The Path(s) Forward: The Future of Retirement Savings, and Retirement … · 2017-05-02 ·...
Transcript of The Path(s) Forward: The Future of Retirement Savings, and Retirement … · 2017-05-02 ·...
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
The Path(s) Forward: The Future of Retirement Savings, and Retirement Security
Lew Minsky, President & CEO, Defined Contribution Institutional Investment Association (DCIIA)
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
DCIIA
Lew Minsky is the President and CEO of the DefinedContribution Institutional Investment Association(DCIIA). Before helping launch DCIIA in 2010, Lew was theowner and managing member of a boutique consulting firmthat advised plan sponsors, service providers and fiduciarycommittees on governance, public policy and complianceissues. Earlier in his career, Lew served as the senior in-house counsel for a Fortune 200 company, where he hadprimary responsibility for governance and compliance issuesrelating to employee benefit plans and executivecompensation arrangements. He has also worked as anattorney at major law firms and began his legal career workingin the General Counsel’s office at the US Department ofCommerce. Lew is a recognized thought leader on retirementplan issues and has frequently been asked to provide experttestimony to Congressional committees and federal regulatoryagencies.
Lew received a bachelors degree in management (BSM) fromTulane University, a juris doctor (JD) from the University ofFlorida and a master of laws (LLM) with a certificate inemployee benefits law from Georgetown University
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
INTRODUCTION: KEY THEMES
We’ll explore the role that the industry leaders, plan sponsors and policymakerscan (and should) play in improving the retirement security of American workers.
Ø We’re heading in an uncertain time where we will likely see a “Policy Window” open up that can bring great opportunity but also presents meaningful risks to retirement security
Ø There is ongoing debate over whether we have a retirement crisis that is both polarizing and paralyzing
Ø We need bring some context to the discussion to better understand why smart/thoughtful people can have such different perceptions and perspectives
Ø We’ve made significant progress in the decade since PPA, and we know how to drive success outcomes for those that have access to the current system
Ø But, we need to move from understanding to implantation on these best practices, and we still have far too many people that are left out of the system…
Ø So, what’s the path forward?
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 4
HOW BEST TO PRESENT THESE THEMES…?
Two roads diverged in a yellow wood,And sorry I could not travel bothAnd be one traveler, long I stood
And looked down one as far as I couldTo where it bent in the undergrowth;
Then took the other, as just as fair,And having perhaps the better claim,
Because it was grassy and wanted wear;Though as for that the passing there
Had worn them really about the same,
And both that morning equally layIn leaves no step had trodden black.Oh, I kept the first for another day!
Yet knowing how way leads on to way,I doubted if I should ever come back.
I shall be telling this with a sighSomewhere ages and ages hence:
Two roads diverged in a wood, and I -I took the one less traveled by,
And that has made all the difference.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 5
THE ROAD LESS TRAVELED: LIFE LESSONS REMEMBEREDON A RECENT TRIP TO DARTMOUTH
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 6
THE ZAX: OTHERWISE KNOW AS THE RETIREMENT EXPERTS
Then the North-Going Zax puffed his chest up with pride. ‘I never,’ he said, ‘take a step to one side’
For I live by a rule that I learned as a boy back in south-going school. Never budge! That’s my rule, Never budge in the least! Not an inch to the west! Not an inch to the east! I’ll stay here, not budging! I can and I will if it make you and me and the whole world stand still!
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 7
LET’S NOT BE THE ZAX…
Well…Of course the world didn’t stand still. The world grew.In a couple of years, the new highway came throughAnd they built it right over those two stubborn ZaxAnd left them there, standing un-budged in their tracks.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 8
GREEN EGGS AND HAM: MAYBE THEY’RE NOT SO BAD!
I do not like green eggs and ham! I do not like them, Sam-I-am.
You do not like them. SO you say. Try them! Try them! And you may. Try them and you may I say. Sam! If you will let me be, I will try them. You will see.
