Session 119PD: Designing a Retirement Program: A Sponsor Perspective
10/16/2018
2:00-3:15 p.m.
SOA Antitrust Compliance Guidelines
SOA Presentation Disclaimer
PRESENTERS:
BILL BRANCH, ASA, EA
ARTHUR RAINS-MCNALLY, FSA, EA
Retirement Plan Designs from a Plan
Sponsor’s Perspective
Session 119
October 16, 2018
SOCIETY OF ACTUARIES
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Retirement plans are not a new concept
5
The Transition to Modern Retirement
For much of our national history, families were the
“retirement plan.” But then, after World War II . . .
Here comes ERISA . . .
Company sponsored retirement plans—but many
receive no benefits
7
“History of Retirement Plans and Savings,” TIAA, March 27, 2017
ERISA—Enacted in 1974;
included formation of PBGC
1963—Studebaker terminated
pension plan; more than 4,000
auto workers in South Bend,
Indiana, lost some or all
•
1978 – The Revenue Act of 1978
•
1983 – The Social Security Amendments of 1983
(NRA from 65 to 67)
•
1992 – The 404(c) Regulation
•
2006 – The Pension Protection Act of 2006
Post World War II Developments
Possibility of Survival if Age 65 Today
9
Source: Cannex Financial Exchange Using the Society for Actuaries RP 2014 Mortality Table with MP 2014 Projection
Scale for 2015. The tables reflect the mortality experience of U.S. pension plan participants.
The Aging of America
Why did sponsors put retirement plans in
place at all?
Support of workforce strategy
•
Attraction
•
Retention
•
Renewal
•
Promotion
•
Financial ability to retire
Headline: “The Champions of the 401(k)
Lament the Revolution They Started”,
Wall Street Journal, January 2, 2017
“Many early backers of the 401(k) now say they have regrets
about how their creation turned out... Some say it wasn’t
designed to be a primary retirement tool …”
Headline: “Corporate pension
contributions reach record-level in 2017,
funding status improves to 86.0%”, PR
Newswire, Milliman analysis, April 19,
2018
“Seventeen employers contributed $1 billion-plus to pensions in
2017.”
Headline: “As Many as 114
Multiemployer Pension Plans Expected
to Fail Within 20 Years”, PlanSponsor,
August 2017
Headline: “Teamsters Pension Fund
Warns 400,000 [people] of Cuts”, New
York Times, October 6, 2015
Real World Example: The Evolution of
Retirement Plans in the Aerospace and
Defense Industry
19
19
Specific characteristics of A&D Industry
•
Requires highly skilled workforce – important to retain
professional and manufacturing labor
•
High labor replacement costs
•
Cyclical industry – slow times requires small workforce,
want to ease transition in and out of workforce during
booms and contractions
•
Competition for skills among industry competitors and in
other industries
Retirement plans have historically been a valuable tool for employers to
attract and retain employees and manage workforce during
Target Industry Peer Group Benchmark Data
20
Company New EntrantsClosure to Benefit ReductionPartial Freeze/ CompleteFreeze TerminationPlan 3M
(1/1/2009)
(Reduced benefits for hires after 1/1/2001)
Boeing
(1/1/2009)
(Cash Balance formula effective 1/1/1999)
(12/31/2015)
Caterpillar
(12/1/2010)
(Reduced benefits for hires after 1/1/2003; frozen for many
participants 12/31/2010)
(12/31/2019)
Emerson Electric
(1/1/2016)
(Frozen for some participants 9/30/2016)
General Dynamics
(1/1/2007)
(Partial FAE freeze 12/31/2010; Complete freeze for Corp
HQ employees 12/31/2013)
Honeywell
(1/1/2013)
(Reduced benefits for hires after 1/1/2009; FAE freeze for
heritage formulas 12/31/2015)
Johnson Controls
(1/1/2006)
(12/31/2014)
L-3
(1/1/2007)
(12/31/2018)
Lockheed Martin
(1/1/2006)
(FAE frozen 12/31/2015)
(12/31/2019)
Northrop Grumman
(7/1/2008)
(Cash Balance 7/1/20013 with 5-year “better of” benefit;
FAE freeze 12/31/2014)
Raytheon
(1/1/2007)
Rockwell Collins
(10/1/2006)
(Reduced benefits for hires after 1/1/1993)
(9/30/2006)
Textron
(1/1/2010)
(Reduced benefits for hires after 1/1/2007)
United Technologies
(1/1/2010)
(Reduced benefits for hires after 7/1/2002; Cash Balance
Primary Peer Group Qualified Plan Provisions
21
Company
Qualified Retirement Plan
Closed
Frozen
Boeing
•
Hired before 1/1/2009: Prior Plan FAE benefits as of 12/31/1998 (with pay increases) + prospective Cash
Balance benefit (3% to 11% based on age). Benefits completely frozen as of 12/31/2015.
