Auto Services and Behavioral Economics

Transcription

1 Auto Services and Behavioral Economics Building retirement readiness through plan design CUPA HR Ohio Chapter November 8, 2018 For institutional investor use only. Not for use with or distribution to the public.

2 Retirement savings trends Employees need help building their financial future. 41% 22% 29% are saving 10% or less of their income for retirement 1 of millennials have their retirement savings mostly in bonds, money market funds and other stable value investments 2 of workers age 55+ believe that they ll need less than $250,000 to live comfortably in retirement TIAA Lifetime Income Survey 2 Perspectives on Retirement: Baby Boomers, Generation X, and Millennials; 17th Annual Transamerica Retirement Survey of Workers, Transamerica Center for Retirement Studies; August Retirement Confidence Survey, Employee Benefits Research Institute and Greenwald & Associates, March 2017 For institutional investor use only. Not for use with or distribution to the public. 2

3 Impact of trends on your institution Insufficient retirement savings Delayed retirements Workforce management issues Higher compensation and benefits costs Limited advancement for younger employees For institutional investor use only. Not for use with or distribution to the public. 3

4 TIAA Auto Services Auto Enroll Three-pronged approach to help promote better outcomes Auto Save QDIA Qualified Default Investment Alternative For institutional investor use only. Not for use with or distribution to the public. 4

5 The Auto Services experience Plan sponsor or TIAA Provides initial consolidated notice describing automatic features Employee who don t actively enroll or opt-out Are automatically enrolled at default contribution rate in the QDIA option and set up for Auto Save, if applicable All employees TIAA Plan sponsor Use My Account on TIAA.org to manage their accounts Provides annual notices and confirmation statements Updates contribution amounts as reported through PlanFocus reports or feedback files For institutional investor use only. Not for use with or distribution to the public. 5

6 Auto Enroll: Making inertia an ally How it works Results Participation rate of workers in their 20s* Employees are automatically enrolled at a default contribution rate, unless they actively enroll or opt-out Potential impact 83% 33% with auto enrollment without auto enrollment Higher participation rates Improved testing results Auto Enroll can make a 50% difference in participation. * 2016 Universe Benchmarks Measuring Employee Savings and Investing Behavior in Defined Contribution Plans Highlights, Aon Hewitt, April 2016 For institutional investor use only. Not for use with or distribution to the public. 6

7 Auto Save: Encouraging better savings behavior How it works Results The Power of Auto Save Automatically increases participants contributions by a preset percentage each year up to an overall limit A person with Auto Save has $500,000 more in savings at age 65 Potential impact 800, , , ,000 Without Auto Save Higher contribution rates Improved retirement readiness Years Invested W 3% Contribution with auto increase W 3% Contribution without auto increase * Hypothetical example based on the following assumptions: Participant age: 30; savings period: 35 years; beginning salary: $50,000; annual salary increase: 3%; initial contribution rate: 3%; interest rate: 6%; automatic annual contribution increase: 1% capped at 10%. This example is for illustrative purposes only and is not intended to predict or project returns. For institutional investor use only. Not for use with or distribution to the public. 7

8 QDIA: Simplifying investment decisions How it works Results Contributions are automatically invested in the plan s default option if instructions aren t provided. Potential impact Reduced fiduciary risk Improved asset allocations 81.4% of individuals who began contributing in 2014 had 100% of their savings in the plan s target-date default investment option.* * Based on a sample of participants from 23 institutional clients for which TIAA is the sole recordkeeper. New Evidence on the Demand for Advice within Retirement Plans, TIAA Institute, Trends and Issues, April 2017 For institutional investor use only. Not for use with or distribution to the public. 8

9 Behavioral economics People often not good judges of what will serve their best interests Institutions, including government and your schools, can help people do better for themselves with small changes nudges in structuring choices Studies led to increasing use of auto enrollment, auto increases, and appropriate investment defaults Higher education employed similar practices long before behavioral economics derived practices including: Mandatory contributions Irrevocable election upon plan eligibility or upon hire Example: Individuals on average spend more time picking out new appliance than choosing a health plan or retirement investment strategy Source: Amazon.com interview with Richard Thaler and Cass Sunstein 9

10 Behavioral economics Improvements in DC plans Behavioral economics is continually improving and shaping DC landscape The Good: Accumulation Automatic enrollment Automatic increases Automatic rebalancing Required re-enrollment and increases every year The not yet Good: Decumulation* We ve made good progress on the accumulation phase of retirement saving, but the decumulation phase hasn t received nearly enough attention. This is unfortunate because the spending-down phase is even harder for individuals to solve, especially since so few people elect to annuitize their wealth *Source: Prof. Thaler as quoted in the WSJ on November 29, 2015 TIAA PUBLIC 10