Say! I like green eggs and ham! I do!! I like them, Sam-I-am!
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 9
MENDING WALL: IT’S TIME TO RETHINK WHAT WE “KNOW”
Mending WallSomething there is that doesn’t love a wall…
There where it is we do not need the wall:He is all pine and I am apple orchard.My apple trees will never get acrossAnd eat the cones under his pines, I tell him.He only says, ‘Good fences make good neighbors.'Spring is the mischief in me, and I wonderIf I could put a notion in his head:'Why do they make good neighbors? Isn’t itWhere there are cows? But here there are no cows...
Something there is that doesn’t love a wall,That wants it down.' I could say ‘Elves’ to him,But it’s not elves exactly, and I’d ratherHe said it for himself. I see him thereBringing a stone grasped firmly by the topIn each hand, like an old-stone savage armed.He moves in darkness as it seems to me,Not of woods only and the shade of trees.He will not go behind his father’s saying,And he likes having thought of it so wellHe says again, ‘Good fences make good neighbors.'
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 10
AND FOLLOW THE LEAD OF THE LORAX
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 11
AS WE HAVE MILES TO GO BEFORE WE SLEEP!Stopping by Woods on a Snowy Evening
Whose woods these are I think I know.His house is in the village, though; He will not see me stopping hereTo watch his woods fill up with snow.
My little horse must think it queerTo stop without a farmhouse nearBetween the woods and frozen lakeThe darkest evening of the year.
He gives his harness bells a shake
To ask if there is some mistake.The only other sound's the sweepOf easy wind and downy flake.
The woods are lovely, dark and deep,
But I have promises to keep,And miles to go before I sleep,And miles to go before I sleep.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 12
THE SOLUTIONS ARE OUT THERE
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 13
AND, IF WE WORK TOGETHER, WE CAN DRIVE BETTER RETIREMENTSECURITY OUTCOMES FOR AMERICAN WORKERS
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 14
THE OTHER ROAD (SORT OF)
Relevant Research, Details and Analysis(with an assist from Frost and Seuss…)
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 15
THE ZAX: OTHERWISE KNOW AS THE RETIREMENT EXPERTS
Then the North-Going Zax puffed his chest up with pride. ‘I never,’ he said, ‘take a step to one side’
For I live by a rule that I learned as a boy back in south-going school. Never budge! That’s my rule, Never budge in the least! Not an inch to the west! Not an inch to the east! I’ll stay here, not budging! I can and I will if it make you and me and the whole world stand still!
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
WSJ ARTICLE: IS THERE A RETIREMENT SAVINGS CRISIS?
ANDREW BIGGS: No. A “retirement crisis” is when inadequate savings
cause large numbers of households to face a substantial drop in their
standard of living in retirement. That is not going to happen.
ALICIA MUNNELL: Yes. To be considered “at risk,” households in
the NRRI must fall at least 10% short of their target. And many of the “at risk” households fall much further
short.
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
HOUSEHOLD RETIREMENT SAVINGS
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 18
THE ZAX: OTHERWISE KNOW AS THE RETIREMENT EXPERTS
Then the North-Going Zax puffed his chest up with pride. ‘I never,’ he said, ‘take a step to one side’
For I live by a rule that I learned as a boy back in south-going school. Never budge! That’s my rule, Never budge in the least! Not an inch to the west! Not an inch to the east! I’ll stay here, not budging! I can and I will if it make you and me and the whole world stand still!
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
ONE REALITY…DIFFERENT PERCEPTIONS
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 19
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 20
VARIATIONS IN STUDIES OF RETIREMENT INCOME ADEQUACY
Organization(yearofstudy)Retirementadequacybenchmark(replacementrateunlessotherwisespecified)
Percentageofsampleprojectedtobebelowbenchmark
Othernotesandstatistics
AonHewitt(2012) 85%,or11timespayatage
65.
