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transcript
Defined Contribution in Review A Quarterly Briefing for Plan Sponsors: 1Q17
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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What’s Inside?
Our Defined Contribution in Review is designed to help institutional plan sponsors and consultants stay informed on recent events that could have an impact on plans or plan participants. Inside you will find the following information:
Quarterly Highlights: A summary of plans and sponsors making the news
Plan Sponsors’ Corner: Timely insights about plan sponsors’ retirement readiness
Legislative Review: A summary of new and pending legislation
Regulatory Review: News out of the Department of Labor and other regulatory bodies
Legal Review: An update on high-profile ERISA cases
Global Headlines: A brief synopsis regarding global retirement issues
Defined Contribution Capabilities: Janus Henderson defined contribution capabilities
Defined Contribution in Review 1Q17
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Quarterly Highlights
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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PLANSPONSOR Announces 2017 Plan Sponsors of the Year
Quarterly Highlights
For additional information, please visit plansponsor.com/awards
Category Winner
Corporate 401(k) $250M-$1B Owens-Illinois, Inc.
Corporate 401(k) >$1B Pitney Bowes, Inc.
Public DC Fulton County Government
403(b) Miami Children’s Health System
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Quarterly Highlights
Owens-Illinois Freezes Pension While Enhancing 401(k) Plan Features
﹢ Owens-Illinois, the world’s largest glass-packaging maker, froze its U.S. Defined Benefit plan for salaried employees effective January 1, 2016; the company still maintains an active cash-balance plan for hourly employees
﹢ At the same time, the company decided to enhance its 401(k) features by:
• Increasing the base contribution from 2% to 3% and match from 50% on 8% to 50% on 10%
• Including bonuses in the eligible compensation definition for the base contribution and match
• Increasing auto enrollment from 3% to 4% and the auto escalation ceiling from 10% to 20%
• Launching an annual sweep to re-enroll nonparticipating employees and employees saving less than 4%
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Quarterly Highlights
Pitney Bowes History of 401(k) Innovation Continues
﹢ Pitney Bowes, who adopted auto enrollment in 2004, recently increased the default deferral rate to 6% and tied this amount to an auto escalation feature
﹢ The company match is now 100% up to 4% of salary and all employees receive a 2% employer contribution after one year of service
﹢ The company also developed a website (www.pbprojectliving.com) to communicate the benefits to current and prospective employees and their families
• The site is viewable by the public and uses Google Translate, allowing users to interact with their benefits in Spanish, Thai, Vietnamese, German, French or Arabic
﹢ All employees have complimentary access to one-on-one financial counseling
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Quarterly Highlights
Fulton County Government Employees Get Both a 401(k) and 457 Plan
﹢ Employees of Fulton County have a mandatory 401(k) and a voluntary 457 plan
• Within the 401(k), employees are required to contribute 6% while the county contributes 8%; employees’ contributions to the 457 plan receive a 50% match up to 4% of their contribution
• 95% of Fulton County employees are on track to replace 75% or more of their pre-retirement income
﹢ The plan’s record-keeper provides a full time, on-site retirement education specialist; the specialist spends half of her time at the county’s headquarters in Atlanta and the other half between the county’s more than 40 locations
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Quarterly Highlights
Miami Children’s Health System Triples 403(b) Participation
﹢ The southern Florida health system tripled its 403(b) participation from 33% in 2011 to 95.5% today. Over time, specific changes to the plan design included:
• In 2013, implementation of automatic enrollment at a 3% default rate and a reduction of its non-elective contribution from 6% to 3%, thereby removing a disincentive for participants to increase salary deferrals
• In 2014, implementation of auto-re-enrollment, requiring employees to opt out annually to avoid joining the plan
• In 2015, implementation of auto deferral escalation of 1% annually, up to 6%
﹢ The sponsor also reduced investment fees and, since adopting a strategic plan, over 84% of participants are invested in four or more funds
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Plan Sponsors’ Corner
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Plan Sponsors’ Corner
LIMRA: Workers Value Key Features of DC Plans