•
Hired on or after 1/1/2009: DC only.
Yes
12/31/2015
General Dynamics
•
Hired before 1/1/2007: FAE5 (1.33% for service prior to 1/1/2007 + 1% thereafter); FAE5 for service prior to
1/1/2007 frozen as of 12/31/2010, but FAE5 for service after 1/1/2007 continues to grow. Corporate
Headquarters employees completely frozen as of 12/31/2013.
•
Hired on or after 1/1/2007: DC only.
Yes
Partially
12/31/2013
(Corp HQ
Employees only)
Lockheed Martin
•
Hired before 1/1/2006: FAE3 (1.25% plus 0.25% in excess of Covered Compensation; 1.5% for service over 35
years) x Service. FAE3 frozen on 12/31/2015 and service will be frozen on 12/31/2019.
•
Hired on or after 1/1/2006: DC only.
Yes
Will Be 12/31/2019
Northrop Grumman
•
Hired before 7/1/2008: Heritage Plan through 7/1/2003 transitioning to Cash Balance by 7/1/2008 on a 5-year
“better of” basis. FAE for Heritage benefits frozen as of 12/31/2014.
•
Hired on or after 7/1/2008: DC only.
Yes
No
Raytheon
•
Hired before 1/1/2007: FAE5 (1.8% for first 20 YOS + 1.2% thereafter, less same percentage split of Social
Security).
•
Hired on or after 1/1/2007: DC only.
22
22
Example of Alternatives Considered
•
Pension plan liabilities became increasingly large over the last
50 years
•
Populations matured; lifespans increased; interest rates (and
underlying inflation) decreased substantially
•
Workforce size remained constant or declined
•
Pension liabilities became larger than business capitalization in many
cases. Some analysts noted that a few of the A&D companies were
becoming insurance companies with an aerospace/defense sideline
•
Companies wanted to ease out of DB liabilities but maintain
the attraction/retention/workforce management advantages
of a retirement plan
De-Risking Approaches
23
• Lump sum offers to active
participants on termination
• Bulk lump sum offers to deferred
vested employees
• Bulk lump sum offers to retirees
(within restrictions)
• Increase funding
• Implement liability-driven
investment (LDI) strategy
• Immunization or
duration-matching strategies
• Liability settlement
through targeted
purchase of annuities
• Terminate the plan
• Close plan to new entrants
• Freeze any Final Average Pay
components
• Introduce prospective Cash
Balance formula
• Freeze/Reduce future benefit
accruals
Plan Design
Risk
Transfer to
Insurance
Company
Risk
Transfer to
Participants
Funding &
Investment
Policy
24
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
20
46
20
48
20
50
20
52
20
54
20
56
20
58
20
60
20
62
20
64
20
66
20
68
20
70
20
72
20
74
20
76
20
78
20
80
20
82
20
84
20
86
20
88
20
90
20
92
20
94
20
96
Future Accruals: Additional projected payments to be
earned in the future for active plan participants.
Active Accrued Benefits: Payments to active plan
participants that have already been earned.
Vested Terminated Benefits: Payments to terminated
participants not currently receiving benefits.