85%ofsample Estimatesthatsavingsshortfallrelativeto
targetforfull-careercontributing
employeeis2.2xpay.
Biggs-Schieber (2014) Abletomaintainstandardof
livinginretirement,butno
specifictargetstated
N/A Forthosewhoworktofullretirementage,
SSreplaces62%offinal-avgearnings;
incomefrom401(k)’sandIRA’s
underreportedbySSA.
CenterforRetirement
ResearchatBostonCollege
(2014)
69%forhighest-thirdincome,
72%formiddle,79%,for
lowest.
52%overall;60%oflow-income
and43%ofhigh-income
households.
Projectsretirementincomeatage65.
Assumes annuitizationofwealth,including
housingequity.
EmployeeBenefitResearch
Institute(2012)
Sufficienttomeetbasic
expenses, includinghealth
expenses, throughout
retirement.
44%of1948-1954birthcohorts;
87%oflowestincomequartile,
13%ofhighestincome
Assumes age-65retirement;housing
equityconvertedtosavingsonlywhen
otherresourcesareexhausted.
Scholz-Seshadri-Khitatrakun
(2006)
Wealthconsistentwith
predictionsoflifecyclemodel.
16%ofhouseholdsoverall;30%
oflowest-incomedecile,5%of
highest-incomedecile
Samplefrom1992waveoftheHealthand
RetirementStudy.ProgressiveSocial
Securitybenefits,othertransfers,and
childrenleavinghouseholdaccountfor
muchoflower-incomesavingsadequacy.
UrbanInstitute(2012) 75%replacementrateatage
70.
30-40%of1956-65birthcohorts Calculatesworking-yearsincomeusingage
50-54incomeand35yearshighest
earnings.
Sample of May 2015 GAO Report on Retirement Security
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
IMPORTANCE OF THE DEFINITION & THE ASSUMPTIONS
Why it’s important: GAO study found that retirement income adequacy analyses range widely in theirconclusions about the degree to which Americans are likely to maintain their pre-retirement standard of living in retirement, largely because of different assumptions abouthow much income this goal requires.
The studies generally found about one-third to two-thirds of workers are at risk of falling short of this target.
ü The Center for Retirement Research at Boston College concluded that 52% of households faced risk of having insufficient retirement income to maintain their standard of living.
ü NIRS finds that approximately two-thirds of workers have savings below the suggested benchmark.
ü Scholz, Seshadri, and Khitatrakun find that only 16% of households have savings below the predictions of their model.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 21
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 22
GREEN EGGS AND HAM: MAYBE THEY’RE NOT SO BAD!
I do not like green eggs and ham! I do not like them, Sam-I-am.
You do not like them. SO you say. Try them! Try them! And you may. Try them and you may I say. Sam! If you will let me be, I will try them. You will see.
Say! I like green eggs and ham! I do!! I like them, Sam-I-am!
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
A BRIEF HISTORY OF THE 401(K) SYSTEM
1978: Congress passes the Revenue Act of 1978, which includes a provision that allows employees to avoidbeing taxed on a portion of income that they decide to receive as deferred compensation, rather than directpay. The provision becomes Internal Revenue Code Sec. 401(k).
1981: The I.R.S. issues rules allowing the funding of 401(k) plans through employee salary reductions.
1982: Several companies—such as Johnson & Johnson, PepsiCo and Honeywell—begin to offer 401(k) plansto their employees. By 1983, nearly half of all large employers either offer a 401(k) plan or are consideringoffering one, according to EBRI.
1984: The Tax Reform Act of 1984 requires “nondiscrimination” testing to prevent 401(k) plans from favoringhighly compensated employees over rank-and-file workers. At the time, Congress was concerned thatexecutives would take advantage of 401(k) plans more than lower-paid employees.
1996: Assets in 401(k) plans surpass $1 trillion, with more than 30 million participants.