﹢ A new study by LIMRA, Workers and Retirement Programs: What Are They Thinking, indicates that three-quarters of workers want to save for retirement through their employer and 53% feel that employers should be required to offer savings plans
﹢ Additionally, 91% of surveyed workers say it is important to know their retirement plan investments have been made with their best interests in consideration, while 90% felt that investment choice is important in a retirement program
﹢ 61% of U.S. workers surveyed without an employer-sponsored retirement savings plan would be more likely to save for retirement if they had access to one
Defined Contribution in Review 1Q17
For additional information, please visit limra.com/research
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Plan Sponsors’ Corner
Transamerica Releases 17 Facts About Women and Retirement
﹢ The Transamerica Center for Retirement Studies has released a new research report, Seventeen Facts About Women’s Retirement Outlook, that sheds light on challenges unique to women regarding a secure retirement. Some of the facts in the report include:
• Only 10% of women are “very confident” in their ability to fully retire with a comfortable lifestyle
• 53% of women plan to retire after age 65 or not at all
• A majority of women are taking proactive steps to help ensure they can continue working past age 65
• Most women (64%) do not have a backup plan if forced into retirement sooner than expected
Defined Contribution in Review 1Q17
For additional information, please visit transamericacenter.org
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Plan Sponsors’ Corner
Guardian Develops a Workforce Well-Being Index (WBI)
﹢ As part of Guardians’ 4th Annual Workplace Benefits Study, an index was developed to help gauge the overall well-being of working Americans
• The inaugural index score is derived from workers’ self-assessments of their financial, physical and emotional health
﹢ The weight average index score is 3.26 out of a possible 5.0
﹢ Specific scores of the three pillars are:
• Financial wellness: 3.19
• Physical wellness: 3.26
• Emotional wellness: 3.45
Defined Contribution in Review 1Q17
For additional information, please visit guardiananytime.com
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Plan Sponsors’ Corner
Fees Top of Mind in Callan’s Latest Survey
﹢ In Callan’s 10th Annual Defined Contribution Trends Survey, fees were cited as key areas of fiduciary focus. Specific trends include:
• Increase in record-keeper search activity
• Movement to institutional fund structures
• De-emphasis on revenue sharing
• Adoption of fee policy statements
﹢ In addition, 47% of plan sponsors reported making a fund change due to performance-related reasons and 64% of respondents have changed to a different money market fund or eliminated their money market fund altogether
Defined Contribution in Review 1Q17
For additional information, please visit callan.com
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Plan Sponsors’ Corner
Housing an Underutilized Retirement Asset
﹢ According to a March 2017 paper by the Center for Retirement Research at Boston College, while home equity has been the largest store of savings for most households, retirees have generally resisted using it as part of their everyday retirement plan, tapping home equity only in response to a late-in-life financial shock
﹢ The paper points out that downsizing early in retirement cuts the household’s ongoing expenses and increases its financial resources, but strong behavioral and informational barriers have impeded use of home equity that could improve retirees’ well-being
Defined Contribution in Review 1Q17
For additional information, please visit crr.bc.edu
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Plan Sponsors’ Corner
Aon: Few Employers Satisfied with Worker Savings Rates
﹢ According to Aon Hewitt’s 13th annual survey of large U.S. employers, only 15% of employers are satisfied with their workers’ current savings rates. The three areas of focus indicated by employers for 2017 include:
• Emphasizing retirement readiness: 90% of those employers not satisfied will take action this year to help workers make plans to reach those goals
• Focusing on financial wellness: 92% of employers are likely to focus on the financial wellbeing of workers in a way that extends beyond retirement, such as help managing student loan debt, day-to-day budgeting and physical and emotional wellbeing
• Refining automation: More than half of all plans with automatic enrollment default workers at or above the company match threshold, while more employers are adding auto escalation features and back sweeping non-enrolled workers
Defined Contribution in Review 1Q17
For additional information, please visit aon.com
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Plan Sponsors’ Corner
Guaranteed Income Adoption May Pick Up