Retiree Benefits: Payments to participants currently
receiving benefits.
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
20
46
20
48
20
50
20
52
20
54
20
56
20
58
20
60
20
62
20
64
20
66
20
68
20
70
20
72
20
74
20
76
20
78
20
80
20
82
20
84
20
86
20
88
20
90
20
92
20
94
20
96
25
If assets return 5.12% each year, no future
contributions would be necessary to fund projected
benefit payments. However, contributions may still
be required due to minimum funding requirements
and volatility associated with investment returns.
Projected Benefit Payments –
Matching IRR
Benefit Payments from future contributions.
Benefit payments from earnings on current assets.
Pension Design Alternatives
26
Alternative Advantages Disadvantages Notes/Comments
1. Reduce future Cash Balance
contribution crediting rates • Relatively easy to implement and offers multiple flexible alternatives for prospective change.
• Current plan has some room to lower credits and still maintain a competitive level of benefits.
• Approach was used as recently as July 1, 2008, leading to questions of why again?
• Participants with a low contribution crediting rate may prefer enhanced savings.
Contribution credits currently range from 3.5% to 9.0% of pay based on points (age + service), with an additional 4.0% for pay above the Social Security Wage Base.
2. Reduce future Cash Balance interest
crediting rate • • Relatively easy to implement. Will not significantly reduce benefits for longer-service employees.
• Current interest crediting rate is already considered low by most investment standards.
• Participants may prefer enhanced savings so they can invest their accounts more aggressively.
Cash Balance interest crediting rate currently tied to 30-Year Treasury’s; which are already at historically low levels.
3. Reduce early retirement subsidies • No effect on those that retire on or after age 65.
• May discourage some unwanted early retirements.
• Very complex administratively as any reduction can only apply to future benefit accruals (current benefits must be grandfathered). • May discourage some wanted early
retirements.
Substantial early retirement subsidies generally apply to those hired before July 1, 2003; these subsidies apply to both the FAE and cash balance portions of the total retirement benefit.
4. Eliminate pay updates to FAE
portion of benefits • Relatively easy to implement. • Common approach for many other
companies when converting from FAE to cash balance structure.
• Larger reductions in projected benefits for those with longer service nearing retirement age. • Tends to impact higher performers
more than lower performers.
Change would affect less than half of the current workforce, but amounts could be large for certain individuals.
5. Exclude certain employees from
future participation in the plan • Somewhat easy to administer as it does not involve a change in the plan formula, but affected participants must be identified.
• Potential non-discrimination testing issues.
• Complexities in determining who is in and who is out of the plan.
Is generally the approach taken by some business segments to reduce costs and volatility.
6. Complete plan freeze • Easy to implement.
• Approach taken by some direct competitors.
• Involves multiple segment closings. • Would need to develop alternative arrangements to offer a competitive benefits structure.
Most of the newer defense/aerospace competitors do not (and never have) offered DB benefits.
