Employee Retirement Readiness – Measuring, …...retirement 5 48% of companies expect older...

© 2013 Towers Watson. All rights reserved.

Employee Retirement Readiness –Measuring, Tracking and Improving in a DC World

Midwest Pension ConferenceSeptember 19, 2013

© 2013 Towers Watson. All rights reserved.2

Today’s discussion

It is getting harder for employees to determine if they have the resources to retire

Employers feel the

need to get their arms

around retirement readiness

They also have a vested

interest in helping their employees

prepare

This is having a more direct impact on employers’ ability to manage their business

Four case studies…

© 2013 Towers Watson. All rights reserved.3

Most retirement benefits are lump sums

6459 58

5347

37 33 2922 20

13

3641 42

4753

63 67 7178 80 83 87

0102030405060708090

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Traditional DB pension plansAccount-based plans(hybrid and DC)

n=100

40

60

36

64

17

6459 58

5347

37 33 2922 20

13

3641 42

4753

63 67 7178 80 83 87

0102030405060708090

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Traditional DB pension plansAccount-based plans(hybrid and DC)

n=100

40

60

36

64

17

Fortune 100 Retirement Plan Prevalence — Traditional DB Pensions versus Account Based Plans (For Newly Hired Employees)

© 2013 Towers Watson. All rights reserved. 4

Cost of health care coverage in retirement is high –and not well understood

Annual Total Premiums

Retiree Premium Share

Retiree-Only Family Retiree-Only Family

Retirees under age 65 $8,031 $19,275 51% 53%

Retirees age 65 and older $4,507 $11,000 46% 48%

l Retirees pay a considerably larger share of costs than active employees

l Total premiums for single-only coverage is about $3,000 higher for retirees than for active employees

Source: 2011 Towers Watson/NBGH Employer Survey on Purchasing Value in Health Care


Employees - and employers - face uncertainty in preparing for retirement

5

of companies expect older workers to delay retirement* 48%

*Towers Watson 2012 U.S. Defined Contribution Survey; ** Towers Watson Retirement Attitudes Survey, 2011.

42%21%

of companies state that providing an adequate retirement benefit at a reasonable age is the primary goal of their defined contribution program*74%

believe that employees make informed decisions about retirement savings*

of employees believe that they have enough retirement resources to last 25 years**


Retirement readiness

Measure and set goals

Track progress

Identify improvements

6


Case study – Measuring

7

Large food company with over 30,000 employee

Patchwork of pension benefits, due to phased-in changes and union agreements

DC plan is the “go-forward” plan – only retirement income plan for newer hires

Needed a basis for setting retirement plan objectives and progressNeeded a basis for setting retirement plan objectives and progress


A benchmark to measure retirement readiness

8

FiT Age is defined as the age when retirement resources exceed retirement needs

FiT Age includes:

l Retirement resources include all benefits: 401(k), pension, medical, Social Security

l Retirement needs are net take home pay increased for medical premiums


FiT Age illustrated

• All benefits – 401(k), pension, medical, Social Security• Individual tax calculations• Active and retiree health care costs

When the retirement resources bar exceeds the retirement needs lineyou have reached your Financial independence Target age

FiT Age = 70


Retirement readiness assessment

Total workforce

l 15% of career employees have FiT Ages above age 70, reasons include:l 60% of them do not currently save

l many of those who are saving started saving late in their careers

13556

4910

66687519 7820 7874

88058249

7821 77257006

57224940

42833518 3103

2520 2333 2350 22151546

1043566 267 122

< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >

FiT = Financial Independence Threshold

Hired Under 40 about 83% of workforce | average FiT=64

10


Retirement readiness assessmentVariation by benefit structure

6 8 15 15 24 2949

70

128

356382

270

223

317

364

297

209

155 144

95

40 28 172

25

< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >


Hired Under 40, Salaried, DC Only about 2% of workforce | average FiT=69

5697

1636

2392 2479 26002927

33773573 3427

3081

2287

17321392

1154932 900 770 692 566 448 308 169 72 30 17

< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >


Hired Under 40, Salaried, DB, No Retiree Medical about 29% of workforce | average FiT=63