﹢ The Plan Sponsor Council of America’s annual survey found that while only 5% of all plans offer a retirement income guarantee product in the plan, 12% of respondents indicate their organizations are considering adding an option
• Large plans (18%) are expressing more interest than small plans (7%)
﹢ Products that offered a guaranteed minimum withdrawal benefit or guaranteed lifetime withdrawal benefit are the most common (40%)
﹢ The top three concerns expressed about adding a retirement income guaranteed product are:
• Fiduciary exposure (38.3%)
• High costs (33.3%)
• Operational hurdles (28.9%)
Defined Contribution in Review 1Q17
For additional information, please visit psca.org
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Legislative Review
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Legislative Review
State and City Retirement Plans Hit Roadblock
﹢ On April 13, 2017, President Trump signed into a law a resolution that nullifies Obama-era retirement rules meant to encourage cities and other municipalities to develop auto-IRA programs for private sector workers
• The rule had offered a safe harbor for qualifying municipalities that would exempt their programs from ERISA if they met certain conditions
﹢ The House of Representatives passed a separate resolution in February that would also nix the same rules for state governments; that resolution hasn’t received a vote in the Senate
Defined Contribution in Review 1Q17
For additional information, please visit investmentnews.com
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Legislative Review
Two Pieces of Legislation Introduced to Help Small Business Retirement Plans
﹢ U.S. Representative Vern Buchanan (R-FL) introduced the “Retirement Security for American Workers Act”; the proposed legislation would let businesses join together in a multiple employer plan (MEP) with pooled plan providers to share the administrative burden and costs of offering a retirement plan1
﹢ Senators Mark Warner (D-VA) and Susan Collins (R-ME) introduced a bill that would direct the DOL and Treasury Department to allow employers and sole proprietors participating in retirement plans administered in the same way to file a single, aggregated Form 55002
Defined Contribution in Review 1Q17
1 For additional information, please visit buchanan.house.gov 2 For additional information, please visit warner.senate.gov
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Legislative Review
Connecticut Bill Would Require 403(b) Disclosures
﹢ On February 23, 2017 a bill was introduced in the Connecticut legislature that would require all service providers of 403(b) plans in the state to describe their services and disclose all the direct and indirect compensation received
﹢ The bill tasks the state’s Department of Treasury with adopting regulations “guided by” the U.S. DOL’s 408(b)2 regulations from 2012
﹢ Non-ERISA 403(b) plans are generally exempt from the 408(b)2 regulations
Defined Contribution in Review 1Q17
For additional information, please visit cga.ct.gov
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Regulatory Review
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Second Quarter Compliance Calendar
Defined Contribution in Review 1Q17
Regulatory Review
April 1 April 18 June 30
+ Required beginning date
for required minimum
distributions to participants
age 70 ½ or retiring after
age 70 ½ in prior year
+ Deadline for processing
corrective distribution for IRC
Section 402(g) excesses
+ Deadline for filing individual
and/or corporate tax returns
+ Deadline for requesting
automatic extension to
October 16 for individual and
corporate tax returns
+ Deadline for processing
corrective distributions for
failed 2016 ADP/ACP test
from plan with EACA
without the 10% excise tax
(if applicable)
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Regulatory Review
Department of Labor (DOL) Delays Fiduciary Rule’s Applicability Date
﹢ On April 4, 2017, following a notice and comment period, the DOL postponed the applicability of the fiduciary rule for sixty days, until June 9, 2017
﹢ The DOL also delayed to June 9 certain transitional requirements under the Best Interest Contract Exemption (the “BICE”) and other new or revised prohibited transaction exemptions; but it did not delay the compliance date for the full BICE, that remains January 1, 2018
﹢ The Department also repealed all of the requirements for relying on the BICE between June 9, 2017, and January 1, 2018, other than the requirements to:
• Adhere to a best interest standard
• Receive no more than reasonable compensation
• Avoid making materially misleading statements
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Regulatory Review
Second Set of FAQ Guidance Released on Fiduciary Rule
﹢ On January 13, 2017, the DOL issued a second set of frequently asked questions (FAQs) regarding its fiduciary rule; while the first set of FAQs focused on the prohibited transaction exemptions, the second set addressed interpretive questions about the rule itself