FAS Cost Projections ($ in Millions)
27
2017 2018 2019 2020 2021 2022 Current Plan $239 $350 $359 $335 $286 $234 Alternative I 239 255 258 231 179 134 Alternative II 239 241 251 239 200 153 Alternative III 239 297 305 286 240 189$0
$50
$100
$150
$200
$250
$300
$350
$400
2017
2018
2019
2020
2021
2022
FAS Projections
Cash Cost Projections ($ in Millions)
28
2017 2018 2019 2020 2021 2022 Current Plan $559 $125 $397 $781 $850 $670 Alternative I 559 125 397 781 734 519 Alternative II 559 99 358 577 761 585 Alternative III 559 110 373 672 798 604$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2017
2018
2019
2020
2021
2022
Cash Projections
Alternative Design Benefit Impacts
29
Years of Service
Age 0 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 Over 34 Total
Under 25 7 46% → 40% 13 43% → 40% 20 25 to 29 30 40% → 38% 42% → 39%465 47% → 41%21 516 30 to 34 13 34% → 33% 1297 41% → 38% 439 46% → 40% 16 49% → 41% 1,765 35 to 39 11 31% → 30% 36% → 33%793 43% → 37%813 48% → 40%243 45% → 38%8 1,868 40 to 44 10 27% → 26% 721 32% → 29% 745 38% → 33% 44% → 37%474 50% → 40%242 56% → 44%33 2,225 45 to 49 4 19% → 18% 927 27% → 25% 797 33% → 29% 635 39% → 33% 980 47% → 39% 915 51% → 42% 79 54% → 45% 4,337 50 to 54 3 17% → 17% 22% → 21%983 28% → 25%884 34% → 30%759 43% → 37%1185 48% → 41%2121 52% → 45%1022 45% → 40%74 7,031 55 to 59 3 13% → 13% 676 17% → 16% 653 22% → 21% 600 29% → 27% 727 37% → 34% 1504 42% → 39% 1208 48% → 44% 503 49% → 45% 5,874 60 to 64 1 8% → 8% 14% → 14%139 19% → 18%151 25% → 24%121 34% → 33%163 39% → 38%299 44% → 43%255 46% → 44%172 1,301 Over 65 0 Total Count 82 6,014 4,503 2,848 3,305 4,872 2,564 749 24,937 Benefit Reduction % # of employees Assumptions in calculating age 65 accrued benefits:
20% - 25% 33 Salary Scale
15% - 20% 2,949 Age Rate
10% - 15% 8,626 < 30 6.00% Cash balance interest crediting rate: 4.50%
5 - 10% 11,308 30 - 40 5.00% >0% - 5% 2,021 40 - 50 4.00% No Change 0 50 - 60 3.00% 60 + 2.50% Cell Legend
Number of employees affected
Replacement ratio before alternative → Replacement ratio after alternative
Alternative Design Benefit Impacts
30
Alternative II
Years of Service
Age 0 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 Over 34 Total
Under 25 261 41% → 33% 52 41% → 33% 313 25 to 29 1344 37% → 30% 1556 39% → 32% 26 46% → 39% 2,926 30 to 34 963 33% → 27% 3345 38% → 32% 798 43% → 36% 23 46% → 39% 5,129 35 to 39 636 29% → 23% 33% → 28%2092 40% → 34%1526 44% → 39%354 41% → 36%13 4,621 40 to 44 568 24% → 20% 2086 29% → 24% 1500 35% → 30% 790 40% → 35% 350 45% → 40% 41 51% → 46% 5,335 45 to 49 638 18% → 15% 24% → 20%2413 30% → 26%1497 35% → 31%1067 42% → 38%1449 46% → 42%1280 49% → 45%98 8,442 50 to 54 571 14% → 12% 2533 19% → 17% 1688 25% → 22% 1202 30% → 28% 1645 38% → 35% 3135 43% → 40% 1510 46% → 43% 88 43% → 40% 12,372 55 to 59 320 9% → 8% 1738 15% → 13% 1299 20% → 19% 978 25% → 23% 1060 32% → 31% 2147 37% → 36% 1950 42% → 40% 802 42% → 40% 10,294 60 to 64 231 5% → 5% 1045 10% → 9% 825 16% → 15% 589 19% → 19% 688 26% → 26% 1119 32% → 32% 1018 35% → 34% 943 37% → 36% 6,458 Over 65 103 6% → 6% 572 11% → 11% 490 17% → 17% 321 20% → 20% 388 25% → 25% 555 29% → 29% 426 31% → 31% 835 35% → 35% 3,690 Total Count 5,635 17,432 9,649 5,324 5,593 8,277 5,002 2,668 59,580 Benefit Reduction % # of employees Assumptions in calculating age 65 accrued benefits:
20% - 25% 0 Salary Scale
15% - 20% 14,936 Age Rate
10% - 15% 15,812 < 30 6.00% Cash balance interest crediting rate 4.50%
5 - 10% 19,158 30 - 40 5.00% >0% - 5% 5,984 40 - 50 4.00% No Change 3,690 50 - 60 3.00% 60 + 2.50% Cell Legend
Number of employees affected
Alternative Design Benefit Impacts
31
Years of Service