2001: The Economic Growth and Tax Relief Reconciliation Act of 2001 provides for catch-up contributions forparticipants 50 and older (as of 2014, the max catch-up contribution is $5,500), as well as the creation ofRoth 401(k)s, which let after-tax contributions grow tax-free.
2006: The Pension Protection Act of 2006 allows employers to automatically enroll employees in 401(k)plans, and offer TDFs as a QDIA (safe harbor default investment).
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 23
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
BORN IN 1981
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security
ALSO BORN IN 1981…
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 25
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
401(K) SYSTEM GROWTH SINCE 1981
So, while the 401(k) system has some challenges to address, it’s still maturing (and doing a pretty good job comparatively)…
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 26
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 27
DB/DC TRENDS
Participation by plan typePrivate sector, active-work participants, 1979-2011
DC only69%
Both DB & DC24%
DB only7%
Source: U.S. Department of Labor Form 5500 Summaries 1979-1998, Pension Benefit Guaranty Corporation, Current Population Survey 1999-2011, EBRI estimates 1999-2011
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
DISTRIBUTION OF US PRIVATE PENSION PLAN ASSETS BYPLAN TYPE: 1975 – 2009
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 28
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security
U.S. RETIREMENT INDUSTRY HAS REACHED ESCAPEVELOCITYUS Retirement Industry Has Reached Escape Velocity
4
$(1)
$-
$1
$2
$3
$4
$5
$6
2009 2010 2011 2012 2013 2014 2015
Trill
ions
Total DC Assets and Cash Flows
Net Assets Total Cash Contributions Total Benefit Payments Net Cash Flow
Source: Strategic Insight
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 30
MENDING WALL: IT’S TIME TO RETHINK WHAT WE “KNOW”
Mending WallSomething there is that doesn’t love a wall…
There where it is we do not need the wall:He is all pine and I am apple orchard.My apple trees will never get acrossAnd eat the cones under his pines, I tell him.He only says, ‘Good fences make good neighbors.'Spring is the mischief in me, and I wonderIf I could put a notion in his head:'Why do they make good neighbors? Isn’t itWhere there are cows? But here there are no cows...
Something there is that doesn’t love a wall,That wants it down.' I could say ‘Elves’ to him,But it’s not elves exactly, and I’d ratherHe said it for himself. I see him thereBringing a stone grasped firmly by the topIn each hand, like an old-stone savage armed.He moves in darkness as it seems to me,Not of woods only and the shade of trees.He will not go behind his father’s saying,And he likes having thought of it so wellHe says again, ‘Good fences make good neighbors.'
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
WHAT ARE THE LEVERS TO IMPROVING OUTCOMES WITHAUTO FEATURES?
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security
AUTOMATION WORKS, WE JUST NEED TO GET EVERYONECOVERED…
Citation: EBRI Retirement Security Projection Model® version 2562
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 32
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
HOW AUTOMATION INFLUENCES OUTCOMES
AutomaticFeatures
=BetterOutcomes
SavingsAutoenroll
DefaultsavingsrateAutoescalate
Matchstructure
InvestingDefaultinvestmentAssetAllocation
RetirementIncomeSolutions Communications
EasyEnrollment“TakeAction”easycommunicationsSocialmedia
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 33
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
HOW TO FILL THE RETIREMENT ADEQUACY CAP: THEAUTOMATIC PROGRAM
AUTO ENROLLMENT ü For all
ü Opt-out
ü Annually revisit the opt-outs
ü Start at a higher default rate-6% (or higher)
AUTO INCREASE ü Consider increases in 2% increments
AUTO INVEST ü Use QDIA investments like TDF’s or Managed Accounts
ü Focus of value and outcomes not just minimizing costs
ü Consider stretching the match “institutionalize” the investment menu (consider “white labeling” and other custom solutions)
ü Encourage roll-ins and control leakage
ü Illustrate lifetime income
ü Increase participant engagement and advice
ü Facilitate access to a range of lifetime income solutions
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 34
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
DCIIA 401(K) SUCCESS FACTORS PROJECT
OBJECTIVES:
ü Create a dynamic metric for monitoring state of DC system.