11


Case study – Tracking

12

Large food company with over 90,000 employees• Multiple company divisions and locations

Maintains multiple DB, DC and H&W plans

Uses FiT Age to set goals, monitor progress

Measures results on a quarterly basis


Benefit delivery – measuring effectiveness

13

3. Establish remedial plan

21

3

1. Establish/confirm plan objectives

Retirement Adequacy

Cost

Market Competiveness

2. Assess plan performance

Review savings and investment behavior

Review investment structure

Review investment and administrative fees

Determine the impact on retirement

adequacy

Plan and investment design

Communications and Education


Goals and results

Overall Participationl Participation slightly above

peer groupl Salaried employees (87%),

hourly employees (75%)

Plan Investmentsl Company stock is the largest fund

holding in the planl 27% of assets in target date funds

Deferral Ratel Overall plan deferral rate is 6.4%,

above the peer group l Deferral rates of 10% will improve

FiTAge by 3 years

FiTAge l FiTAge for salaried

employees is 70l FiTAge for hourly

employees is 71

2012 Goal 2015 Goal

69 66

80% total90% salaried77% hourly

85% total95% salaried80% hourly

6.5% 9.0% total

30% company stock

27% TDFs

15% company stock

35% TDFs

78%

76%

Plan

Peer Group

6.4

6.0

Plan

Peer Group

30% 27% 18% 25%

7 4 8 8 9 15 52 154276 338

491742

1,2891,212978

1,2051,0271,020

487

157 92 16 5 2221

< 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 >FIT = Financial Independence Threshold

Track retirement readiness

14


Don’t tell me…show me

Make it easy for me to do something15

Don’t teach me, entertain me

Creative retirement communications approaches


Opportunities to sustain engagement

l Provide bite-sized educational nuggetsl Leverage consumer approachesl Address what’s on their mindsl Show the long-term impactl Make it personall Make it compelling l Keep it simple

Whiteboard videos

Personalized statements

Interactive media16


Case study – Improving through design

17

Manufacturing company with approximately 12,000 employees

Has separate “deals” for union and non-union employees

Used the retirement readiness assessment to compare the two deals

Implementing new design features as a result of the assessment:• Auto-enroll everyone, increase default to 6%, auto-increase to 10%


“What if” scenario - overall results

18

Results Recommendations1. Participants on average defer 8% to the DC plans.

However, consider auto-enrolling all employees with an auto-increase feature that would require an opt-out, as this will improve the FiT by 2 years.

Average FiT Age Based on Expected Investment Returns

25th

Percentile(Poor

Scenario)

50th

Percentile(Average Scenario)

75th

Percentile(Good

Scenario)Current 73 70 67

Assumes all DC plan participants defer at least 10%

71 68 65

1. Approximately 2,200 participants would be projected to retire on or before age 65 (average scenario)

2. Approximately 6,000 participants would be projected to retire on or after age 70 (average scenario)


“What if” scenario - results for union employees

19

Results

Average FiT Age Based on Expected Investment Returns

25th Percentile(Poor

Scenario)

50th Percentile(Average Scenario)

75th Percentile(Good

Scenario)Union 70 68 66Union assuming all DC plan participants defer at least 10%

67 65 63

Union W RetMed 68 66 65Union W RetMed assuming all DC plan participants defer at least 10%

66 64 62

1. The FiT for those with Retiree Medical is 66 while those without this benefit have a FiT of 69 (average scenario)

2. Approximately 1,100 Union participants would be projected to retire on or after age 70 (average scenario)

3. Approximately 630 participants with Retiree Medical would be projected to retire on or after age 70 (average scenario)

Recommendations1. Participants on average defer 6.2% to the DC plans. Of

the 3,000 participants there are 400 non-savers and 550 who defer less than 5% (330 will eventually get there with auto-increases). Consider auto-enrolling all employees with an auto-increase feature that would require an opt-out, as this will improve the FiT by 3 years.


Case study – Improving through education

20

Large hi tech company

401(k) is the only retirement plan type they have ever sponsored

For the first time in company history, helping employees prepare and plan for retirement is a priority

Rolling out a retirement planning tool for employees, using FiT Age



Retirement readiness

Measure and set goals

Track progress

Identify improvements

22

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