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Midwest Pension Conference | September 10, 2008. Is Now the Right Time: Retirement Plan Design in the Post-PPA Environment. Today’s Discussions. Is Now the Right Time? Pension Plans Defined Contribution Plans Retiree Health Care Putting it all Together Thoughts for Plan Sponsors.
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Midwest Pension Conference | September 10, 2008 Is Now the Right Time: Retirement Plan Design in the Post-PPA Environment
Today’s Discussions Is Now the Right Time? Pension Plans Defined Contribution Plans Retiree Health Care Putting it all Together Thoughts for Plan Sponsors
Today’s Reality • Retirement Plans • Shift to DC • Automation • Flexibility • Income adequacy Changing Retirement Landscape • Employer • Compliance • Governance • Fees and expenses • Workforce management • Employees and Families • Increasing workforce diversity • Health care costs and increasing debt • Retirement affordability
Most Common Objectives in Plan Design Cost and predictability Optimal outcomes Competitive position Income adequacy Allocation of dollars Flexibility vs. simplicity Source: Hewitt Associates, Benefits Quarterly, Fourth Quarter 2007
Interesting Statistics • 53% • 49% • 21% Percentage of adults who consider the retirement plans extremely or very important when looking at an employer Among DC only plan sponsors, the percentage concerned about ability to effectively manage departures Among Pension plan sponsors, the percentage concerned about ability to effectively manage departures Source: 53% statistic: The Wall Street Journal On-line/Harris Interactive Personal Finance Poll using 2,373 adults ages 18+, April 2007. 49% and 21% statistics: Hewitt Associates, Hot Topics in Retirement 2007
Trends—Fortune500 DB Plan Activity 63% that had DB 10 years ago still have them (includes frozen, closed, terminated and ongoing plans) Less than half now have ongoing, open pension plans 1996 2007 Ongoing Pension 67% Source: Hewitt Associates surveys of public announcements through November 2007 about primary retirement program.
Defined Benefit Plan Activity Among Fortune 500 Organizations • Cumulative Since 1996 • Closed: 47 • Frozen: 71 • Terminated: 5 % of Companies with Plans
Pension Sponsorship for New Hires by Industry Overall Average Source: Hewitt Associates’ SpecSummary™ 2007–2008 database. All salaried plans.
Expect continued decline, but slower rate May accelerate with poor market, change in leadership, etc. Some renewed interest in cash balance plans Helped by PPA and recent IRS positions Greater focus on pension risk Hedging, LDI, alternative investment Renewed focus on retirement income adequacy Workforce management, phased retirement, etc. Pension Plans—The Next Few Years
Dramatic Move Toward DC • Number of Active Participants Prevalence—Retirement Plans for New Hires DC DB Source: U.S. Department of Labor, Private Pension Plan Bulletin: Historical Tables, Employee Benefits Security Administration, March 2007, Table E1, various years Source: Hewitt Associates’ SpecSummary
Emerging Cost Patterns—Retirement Benefits 8.0%–10.0% Other DC = 0.6% Available Match = 3.9% Pension ≈ 3%–6% long term(varies; income to even higher cost) 7.1% Other DC = 3.1% Available Match = 4.0% Source:Hewitt Associates’ 2008 SpecBookTM of 864 large employers’ benefits for new salaried hires. Available match is maximum available. Five-year average contributions were used when level is variable. Estimated current costs for pension plans range from 3.0% to 6.0% (4.5% midpoint used).