ü Identify features critical to improved retirement readiness
ü Measure impact of implemented behaviors
ü Illustrate success over time
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 35
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
GOALS AND TARGET AUDIENCE
Assess initial and ongoing preparedness DC participants and demographic subsets
• Strategy tool for proposing and implementing change
• Educational tool for policymakers and plan fiduciaries
• Industry tool for progress tracking – includes assessment of
DCIIA impact
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 36
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
WHAT WILL IT ASSESS?
Highlight correlation between:• Plan features and behaviors
• Behaviors and improving income replacement
Assess for direct causal relationship• How do various plan features drive outcomes?
IDENTIFY CRITICAL FACTORS FOR SUCCESSüAsset Allocation üPlan Management
üPlan Features üAppropriate Diversification
üRisk Management üPost Retirement Phase
üFees & Expenses
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 37
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
ANALYTICAL FRAMEWORK
RetirementIncomeAdequacy
Participation AutoEnrollment
Savings AutoEscalation
Leakage DiscourageCashouts
AssetAllocation TDFs,Re-enrollment
MarketTiming/Rebalancing TDF;Auto-rebalancing
MarketReturns Diversification
Fees Institutionalization
PostRetirement RetirementIncome/Annuities
UltimateGoal
Factors toMeasure
Strategies to Enhance
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 38
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
ANALYSIS
EBRI has developed an analysis to evaluate the current state of
the DC system for DCIIA.
v Based on the EBRI Retirement Security Projection Model®
v Analyzes both voluntary enrollment and automatic enrollment plans (with
and without auto escalation)
v However, today’s results focus just on workers in automatic enrollment
plans
v Today’s results are preliminary and focus only on a small number of plan
design issues
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 39
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 40
BASELINE RESULTS: REPLACEMENT RATES
69%63%
55%
48%42%
37%33%
23%
0%
10%
20%
30%
40%
50%
60%
70%
80%
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated replacement rates from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile of AE plans
with auto escalation, by age.
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 41
BASELINE RESULTS: MULTIPLES OF PAY
8.1
7.3
6.4
5.54.9
4.33.9
2.6
0
1
2
3
4
5
6
7
8
9
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated multiples of final earnings from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile
of AE plans with auto escalation, by age.
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 42
IMPACT OF VARIOUS DEFAULTS: REPLACEMENT RATES
75%68%
60%
52%45%
39%35%
23%
65%60%
53%46%
41%36%
33%
22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated replacement rates from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile of AE plans
with auto escalation, by age
default percent = 6% default percent = 3%
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 43
IMPACT OF VARIOUS DEFAULTS: MULTIPLES OF PAY
8.77.9
7.0
6.05.3
4.54.0
2.7
7.56.9
6.25.4
4.84.2 3.8
2.6
0
1
2
3
4
5
6
7
8
9
10
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated multiples of final earnings from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile
of AE plans with auto escalation, by age
default percent = 6% default percent = 3%
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 44
IMPACT OF MATCH STRUCTURES: REPLACEMENT RATES
55%51%
45%40%
37%33% 31%
22%
70%
63%
55%
48%42%
37%33%
23%
65%59%
52%
45%40% 36%
33%22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated replacement rates from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile of AE plans
with auto escalation, by age
max match = 3% max match = 6% max match = 4%
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 45
IMPACT OF MATCH STRUCTURES: MULTIPLES OF PAY
6.45.9
5.34.7
4.33.9 3.6
2.5
8.1
7.3
6.4
5.54.9
4.33.9
2.6
7.56.8
6.05.3
4.74.1
3.8
2.6
0
1
2
3
4
5
6
7
8
9
25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Medians of simulated multiples of final earnings from 401(k) balances at 65 for participants in the 2nd or 3rd income quartile
of AE plans with auto escalation, by age
max match = 3% max match = 6% max match = 4%
