CASE STUDY: Plan Sponsor Insights on Custom Target-Date and Re-Enrollment

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1 CASE STUDY: Plan Sponsor Insights on Custom Target-Date and Re-Enrollment Tim Dillane Director, Pension Investments Merck & Co., Inc. Dick Davies Senior Managing Director AllianceBernstein, L.P.

2 Today s Discussion Overview of Merck s 401(k) Plan Reasons For Going Custom Implementation Process Portfolio Design Decisions Re-Enrollment Case Study Potential Plan and Portfolio Enhancements 2

3 Merck 401(k) Plan Profile Assets of $8.8 billion 44,500 participants 96% participation rate 75% match on first 6% of contributions Auto-enrollment at 6% rate Auto-escalation up to 10% Custom TDF: April 2009 TDF Assets: $3.7 billion Recordkeeper: Fidelity 2% 13% 8% 6% 6% 23% Merck Plan Assets Target-Date Large Cap Equities Small Cap Equities 42% Int'l Equities Company Stock Fixed Income Money Market 3

4 Merck Investment Menu Tier 1 All-in-One Approach Target Date Funds (QDIA) Merck s Retirement Portfolios Simple, Yet Sophisticated: A Fully Diversified Portfolio in a Single Fund 42% Tier 2 Build Your Own Approach Core Options Active Options Money Market Fund US Large Cap Equity Passive Options S&P 500 Russell 2000 Basic Food Groups 58% US Small Cap Equity MSCI EAFE International Equity (2) Barclays US Agg Company Stock 4

5 Why Did Merck Go Custom? Industry Survey Results Address unique plan demographics Apply established DB principles Asset class selection Blend of Active and Passive Custom Glide Path Fiduciary Concerns 9% 9% 34% Control Over Managers Leverage combined DB/DC scale Costs/Fee Transparency 17% 31% More Diverse Asset Allocation 5 Source: Casey Quirk Target-Date Retirement Funds: The New Defined Contribution Background, November 2009

6 Implementation: Three Primary Workstreams Investments Design Glide Path Glide path Asset classes Components Operations Daily Operations/ Develop Asset Transition Strategy Component transition strategy Interfaces: Recordkeeper Managers Custodian Communications Advise and Consult With Recordkeeper on Participant Communications Strategy Introduction Ongoing 6

7 % Stock Glide Path Customization Issues Key Customization Considerations Goals, risk tolerance or other objectives Typical retirement age and post-retirement behavior Custom Target-Date Glide Paths Range AllianceBernstein Clients Company stock holdings and defined benefits Wage level, growth and deferrals Employment risk or frequency of job changing Sponsor perspective Source: AllianceBernstein Age 7 7

8 US Large Cap US Small/Mid Cap US All Cap Int l Developed Int l Small Cap Emerging Markets Core Bond Global Bond Gov t Bond High Yield Long Duration Short Duration Emerging Markets TIPS Stable Value Cash REITS Commodities Real Assets Risk Parity Asset Class Usage in Custom Portfolios 22 Plans Year-End 2013 Equity Fixed Income Diversifiers Asset Classes Active Blend Passive Total Plans Source: AllianceBernstein Active Bias 8 Passive/Hybrid Bias

9 Exposure (%) Merck Portfolio Construction Diversifiers Bonds Bonds Stocks Stocks Age Young Saver Midlife Saver New Retiree Senior Retiree US Large Cap Stocks US Small Cap Stocks International Stocks Emerging Markets Stocks Core Fixed Income TIPS Cash Total Stock Allocation Total Diversifier/Bond Allocation This chart does not represent any particular target date fund. It is meant to show how the investment mix of any target-date portfolio changes over a lifetime. Numbers may not sum due to rounding. Source: AllianceBernstein 9

10 Re-Enrollment Case Study Date November 2009 November 2010 August/ September 2011 October 2011 Merck merged with Schering-Plough (S-P) Merck s Investment Committee approved a harmonized investment lineup for domestic DC plans Legacy S-P plan participants were given a 6-week window to make investment elections from the new lineup Participants who did not make an active election are defaulted, per his/her age, into a custom target-date fund Participant balances were re-allocated per election window results 10

11 33% of Legacy Plan Participants Made Elections 70% 60% 61% 50% Pre Re-Allocation - Sep 2011 Post Re-Allocation - Oct 2011 % of Plan Assets 40% 30% 20% 20% 24% 21% 12% 10% 9% 7% 7% 8% 8% 6% 7% 4% 6% 0% Money Market Bonds US Large Cap Equity US Small/Mid Cap Equity Global/Int'l Equity Company Stock Asset Allocation 11

12 Target-Date Defaults: More Systematic Outcomes 100 Percent of Assets Invested in Equities By Age Client Example AllianceBernstein Implemented Target-Date Glide Path Equities by Participant Representative DC data for the example client reflect stock allocations for excluding self-directed brokerage investments as of 1Q:09 for 29,483 participants with over $5,000 in account value. 401(k) plan average stock allocations exclude investments in target-date funds and treat allocations to balanced funds as 50% stock. Source: AllianceBernstein 12

13 Re-Enrollment Growing, But Still Misconceptions Have You Re-Enrolled? Why Not Re-Enroll? Next Year 8.5%? 12.2% Yes Participant Objections Not Necessary Fiduciary Liabilities Communication Difficult Admin Complexities 76.8% Mgmt Objections Too Costly No Source: Callan 2014 Defined Contribution Trends = Most Important 13

14 What s Next For Merck? Continue to streamline core investment menu Pursue investment re-allocation for primary US Savings Plan Revisit glide path methodology in response to DB plan design changes Evaluate portfolio construction under various AUM scenarios 14