Age 0 to 4 5 to 9 10 to 14 15 to 19 20 to 24 25 to 29 30 to 34 Over 34 Total
Under 25 3 40% → 39% 3 25 to 29 513 38% → 36% 790 40% → 38% 7 47% → 45% 1,310 30 to 34 422 35% → 32% 1967 39% → 37% 551 44% → 41% 12 48% → 46% 2,952 35 to 39 283 30% → 28% 1118 35% → 32% 968 42% → 39% 242 46% → 42% 5 40% → 39% 2,616 40 to 44 232 25% → 23% 1049 30% → 28% 819 36% → 34% 534 41% → 38% 174 46% → 43% 13 58% → 56% 2,821 45 to 49 221 20% → 18% 1249 25% → 23% 823 31% → 29% 658 36% → 34% 919 43% → 41% 752 47% → 45% 46 54% → 52% 4,668 50 to 54 227 15% → 14% 1305 21% → 19% 877 26% → 25% 727 31% → 30% 1014 39% → 38% 2135 44% → 42% 927 48% → 46% 43 44% → 43% 7,255 55 to 59 131 10% → 9% 16% → 15%885 21% → 20%652 27% → 26%534 33% → 32%618 39% → 38%1373 43% → 42%1258 44% → 44%429 5,880 60 to 64 106 6% → 5% 519 11% → 10% 400 17% → 16% 313 20% → 20% 335 27% → 27% 643 33% → 33% 619 36% → 36% 570 39% → 38% 3,505 Over 65 0 Total Count 2,138 8,882 5,097 3,020 3,065 4,916 2,850 1,042 31,010 Benefit Reduction % # of employees Assumptions in calculating age 65 accrued benefits:
20% - 25% 0 Salary Scale
15% - 20% 0 Age Rate
10% - 15% 0 < 30 6.00% Cash balance interest crediting rate 4.50%
5 - 10% 17,239 30 - 40 5.00% >0% - 5% 13,771 40 - 50 4.00% No Change 0 50 - 60 3.00% 60 + 2.50% Cell Legend
Number of employees affected
Replacement ratio before alternative → Replacement ratio after alternative
Conclusion
•
There is no perfect retirement plan
•
Shifting investment and longevity risk to employees
through a traditional 401(k) improves financial volatility,
but dampens effectiveness of retirement as a tool for
retention and workforce management
Plan design from the viewpoint of
multiemployer plan sponsors
Multiemployer plans
•
Have remained largely DB, though many have DC as supplement
•
Plans funding
•
Liability calculated based on long term asset return assumption, most between
7.0% and 7.5%
•
Assets invested in balanced portfolios, most hold 60-70% stocks
•
System is struggling since global financial crisis
•
Some plans healthy
•
Some heading to insolvency (running out of money)
•
Plans sponsored jointly by employers and labor unions
Employer perspectives
•
For smaller employers, allows access to benefits plans at
economies of scale
•
Provides access to union workforce
•
Well trained workers
•
Workforce flexibility, can employ just the number of people
needed
Employer perspectives
•
Contributions made based on hours worked
•
At negotiated level, based on collective bargaining agreement
•
Contribution stability very important in many industries
•
Volatile of contribution requirements substantial since global
financial crisis
•
Underfunding exposes employers to withdrawal liability
•
Makes exit less feasible, more costly
•
May reduce credit-worthiness or business sales price
Union perspectives
•
Want to be able to attract and retain top workers
•
Want to be able to retain current employers
•
Committed to retirement plans that
•
Provide retirement benefit as lifelong income
•
Provide solid benefits for generations to come
•
Remain strong without intergenerational risk transfer
•
Committed to retirement plans that
Current system is vulnerable
•
The widespread plan underfunding creates problems for
both sponsoring entities
•
Some plans headed toward insolvency
•
Some plans have switched to DC
•
Some plans are remaining in traditional DB plans
•
With goal to build reserves in order to withstand downturns
•
Think current funding problems are only due poor decade of returns
•
Some plans are exploring/transitioning to alternative designs
Multiemployer plans, zone status v. maturity
39
•
The 2000s were
more difficult for
more mature
plans.