Source: EBRI Retirement Security Projection Model® Version 2289.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 46
AND FOLLOW THE LEAD OF THE LORAX
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
INVESTMENT MENUS: PARTICIPANT ENGAGEMENT
~80% ~20%“Default” Investors “Active” Investors
0%
20%
40%
60%
80%
100%
06 07 08 09 10 11 12 13 14 15
% o
f Par
ticip
ants
Year
Source: Blanchett, David. Dan Bruns, and Nathan Voris. 2016. "Building Better Core Menus in the Age of Default Investments: Breadth is Better Than Depth.” Morningstar White Paper.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 47
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
INVESTMENT MENUS: THE ADVICE CONTINUUM
LowHigh Required Participant Expertise
Trend
Self-Selection Target RiskFund
Target DateFund
ManagedAccounts
FinancialPlanner
Source: Blanchett, David. Dan Bruns, and Nathan Voris. 2016. "Building Better Core Menus in the Age of Default Investments: Breadth isBetter Than Depth.” Morningstar White Paper.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 48
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 49
BUILDING A COMMON LANGUAGE TO PROMOTE ADOPTION OFAUTO FEATURESBackgroundDCIIA believes that outcome-focused features in defined contribution (DC) plans may contribute to positive retirementoutcomes for employees. These features take advantage of the safe harbors created by the Pension Protection Act(PPA), and incorporate insights from the field of behavioral economics. Collectively, these plan design features andbehavioral insights are referred to as “auto or automatic” features. However, DCIIA research revealed a communicationbarrier. Consider the term "re-enrollment.” Ask half a dozen DC industry professionals and each would likely give adifferent definition of this term. We lose valuable time clearing up confusion instead of planning for implementation.
DCIIA’s Proposed Definitional Framework1. Auto enrollment: Automatically enrolling new hires into a QDIA within the DC plan, at a fixed contribution rate.2. Auto enrollment sweep: Automatically enrolling existing eligible employees who aren’t participating in the plan intothe DC plan’s QDIA at a fixed contribution rate, either as a one-time event or periodically.3. Auto escalation: Increasing participant contribution rates at regular intervals, by a predetermined amount.4. Fund-to-fund mapping: Re-directing an existing investment from one fund to a similar, or like, fund.5. QDIA re-enrollment: Redirecting existing account balances and future participant contributions from existinginvestment allocations to a QDIA, unless participants opt out or make another election before assets are moved.Provided that the plan sponsor has satisfied the safe harbor requirements, it will be provided with relief under ERISASection 404(c) for investment outcomes related to the QDIA.6. Non-safe harbor re-enrollment: Redirecting existing account balances and/or participants’ future elections to aQDIA-eligible fund, without providing participants the opportunity to opt out or make another election prior to the assetsbeing moved, or otherwise not satisfying the safe harbor requirements. In this instance, the plan sponsor will not beprovided with relief under ERISA Section 404(c).
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 50
AS WE HAVE MILES TO GO BEFORE WE SLEEP!Stopping by Woods on a Snowy Evening
Whose woods these are I think I know.His house is in the village, though; He will not see me stopping hereTo watch his woods fill up with snow.
My little horse must think it queerTo stop without a farmhouse nearBetween the woods and frozen lakeThe darkest evening of the year.
He gives his harness bells a shake
To ask if there is some mistake.The only other sound's the sweepOf easy wind and downy flake.
The woods are lovely, dark and deep,
But I have promises to keep,And miles to go before I sleep,And miles to go before I sleep.
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
THE NEXT FRONTIER IN DC
q Combating Leakage• 46% of 401(k) participants cash out of their plan upon termination.
• 28% cash out where balances exceed $1,000.• Nearly all 401(k) plans permit hardship withdrawals.• More than half permit no hardship withdrawals• <50% of plans allow immediate plan eligibility.
q Solving the decumulation puzzleq Globalization of DC solutionsq Institutionalization of the entire DC system?
