cap, Roth, govt. bonds, payroll deduction plan

• Targeted at ERs who do not sponsor retirement plans


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Federal Budget Considerations“… if this Congress want to help, work with me to fix an upside-

down tax code that gives big tax breaks to help the wealthy save, but does little or nothing for middle-class Americans.” (President Obama, 2014 State of the Union Address)



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Federal Budget ConsiderationsDave Camp, Chairman, House Ways and Means Committee,

REPUBLICAN, MITax Reform Act (2014 draft)401k limit to be comprised of 50% pre-tax, 50% Roth

—For 2014, $8,750 pre, $8.750 Roth plus 50/50 on catch-up—Generates $143 billion over 10 years



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Federal Budget ConsiderationsInflation adjustments to DB benefit limits, DC contribution

limits to be frozen for 10 yearsGenerates $63 billion over 10 years (inflation rate?)TRA 2014 (cont.)Camp25% deductibility limit on ER/EE contributions to DC plans

vs. 35% top marginal rate (10% tax on $52,000)



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Federal Budget ConsiderationsThe American Society of Pension Professionals & Actuaries (ASPPA)

and the ERISA Industry Committee (ERIC) expressed concern with Camp’s tax reform proposal. Should this proposal become law, ASPPA said, it would subject individuals in the new 35% tax bracket to a 10% surtax on all contributions made to a qualified retirement plan – that is, both employer and employee contributions. In effect, this proposal would tax contributions to qualified retirement plans twice, ASPAA noted: individuals would pay the 10% surtax when contributions are made to the plan, and then pay tax again at the full ordinary income tax rate when the money is distributed from the plan during retirement.



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SummaryPolicy makers at the State and Federal level concerned about

the rate of retirement plan participation and savings Politicians often react to pollsAbsent progress from private-sector service providers

relative to participation and savings rates and cost effectiveness, there is an emerging willingness amongst elected officials to provide for public-sector-based “solutions.”



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SummarySubstantially all proposals being discussed at the state

level include a mandate for automatic enrollment for EEs in organizations that do not offer retirement plans—A mandate for non-401k/403(b)/457 plans—An optional feature for qualified plans?



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A Global View of DC PlansCountry Overall Index Country Overall Index

Denmark 80.2 USA 58.2

Netherlands 78.3 Poland 57.9

Australia 77.8 France 53.5

Switzerland 73.9 Brazil 52.8

Sweden 72.6 Mexico 50.1

Canada 67.9 China 47.1

Singapore 66.5 Japan 44.4

Chile 66.4 S Korea 43.8

UK 65.4 India 43.3

Germany 58.5 Indonesia 42.0


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A Global View of DC PlansTotal Adequacy Sustainability Integrity

USA

2012 59.0 58.3 58.4 61.1

2013 58.2 56.6 57.8 61.2

Average

2012 61.0 62.2 52.1 71.5

2013 61.6 63.5 52.8 70.8


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Chile DC SystemPioneered Social Security in Latin America, establishing a

PAYGO system in 1924Country of 17 mmIn late 1960s, 500k retirees receiving benefitsIn late 1970s, 1 mm retirees receiving benefitsSystem was greatly underfunded, deemed a fiscal burden,Too many schemes for different sectors, ineffective

regulatory environment for investments


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Chile DC SystemReformed in 1981Mandatory DC programAll workers establish individual accounts with private firmMandatory contribution rate: 10% of pay; optional voluntary

contributions6 investment options, five target portfolios plus government

bond fundUp to 60% of assets may be invested in non-Chilean securities


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Chile DC SystemLargest investment firms in the system

— iShares: 11.2%— Vanguard: 10.8%— Franklin-Templeton: 9.1%

Upon retirement — Age 60 for women— Age 65 for men— Accumulated fund balance my be paid out as a programmed

withdrawal option (RMD recalculated every year) OR value of purchased annuity


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Chile DC SystemAge 65 male contributing for 80% of working life projected

to receive benefit amounting to 60% of pre-retirement income, in the form of a J&S

DC benefit supplemented by non-contributory public system that is means-tested and funded by general tax revenue