•
Traditional plans
are vulnerable to
effects of
maturity.
Source: Zone statuses and cash flows from most
recent IRS Form 5500 filings and funded percentages
from Spring 2017 Milliman Pension Funding Study
Mature plan “management” (actual plan)
40
•
This is an extreme intergenerational risk transfer
•
Doesn’t include loss of adjustable benefits
Year
Hourly Contrib
Worked
Hours
Accrual
Rate
Contrib
Annual
Earned Per Yr
Mo. Benefit
2000
$1.00
1,800
9.5%
$1,800
$171
2010
$1.00 inside the multiplier,
$1.50 outside the multiplier
1,800
1.0%
$4,500
$18
Change
Increased
150%
Decreased
90%
Change
9.5 times
Maturity life cycle
•
Maturity is
inevitable.
•
We need plan
designs that are
indifferent to
maturity.
Assumptions
New plan starts in year 0
No legacy liability
Open group, average age 40
Asset returns = asset return assumption
Asset returns/assumption
7.00%
Contribution inflation
3.00%
-3.74%
-20%
0%
20%
40%
60%
80%
100%
0
10
20
30
40
50
60
A
nnual
c
as
hf
low
as
a per
c
ent
of
as
s
et
s
Plan Year
Why alternative design?
•
Alternative design applicable to corporate, public, and
multiemployer plans
•
Traditional plans become “difficult to maintain” (funding
variability causes large contribution requirements) as they
mature. Mature plans:
•
Are often large compared to their sponsoring entity
•
Typically have large negative cashflows
•
Have relatively few actives upon which to make contributions
•
Alternative design goals: retain lifelong income but without
contribution volatility
Is maturity a problem?
•
Maturity is only a problem
•
If a plan is underfunded
•
Or can become underfunded
•
Plans become mature
•
That is the point of a pension plan
•
To pay benefits when people retire
•
Is avoiding it reasonable?
2018 Enrolled Actuaries Meeting
44
The problem is a system that is
BOTH vulnerable to maturity
2018 Enrolled Actuaries Meeting
45
The problem is being less than
100% funded
2018 Enrolled Actuaries Meeting
46
We need plans that are indifferent to maturity
•
We need plans that remain 100% funded
•
Alternative design goals: retain lifelong income but w/o contribution
volatility—and remain 100% funded in all market conditions
•
Basic variable annuity plan (basic VAPP) does this
•
But at the expense of routine retiree benefit declines
•
Most alternative designs in multiemployer sector are
•
Modifications on variable annuity plan
Basic VAPP
•
Basic variable annuity pension plan (VAPP) from 1953 Revenue Ruling
•
Initial accruals are smaller than in traditional plan (for same cost)
•
Liabilities are calculated at a hurdle rate (usually between 4% and 5%)
•
For same amount of contribution accruals are smaller than if calculated at 7%
•
Benefits change each year by difference between actual asset return and the
hurdle rate
•
Benefits are expected to grow over time
•
Stays funded in all market conditions
•
Requires that normal cost plus expenses be funded each year
•
Benefits (and therefore liabilities) adjust to match the assets
Traditional DB v. basic VAPP
•
Basic VAPP benefit
is volatile
•
Basic VAPP provides
inflation protection
•
Retirement at 30
years of service,
equal cost plans
Retired
Risk balance: traditional DB plan
•
Current employers and current actives bear most of the risks
EMPLOYERS
AND ACTIVE PARTICIPANTS
PARTICIPANTS
Longevity
risk
Investment
risk
Inflation
risk
Interest
rate risk
Risk balance: DC plan
•
Participants bear all the risk
EMPLOYERS
PARTICIPANTS
Investment
risk
Inflation
risk
Longevity
risk
Interest
rate risk
Risk balance: sought by VAPP modifications
EMPLOYERS
AND ACTIVE PARTICIPANTS
PARTICIPANTS
Longevity
risk
Investment
risk
Inflation risk
•
Longevity risk is predictable and manageable when grouped
•
Investment risk is shared equitably across all participants, not just actives
•
Inflation protection possible, depending on modifications
Modifications to the VAPP
•
Modifications designed to smooth out retiree benefits
•
2014 regulations provide a number of options
•
All modifications sacrifice benefit level for downside
protection
•
The basic VAPP is expected to provide larger benefits than ANY
modified VAPP for the same level of contributions
•
Be aware that some modifications reintroduce risks the
basic VAPP eliminated
Modifications to the VAPP
•
Invest conservatively to limit volatility
•
Locking in benefits in retirement
•
Purchasing annuities
•
Providing a floor benefit
Traditional DB v. basic VAPP
•
Basic VAPP benefit
is volatile
•
Basic VAPP provides
inflation protection
•
Retirement at 30
years of service,
equal cost plans
Retired
Modifications to the VAPP
•
Basic VAPP:
balanced vs.