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 51
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
RECOMMENDATIONS FOR COMBATING LEAKAGE
Cash outs• Actively promote the benefits to new employees of rolling over existing balances from the former
employer's plan into their new employers’ plan, possibly as part of the new hire orientation.• Provide terminating employees with information on the long-term negative implications that leakage
can have on their retirement savings.• Encourage retired employees to leave assets in the plan through communication efforts and through
plan design—retirement income solutions.
Withdrawals• Automatically restart contributions after the statutory six-month suspension period.• Target communication messages to employees’ with hardship withdrawals to encourage restarting
contributions in the plan.• Be more rigorous in enforcing requirement to exhaust loans before allowing hardship withdrawals.
Loans• Don’t make loan taking too easy - create “speed bumps” such as requiring paperwork.• Use loan repayment as an opportunity to encourage contribute rate increases.• Allow loan payments after termination.
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 53
THE SOLUTIONS ARE OUT THERE
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
BENEFITS OF DC
Benefits of the Defined Contribution system • Payroll deductions make it easier to save consistently
• Only 8%-10% of workers eligible for IRAs do so 1
• Over 88 million Americans use payroll deduction 2
DC plans provide access to professional money management• 81% of plans offer target date fund strategies 3
• 74% of plans offer access to outside financial advisory services 4
1 Social Security Administration, The Role of Behavioral Economics and Behavioral Decision Making in Americans’ Retirement Savings Decisions2 Bureau of Labor Statistics3 Aon Hewitt 2011 Trends & Experience in Defined Contribution Plans Survey4 Aon Hewitt
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 54
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
BENEFITS OF DC
DC plans provide an option for millions of workers who have been shut out of traditional pension plans
• As of 2011, there were 88.7 million workers covered under DC plans, compared to 43.9 million in DB plans 1
• In 1993, there were only 43.6 million workers covered by DC plans, compared to 40.3 million DB participants 2
DC plans are growing among small businesses, which employ the majority of U.S. workers
• 24% of companies with 50 or fewer employees now provide 401(k)s, up from 10% in 2008 3
1 U.S. Department of Labor Private Pension Plan Bulletin Historical Tables and Graphs2 U.S. Department of Labor3 ShareBuilder 401k National Survey, 2013
© 2017 DCIIA: Dedicated to Enhancing Retirement Security 55
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
BENEFITS OF DC
DC plans provide greater portability for participants’ retirement savings
• DC plans can be easily rolled over into another DC plan or an individual IRA when they change jobs
• Savings in most traditional pension plans are not portable
Plan sponsors are looking out for their participants’ financial well-being and long-term retirement needs
• Plans sponsors have a fiduciary role, which includes the legal obligation to offer reasonable investment options and implement prudent plan design strategies
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 57
AMERICANS LIKE THEIR 401(K)S
Participation rates are at an all-time high• 78% of eligible employees participated in their employer’s DC plan in
2012, up about two percentage points from 2011 1
Participants are satisfied• 62% are satisfied with their employer’s DC plan and support 2
• 53% say are “extremely” or “very” confident in their retirement savings 3
Participants hold most of their savings in DC accounts• Participants have 40%-50% of financial assets in their DC plan 4• For 25% of participants, DC plan represents 80%+ of their assets 5
1. Aon Hewitt 2013 Universe Benchmarks2. State Street Global Advisors [SSgA] Biannual DC Investor Survey, July 20133. SSgA4. EBRI estimates from Survey of Consumer Finance5. EBRI
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
CONTINUOUS PLAN IMPROVEMENTS
More sponsors offer education and access to professional advice and money management services
• 74% of plan sponsors offer access to outside financial advisory services, up from 50% in 2009 1
• 47% of employers now offer online guidance, up from 28% in 2009 2