﹢ The FAQs were accompanied by a guide for consumers to better understand their rights and the role of the financial advisers. Specific issues addressed included:
• What constitutes a fiduciary recommendation
• The safe harbor exception for the provision providing education information
• When a statement is a general communication and/or falls within the “hire me” exception
• How to determine whether the “independent fiduciary exception” applies
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Regulatory Review
IB 2016-1 Clarifies Duties Regarding Proxy Voting
﹢ On December 28, 2016, the DOL issued Interpretive Bulletin (IB) 2016-1, addressing retirement plan fiduciaries’ responsibilities for voting proxies related to retirement plan investments
﹢ Notable in this guidance is the DOL’s affirmation that plan fiduciaries may consider environmental, social and governance factors – sometimes called “socially responsible” factors – when voting proxies
﹢ This clarification follows Interpretive Bulletin 2015-1 which rescinded 2008 guidance that the Department explained “had unduly discouraged plan fiduciaries from considering economically targeted investments”
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Regulatory Review
DOL: Target-Date Fund with Annuity That Restricts Transfers is Not a QDIA
﹢ In a December 22, 2016, information letter, the DOL said a target-date fund meets the QDIA requirements – unless it contains a fixed guarantee annuity that restricts transfers or withdrawals after a 12-month period – cannot be a QDIA
• One of the conditions for an investment to be considered a QDIA is the ability of the participant to transfer plan assets in their entirety, or in part, to any other investment alternative available in the plan no less frequently than once every 3 months
﹢ The DOL did affirm, however, that such an investment product or portfolio can be a prudent default investment without using the QDIA regulation
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Regulatory Review
Increased Flexibility for Substantiation of Hardship Distributions
﹢ In a February 23, 2017, memorandum, the IRS set forth administrative guidelines for agents examining whether hardship distributions meet the requirements under the safe harbor provisions
﹢ The guidelines provide that, as an alternative to collecting source documents (estimates, contracts, bills and statements), a plan may use a summary (paper, electronic or telephone records) and the participant must agree to “preserve source documents and make them available upon request”
﹢ This clarification comes after the IRS stated in its April 1, 2015 Employee Plans News publication, that participant self-certification was not acceptable to document a hardship
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Regulatory Review
IRS Clarifies That Forfeitures May Be Used as QNECs and QMACs
﹢ Proposed IRS changes to the 401(k) regulations will allow employers to use forfeitures as qualified non-elective contributions (QNECs) and qualified matching contributions (QMACs) to help pass nondiscrimination tests
﹢ Since the regulations require QNECs and QMACs to be fully vested and not eligible for early distribution at the time they are contributed, many employers were hesitant to use forfeitures as a way to fund these contributions
• The proposal will clarify that forfeitures can be used as QNECs and QMACs as long as they otherwise meet the requirements
﹢ The change is proposed to be effective after it is finalized, but can be relied upon currently
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Regulatory Review
Some Plan Sponsors Overpaying User Fees For VCP Submissions
﹢ The IRS has noticed an increase in submissions to the Voluntary Correction Program with incorrect user fees, many of which included fees higher than what is required
﹢ In response, the IRS has updated its website and reminds sponsors:
• The current Employee Plan Compliance Resolution System Revenue Procedure 2016-51 no longer lists Voluntary Correction Program user fees
• Plan sponsors need to refer to Rev. Proc. 2017-4, Appendix A.08 to determine the appropriate user fees for submissions made in 2017
• Only use the 2016 version of Form 8951 (dated September 2016)
﹢ The IRS also reminded sponsors that have not amended their plan for PPA that they are eligible for a 50% reduced fee if the failure is corrected and the VCP submission is mailed by April 30, 2017
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Regulatory Review
Retirement Examinations and Enforcement on the Rise
﹢ The Employee Benefits Security Administration (EBSA), the branch of the DOL that is dedicated to enforcing the rules set forth in ERISA for private employee benefit plans, summarized its enforcement activity for 2016
﹢ The administration closed 2,002 civil and 333 criminal investigations