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UK DC SystemUK Pension Act of 2008/2011 mandates ERs to automatically enroll

workers into ER sponsored plans starting in 2012 (phase-in by size of ER)

Intent increase private pension coverage from 33% to 75%Prior system of DC plans (Stakeholder Pension Act of 2001) failed;

utilized opt-in strategiesNew system allows EEs to opt-out, but ERs must sweep every 3 years

— Age 22 earning 15,800 (US) mandatory— All workers earning 9,500 can opt-in and receive match


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UK DC SystemUK Pension Act requires 4% EE contribution and 3% ER

contribution (matching formula), 1% GOVT contribution;

plan may provide for additional ER and EE contributionsMcDonalds UK

37k EEs in UK, 35k are hourlyEnrolled 1,150 salaried and 11,500 hourly employees to

date w/ 3.48% and 2.15% opt-out rates respectively


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UK DC SystemNational Employment Savings Trust competes against private

firms for ER plans—75 bp cap on default funds

No distributions upon change of employment, no loans, no hardships, benefits available at age 55

One time 25% lump sum distribution, balance annuitized


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A Global View of DC PlansCommon Challenges/Solution Requirements

Increase retirement age to reflect increasing life expectancyEncourage/require higher levels of private savings to reduce

future dependence on the public pensionIncrease coverage for EEs in the private systemReduce leakage from the system prior to retirement


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Automatic Enrollment in the USAutomatic enrollment is arguably one of the most powerful

tools employers have to bolster employee retirement readiness.

The problem isn’t education, access, or as some claim, a “broken” system, it’s … inertia. (Sapers % Wallack, 2013)

“Education is very important, but auto features produce real results.” (Credit Suisse)

9% auto-enroll, 1% auto-increase up to 15%


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Automatic Enrollment in the USOrgan donor participation rate in Denmark (opt-in): 4.25%Organ donor participation rate in Sweden (opt-out): 86%47.2% of 401k plans have auto-enroll feature61.5% of plans with >5k participants13.6% of plans with <50 participants89.8% of Plans with auto-enrollment (AE) sweep new hires

only


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Manufacturing • 69%

Insurance • 52%

Health Care • 54%

Retail • 44%

Financial • 39%

Industry adoption of AE plans

Automatic Enrollment in the US


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23% of AE also provide for auto-increases (AI)Contribution Caps on AI plans

Annual rate of increase—97% report 1 - 1.99%—3% report 2 - 2.99%

<6% 6% 7-9% 10% >10%

7.8% 44.4% 8.5% 28.2% 11.1%



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Default contribution rate with AI

Participants in AE plans without AI contribute 1% LESS than participants in non-AE plans (participant rate is higher, average deferral is lower)—Default rate for AE plans is the major contributing

factor to this phenomenon

< 3% 3-3.99% 4-4.99% 5-5.99% 6% +

14% 44% 14% 15% 13%



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Other Factors Affecting Retirement Income Readiness

Annuity/Installment payout option in plans

12%

Loans payments post termination of employment

3%


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Bold Auto Plan Design6%-8% automatic enrollment rate

within 45 days of date of hire, depending upon average comp and top heavy considerations— Impact of raising default rate from

3% to 6%—25% increase in GAP success rate for

lowest income quartile


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Bold Auto Plan DesignInclude part-time employees

—These persons will become members of the retirement community, they may convert to full-time status with current or subsequent ER, and they also need to start early and save regularly

Eligibility for ER contributions may based upon longer length, hours of service and vesting schedule


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Bold Auto Plan DesignIncrease auto-enrollment rate by 2% until

total EE/ER contribution rate reaches 15% of

pay —Subject to AI above 10% is not a safe

harbor designAuto sweep non-participating EEs every yearAuto increase EEs every year


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Bold Auto Plan DesignSweep into QDIA every year; EEs can opt-out

of AE, AI and QDIA, every year.—Annual sweep will restore contributions for

hardship suspended, if not otherwise

provided —70% of those who swept in after opting out

stay in (NY Life)


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Bold Auto Plan DesignStretch the match, subject to safe harbor

considerations—100% first 3%, —50% next 2% —25% next 4% —5% total on 9% deferral vs. 100% on the

first 5% (5% total on 5% deferral)