conservative
portfolio
•
Conservative
portfolio: benefit
less volatile, but
much smaller
•
Retirement at 30
years of service,
equal cost plans
Investing conservatively
Retired
Modifications to the VAPP
•
Locking benefits in
at retirement vs.
basic VAPP
•
Invested
conservatively in
order to fund lock-in
•
Retirement date has
permanent impact
on benefit
•
Retirement at 30
years of service,
equal cost plans
Retired
Active
Modifications to the VAPP
•
VAPP with floor vs.
basic VAPP
•
Invested
conservatively to
minimize volatility
as floor has cost
•
Retirement at 30
years of service,
equal cost plans
Retired
Active
Modifications to the VAPP
•
SIP vs. basic VAPP
•
Maintains balanced
portfolio
•
Uses years of
outperformance to
prevent benefit
declines in poor
return years
•
Retirement at 30
years of service,
equal cost plans
Retired
Active
The future
•
People need secure retirement, whether they work in
the public, corporate or multiemployer sectors
•
Lifelong retirement income at a reasonable price should
be a priority for our profession
DC Designs and the Plan Sponsor
Perspective
How are DC plans designed?
•
Motivators of DC Design
•
Replacement plan to offset loss of DB accruals
•
Safe harbor/non-discriminatory design
•
Benchmarked to be middle of the road
•
Stretch match to suit philosophical stylings of management
•
Avoid complexities that existed under DB plans
•
Cost containment
•
Little diligence paid historically towards a design that is geared
towards retirement readiness
•
Effective match
•
Limit early access to funds
What does an employer want from a
retirement plan?
•
Attraction and retention of associates
•
Orderly attrition of employees
•
Manageable costs
•
Simple administration
•
Low compliance efforts
Issues under the DC regime
•
No straightforward mechanisms to facilitate exit
•
No extended vesting or early retirement features to
encourage people to stay
•
Associates relying on STD/LTD as bridge to retirement
•
Leakage
•
Loans and hardship withdrawals
•
People generally not proactive with respect to
retirement savings
•
Dearth of payout options and advice
Employers are
having to turn
themselves into
financial
educators to
address these
concerns.
Effective (DC) Design
•
Design ER contributions with an eye toward retirement readiness
•
Automatic enrollment and automatic increases
•
Coordinate disability programs with DC plan
•
Robust distribution options
•
Mitigate leakage
•
Inside vs. outside the plan
•
Risk pooling
•
Investment management
Efficiency of Retirement Money: Pooling assets and risks makes attaining
retirement goals easier in the long run.
Retirement Income Projections
The research indicates that a one-year increase in
average retirement age results in:
66
An incremental cost of over $50,000 for an
individual whose retirement is delayed.
2
This
represents the cost differential between the retiring
employee and a newly hired employee.
“Why Employers Should Care About the Cost of Delayed Retirements,” 2017 Prudential
Financial Inc.
2