﹢ Additionally, $777.5M was recovered for direct payment to plans, participants and beneficiaries
• These amounts were recovered through enforcement actions, the Voluntary Fiduciary Correction Program, the Abandoned Plan program as well as monetary benefit recoveries from information complaint resolution
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Legal Review
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Legal Review
ABB 401(k) Case Continues
﹢ In the case of Tussey v. ABB Inc., the Eighth Circuit remanded the case back to the district court for further consideration regarding whether the participants can prove losses resulting from their original improper fund selection and mapping claim
﹢ The district court earlier concluded that a fiduciary breach had occurred, but it entered a judgement in favor of the defendants because the participants had failed to present the evidence needed to show damages
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Legal Review
Two New Excessive Fee Cases Filed
﹢ Participants in the Delta Air Line’s Saving Plan have filed a proposed class action lawsuit alleging that the company breached its fiduciary responsibility by not offering lower-cost institutional share classes, providing too many investment choices (at least 200 prior to 2011) and paying excessive recordkeeping fees
﹢ A lawsuit filed in the U.S. District Court of Minnesota charges that participants in the Essentia Health 403(b) plan and the Essentia Health Retirement plan paid excessive recordkeeping fees resulting from the plan sponsor’s failure to fully understand and monitor revenue-sharing arrangements among the plan’s vendors
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Legal Review
Several Excessive Fee Cases Allowed to Proceed
﹢ Throughout the early months of 2017, a number of class action lawsuits alleging excessive 401(k) fees survived motions to dismiss and will move forward. Among the cases are:
• Troudt v. Oracle Corp.
• Bell v. Pension Comm. of Anthem Holding Co.
• Lorenz v. Safeway Inc. and Terranza v. Safeway Inc.
• Pledger v. Reliance Tr. Co.
﹢ Additionally, in Munro v. USC, the district court held that claims of fiduciary breaches under ERISA are unaffected by arbitration agreements and participants involved in the case may not proceed with their claims in federal court
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Legal Review
Intel Wins Suit Over Hedge Funds, Private Equity
﹢ The U.S. District Court of the Northern District of California found that claims against Intel’s Investment Policy Committee for its retirement plans are time-barred under ERISA’s three-year statute of limitations
﹢ The lawsuit alleged a fiduciary breach by investing a significant portion of the plan’s assets in risky and high-cost alternative investments through custom-built target-date funds
﹢ In its ruling, the court found that the 2011 QDIA notice, 2012 SPD, 2012 annual disclosures, targeted emails and fund-fact sheets provided the plaintiff with actual knowledge of his imprudence claims more than three years before he filed suit
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Legal Review
New Stock Drop Cases Filed, One Settled
﹢ After being spun-off as an independent, publicly traded company and establishing an ESOP for its employees, Seventy Seven Energy’s plan continued to hold stock of its former parent, Chesapeake Energy Corporation
• When the stock declined more than 70%, a new lawsuit alleged the fiduciaries failed to properly diversify and exposed participants to higher risk of loss
﹢ A proposed class action, filed March 7, 2017, by a former Allergan employee, accuses the company of artificially inflating its stock price by failing to disclose a Department of Justice investigation into price-fixing among major pharmaceutical companies
• When the investigation came to light, employees lost money in the company’s retirement plan
﹢ J.C. Penney agreed to pay $4.5 million to settle a 401(k) suit alleging the company was imprudent in continuing to offer company stock as an investment option after it had declined in value
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Legal Review
Lawsuit Involving Robo-Advice, Fees Filed
﹢ An excessive fee lawsuit has been filed by participants of Caterpillar’s 401(k) plan in the U.S. District Court for the Northern District of Illinois against the plan’s record keeper
﹢ This is the fourth such lawsuit that alleges record keepers, as a precondition to making advice available on their platform, required the robo-adviser to overcharge participants and pay the record keeper a “kick back”
﹢ The advice provider, Financial Engines, has not been named a defendant in any of these lawsuits
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Legal Review
Stable Value Fund Lawsuit Dismissed
﹢ For the second time a judge again ruled in favor of the plan fiduciaries in Barchock v. CVS Health Corp.