How Do Plan Sponsors Measure Success of the 401(k) Plan? Source: Hewitt 2007 Survey: Trends & Experience in 401(k) Plans
Employer Confidence Levels Confidence Level of Employees Effectively Managing Retirement Program Issues Source: Hewitt Study, Hot Topics in Retirement 2008
About half of the employees surveyed in 2008 had completed a retirement-needs calculation Employee Confidence Levels Workers Very Confident They Have Enough Money for Retirement Source: EBRI 2008 Retirement Confidence Survey
Trends—Automatic Enrollment Considerations Participation can increase significantly across all demographic groups Default behavior is strong Need to carefully consider investment defaults Prevalence Source:Hewitt surveys, Trends and Experience in 401(k) Plans Future Decisions Current State Source: Hewitt survey, Hot Topics in Retirement 2007
Trends—Contribution Escalation Considerations Easy way to increase contributions Helps fight power of immediate gratification over deferred gratification Can implement as default with automatic enrollment Feature needs to be promoted Prevalence Case Study—Percent Electing Future Trends Future Decisions Source: Hewitt 2006 and 2007Surveys, Hot Topics in Retirement
Automating Plan Investments—Risk and Age-Based Funds Considerations Can be either risk-based or age-based (target maturity) but growing trend to target maturity Simplifies diversification for a majority of employees Improves diversification even if used inappropriately Makes diversification communication easier Benchmarking becomes more difficult Other forms of automation: automatic rebalancing, managed accounts Prevalence Source: Hewitt Survey: Trends and Experience in 401(k) Plans—1995 through 2007
Continued increase in importance Greater emphasis on savings plans and savings Further plan modifications to find optimal “fit” Focus on the “de-accumulation” phase of the benefits More discussions around governance, fees, fiduciary roles, etc. Increased regulatory activity More demand for lower cost investments Communications and investment advice more critical Greater interest in focused communications Defined Contribution Plans—The Next Few Years
Prevalence of Retiree Medical Benefits Before Medicare Eligibility After Medicare Eligibility (Pre-Age 65) (Post-Age 65) Source: Hewitt Associates SpecSummary™.
Percentage of Employers with Retiree Health Care Caps for Retirees (Ages 65+) Large Employers with a Cap Percentage of Large Employers that Anticipate Hitting the Cap Already Hit Cap: 59% Will Hit Cap in Next Year: 8% Will Hit Cap in Next 3 Years: 19% Will Not Hit Cap in Near Future: 14% Note: Based on responses from private-sector firms for their largest plan with 1,000 or more employees offering retiree health benefits. Source: Kaiser/Hewitt 2005 Survey on Retiree Health Benefits, December 2005.
Retiree Health Care—The Next Few Years • Continued reductions in subsidized coverage • Less employer subsidies • Fewer employers providing subsidized coverage • Strong focus on health care from Washington • Increased importance with respect to retirement income • Employees continuing to work for health care benefits • More focus on innovation (carriers/providers) • Growing activity within the public sector
Income Adequacy in the Spotlight • Retirement Income Adequacy receiving greater attention for many reasons
Affordable Retirement • The “experts” seem to disagree about what is needed
Retiree Health Care’s Impact • A retiree’s needs will be significantly impacted by their retiree health care costs
Age 65 Income Replacement Compared to Needs—Assuming Retiree Medical (Access Only) Needs Retirement Income Source: Hewitt Associates Total Retirement Income at Large Companies—The Real Deal, 2008
Case Study • A Fortune 100 organization with a large, diverse workforce engaged Hewitt to better understand retirement income and the impact of diversity on benefits utilization • Reduce absenteeism, improve disease management • Enhance employees’ ability to retire • Improve attraction, retention, and engagement impact • Demonstrate commitment to diversity and inclusion as core values • In-depth analysis of behaviors was conducted across benefit programs to identify trends and drivers • Health plan selection • 401(k) savings and utilization
Retirement Plan—Additional Features 1 Low income defined as pay below 2 times the Federal Poverty level
Case Study—Impact of Diversity • Regression-adjusted Comparison of 401(k) Behavior: Minorities versus Whites African American Asian White Hispanic
Alignment of Plan Design and Business Goals Key Steps Articulate the objectives Measure competitive position Project income adequacy Automate decisions Select defaults with care Consider a safe harbor Pay attention to the draw down phase Review the fund structure Consider behavioral and cost implications of changes
Retirement Income Adequacy—The Real Deal 2008 Source: Preliminary results from Hewitt’s study on Total Retirement Income at Large Companies—The Real Deal, 2008. Assumes retirement at age 65 with income from Social Security, Pension, Defined Contribution (employer plus employee), and access only retiree medical coverage
3M Boeing Northrup Grumman Gannett Recent Changes in 2008