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LEAKAGELoans

—Limit loans to 50% of vested account balance up to$10,000 vs. 72p limit of $50,000

—Provide for loan continuation (and origination) after termination of employment

Bold Auto Plan Design


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Annuitize benefit payments— Provide for installment payment option for

retirees vs. lump distribution requirement (DB feature)

— Installment payments vs. lifetime income productsNeither are solutions to the issue of under-accumulation

— Longevity InsurancePooled insurance for benefits after age 85

Bold Auto Plan Design


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Resistance to Auto PlansAdministrative burdens

Tracking default enrollment datesIssuing notices to participants in advance of the default

enrollment dateProcessing contribution rate changes for auto participantsTracking auto increase dates and amountsProcessing contribution rate changes for auto increases


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Resistance to Auto PlansAdministrative burdens

Liability of not administering auto feature correctly—Employer makes contribution on behalf of employee equal to 50% of

default amount plus match plus earningsIncrease cost of match associated with increase

participation and savingsPerception among financial advisors that participant

enrollment is a key element of value proposition; it’s what they get paid for

Perception that retirement savings is an EE choice; not the ER’s responsibility to mandate the EE to do so


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Overcoming Resistance to Auto Plans BPAS Administration Services

BPAS determines auto enrollment dates Sends notices to participants Creates payroll change file

With 360 payroll integration, payroll changes are transmitted directly from BPAS to Paylocity

BPAS determines auto increase amounts and dates Creates payroll change file as above Auto increase notices included on quarterly statements

Participants may opt-out using BPAS VRU/Web systems

3rd party administration of Auto Plans requires daily administration, which is more than daily valuation recordkeeping Requires that ERs remit full census date every contribution cycle and that recordkeepers make continuous

eligibility determinations Bifurcated service model of TPA/recordkeeper has limited the adoption of Auto plans in <100 life market


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Overcoming Resistance to Auto PlansIncreased costs

Recognize that ACA, minimum wage (pressure on wages above $10.10) and slow growth economy are impediments to higher retirement plan expenses

Nominal increase in matching expenses (25% match on 4% increase in average savings rate) can be mitigated by future salary increases (as have increases in health insurance cost over the years)


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Overcoming Resistance to Auto PlansAdvisor Perceptions

97% of plan sponsors that embraced automatic enrollment, automatic escalation and QDIAs together say the advantages outweigh any perceived disadvantages, indicating the value of the bundled approach compared to a single-feature approach.(Lincoln Retirement Power Automatic Features Study, 2012)


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Overcoming Resistance to Auto PlansAdvisor Perceptions

Ultimately, Advisor/Administrator services will be evaluated in context of retirement income readiness among plan participants –the ultimately metric for plan success

Auto plan provisions allow Advisors to focus on holistic financial planning, less on transaction of enrollment


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Overcoming Resistance to Auto PlansThe ER’s Cost of an Ineffective Retirement Readiness Plan

The productivity cost of employee meetings for the purpose of opt-in transactions

The productivity and human costs of financial stress associated with inadequate retirement planning

By preparing workers to retire on time, ERs have the ability to make room for new employees with different skills at potentially lower salaries


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Overcoming Resistance to Auto PlansThe ER’s Cost of an Ineffective Retirement Readiness System

The productivity costs of workers who are their only because they can’t afford not to be

Absent a private sector solution to the retirement savings crisis, businesses will be faced with a government mandate


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Overcoming Resistance to Auto PlansThe ER’s Cost of an Ineffective Retirement Readiness System

Our consumer-based economy will be challenged by the absence of retirees who have little discretionary purchasing capacity

The lack of retirement income from private sources will place pressure on government safety net systems (entitlement programs), which will result in increased personal and business tax assessments


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ConclusionWe as industry professionals must accept retirement income

readiness for ALL employees as our core deliverable. Our unwillingness/inability to sell effective plan design

threatens our industry.We have the tax benefits and technology to deliver results.Increasing active employment savings will have limited benefits

to the extent we do not address leakage; we need to re-examine the concept of “distributable events” and promote lifetime benefits.


Questions?

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Contact

Barry [email protected]

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Global Best Practices for DC Plans—A Global Perspective

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