Pension Protection Act of 2006 resulted in greater adoption of “auto” plan features
• The PPA has dramatically increased participation and savings rates, while improving employees’ asset allocations
• These changes are reducing participants’ risk, helping put them on a path to retirement security
1 Aon Hewitt 2011 Trends & Experience in Defined Contribution Plans Survey2 Aon Hewitt
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 59
CONTINUOUS PLAN IMPROVEMENTS
1. DCIIA Plan Sponsor Survey, 20122. DCIIA3. EBRI Issue Brief 349, November 20104. Aon Hewitt
Auto-enrollment boosts plan participation—and auto-enrollment is up dramatically
• 56% of plans had automatic enrollment in 2012, up from 44% in 2010 1
• Participation rates jumped from 69% to 81% after auto enrollment 2
Automatic increases make it more likely that workers will save enough for a comfortable retirement
• Automatic enrollment COMBINED WITH automatic contribution increases the probability that employees will be able to replace most of their income in retirement 3
• 51% of plan sponsors offered automatic contribution increases in 2011, up from 44% in 2009 4
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
CONTINUOUS PLAN IMPROVEMENTS
Most plans now use Target Date Funds as the default investment choice
• 78% of plans use a Target Date Fund as the default investment option, up from 50% in 2007 1
• A TDF can provide a diversified, professionally managed portfolio
1. Aon Hewitt
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© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 61
DCS DO A GOOD JOB ON RETIREMENT SAVINGS
Older/ high income workers save for retirement, and are more likely to work for employers with a plan 1
• Including access through spouses, 74% of these workers have access to an employer-sponsored plan 2
It’s important to examine the make-up of workers not covered by an employer-sponsored DC plan
• 10% were under the age of 21 3
• 48% were not full-time, full-year workers 4
• Many of these part-time workers and younger workers eventually will move into full-time employment that provides access to a DC plan
1. Investment Company Institute, The Success of the U.S. Retirement System, 20122. ICI3. EBRI, Senate Help Hearing, 10/7/104. EBRI
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 62
401(K) BALANCES MUST BE LOOKED AT CLOSELY
1. EBRI presentation at Savings Coalition of America, July 20122. EBRI3. State Street Global Advisors, Biannual DC Plan Investor Survey, January 2012
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 63
5 WAYS TO MAKE THE DC SYSTEM STRONGER
1. DCIIA, Best Practices When Implementing Auto Features in DC Plans, June 20132. DCIIA, Best Practices When Implementing Auto Features in DC Plans, June 2013
© 2017 DCIIA: Dedicated to Enhancing Retirement Security © 2017 DCIIA: Dedicated to Enhancing Retirement Security 64
5 WAYS TO MAKE THE DC SYSTEM STRONGER
#3. Encourage additional institutionalization of plans• We are working with policymakers to extend the benefits large plans
enjoy to smaller plans
#4. Focus on keeping participants active in DC plans• We are working with Treasury Department to make it easier for
employees to roll over retirement balances • Plan sponsors are exploring income-generating strategies
#5. Create a better way to measure retirement readiness• DCIIA is actively working on a new metric that measures whether
participants are on track to retire• Improved measurement may help plan sponsors make changes that
can improve retirement outcomes for their employees
© 2017 DCIIA: Dedicated to Enhancing Retirement Security
FINAL THOUGHTS
Ø Cover everyone, if possible!
Ø Coverage isn’t enough- to ensure retirement income security, plan sponsors and policymakers must find ways of increasing participant savings rates.
Ø EBRI/DCIIA studies demonstrate that automatic enrollment an automatic contribution escalation provide a good starting point to improve worker savings behaviors.
Ø However, much can be done from a plan sponsor, policymaker, and provider perspective to facilitate better outcomes within the context of the existing framework of automatic enrollment and automatic contribution escalation.
Ø Be mindful of potential leakage from the system and implement strategies to keep assets in the system.
Ø Thoughtful plan design and communication can materially alter the long-term savings levels of millions of Americans.
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