﹢ In the most recent complaint, the plaintiffs alleged that the stable fund manager failed to exercise appropriate prudence with respect to the investment allocation and the plan sponsor failed in its duty to monitor the fund manager
﹢ During the years 2010 through 2013, the plaintiffs claimed the fund’s assets were invested too conservatively resulting in “negligible returns”
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Global Headlines
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Global Headlines
Paper Explores Retirement Transitions in Four Countries
﹢ A new paper by Vanguard compares the planning process for pre-retirees and recent retirees in four countries – the United States, Canada, the United Kingdom and Australia
﹢ Among the key findings are:
• Satisfaction with one’s financial situation improves upon retiring; recent retirees are more confident and are less likely to be anxious or uncertain about their financial situation
• Compared with the experiences of recent retirees, pre-retirees are up to four times more likely to expect to work and receive work income in retirement
• Individuals devote most of their retirement planning effort to the timing of claiming government pensions, as well as transitional issues like when to retire, or the amount of monthly retirement income needed
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Global Headlines
Japan Expands Retirement Savings Opportunities
﹢ Effective this year, Japan has expanded eligibility in the country’s 15-year-old defined contribution system to include public-sector employees, non-working spouses of plan participants and others previously only covered by defined benefit plans
﹢ The government is also allowing small companies – those with less than 100 employees – to make contributions to employees’ individual retirement accounts
﹢ These efforts are designed to help expand coverage as only 10% of workers participate in either a company-sponsored or individual savings plan
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Global Headlines
Falling Home Ownership May Strain Australia’s Retirement System
﹢ A report commissioned by the Australian Institute of Superannuation Trustees, “No Place Like Home: The Impact of Declining Home Ownership on Retirement,” concludes that the declining rate of home ownership poses a threat to Australia’s public finances as the retirement income system was built on an assumption that the “overwhelming majority” of retirees would not have housing costs
﹢ The rate of home ownership in Australia, peaking at 73% in the mid-1960’s, has declined to 68%
• The proportion of home owners who own their home outright has declined from 61.7% in 1996 to 47.9% in 2011
﹢ According to the report, declining rates of ownership means a great number of retirees will be wanting to use their super savings to pay off their homes in coming decades
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Global Headlines
Over Half of Canadian Employers Provide Access to Financial Advice
﹢ The 2016 CAP Benchmark Report, sponsored by Great-West Life, found that 57% of DC plan sponsors and 61% of group registered retirement savings plan (RRSP) sponsors provide members with access to professional financial advice
﹢ The report found a gap remains between large and small sponsors; 63% of sponsors with fewer than 499 employees provide advice, while only 52% of sponsors with more than 500 employees do. Other findings include:
• 58% of DC plan sponsors and 43% who offer a group RRSP provide seminars for members who are getting close to retirement
• DC plans have a 90% participation rate, while participation rates for group RRSPs and deferred profit sharing plans (DPSPs) are 60% and 63% respectively
• Target-date funds are the default in 50% of DC plans and 51% in group RRSPs
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Global Headlines
Willis Towers Watson Outlines Similarities, Differences Between UK and U.S. Plans
﹢ “A Tale of Two Countries: Defined Contribution Plans in the UK and U.S.” discusses some of the similarities and differences between UK and U.S. plan design
﹢ The paper noted similarities including behavioral incentives that reward those who save more for retirement, the use of automatic features and uniform contribution rates across all employees
﹢ Among the differences, UK employers tend to make more generous contributions (in large part due to the minimum funding requirements associated with auto-enrollment arrangements) and, while the UK regulators recently have given plan participants total control of their DC balances at retirement, regulators in the U.S. are exploring how to make annuities more feasible within DC plans
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Defined Contribution Capabilities
FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION
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Janus Henderson
Defined Contribution Capabilities
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Defined Contribution in Review 1Q17
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