11 Behavioral economics Three factors at work: 1. People procrastinate, especially when decision is hard Too many choices creates information overload People may delay making choice altogether if they can (by not joining 401(k) or 403(b) plan), or will just take easy way out by selecting default option 2. Our world is complicated Even finance professors have trouble figuring out best choices for investment, how much to save, and retirement payment options Since cost of figuring out best option so hard, unscrupulous financial advisor / mortgage broker can push unsophisticated borrowers into taking bad deal or option Source: Amazon.com interview with Richard Thaler and Cass Sunstein TIAA PUBLIC 11

12 Behavioral economics Three factors at work: 3. We might think that with high stakes people would pay more attention, but can just make people tense Some react by curling into ball, or watching TV. Weighing complicated decisions not easy, not fun Selection of defaults, or Nudges help ensure positives outcomes when plan participants are unwilling to make a hard choice With right default, inaction leads to good default choice Source: Amazon.com interview with Richard Thaler and Cass Sunstein Examples of hard choices Which medical program should I choose? What retirement payment option(s) should I choose? Which new car should I buy Honda or Toyota? (Totally forgot option to delay car purchase to save more for retirement, house down-payment, school loan payoff) 12

13 Framing Presentation, order, wording, emphasis Example: Elect your voluntary deferral to the retirement savings plan 1 st Choice: 6% of compensation 8% of compensation 10% of compensation Other % of compensation % 2nd Choice: 0% of compensation 2% of compensation 4% of compensation Other % of compensation % Framing can be powerful These are possibly extreme examples but they show the point of framing. It can drive decisions much more than you think. TIAA PUBLIC 13

14 Framing Presentation, order, wording, emphasis Example: Elect your voluntary deferral to the retirement savings plan Best choice to drive savings: 6% of compensation 8% of compensation 10% of compensation Other % of compensation % Framing can be powerful These are possibly extreme examples but they show the point of framing. It can drive decisions much more than you think. 14

15 Power of Defaults Defaults are a powerful force so use them wisely More important when many choices or when choice is complex Practical for us to think default is recommended action If we choose something different we need to take action It is easier to do nothing The default must be ok, I will leave it as is Retirement savings plans Initially defaults were set at 1% to 4% with an average of 3% Movement to higher defaults, 6% or more Why keep a 3% (or 1%, 2%) default savings rate? 3% not necessarily enough to reach optimal retirement income target If no automatic savings rate, will communication drive a participant to choosing a rate greater than 3%? Why have auto enrollment with a default rate that is not set at an optimal level? Remember that anyone can change from the default 15

16 Top four potential benefits of Auto Services Improved retirement readiness Auto Enroll Auto Save QDIA Qualified Default Investment Alternative Higher participation and contribution rates Better nondiscrimination testing results Streamlined administration For institutional investor use only. Not for use with or distribution to the public. 16

17 Efficiency through automation Our Administrative Services Suite can also help with: Participant services Eligibility Online enrollment Online salary deferral Administrative & recordkeeping services Employee/Employer contribution calculations Contribution limits monitoring Vesting For institutional investor use only. Not for use with or distribution to the public. 17

18 Consider your next steps Review Auto Services information Develop communications strategy Select the feature(s) you want Update plan document and recordkeeping agreement(s) For institutional investor use only. Not for use with or distribution to the public. 18

19 Important information This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor s personal advisor based on the investor s own objectives and circumstances. The TIAA group of companies does not provide legal or tax advice. Please consult your legal or tax advisor. Investment products may be subject to market and other risk factors. See the applicable product literature, or visit TIAA.org for details. You should consider the investment objectives, risks, charges, and expenses carefully before investing. Please call or go to for current product and fund prospectuses that contain this and other information. Please read the prospectuses carefully before investing. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF), New York, NY. TIAA.org 2018 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY For institutional investor use only. Not for use with or distribution to the public.

20 Appendix TIAA Online Enrollment

21 An Integrated Experience for your employees: Auto Enroll & Online Enrollment For Institutional Investor Use Only. Not for Use With or Distribution to the Public.

22 An Integrated Experience for your employees: Auto Save & Online Enrollment For Institutional Investor Use Only. Not for Use With or Distribution to the Public.