A big picture overview of DC plan investment costs, opportunity for cost savings, and the catalysts

Transcription

1 A big picture verview f DC plan investment csts, pprtunity fr cst savings, and the catalysts Hw t add an additinal $1 trillin in accumulated retirement savings ver the next 30 years IMC estimates that an additinal $1 trillin dllars in cst reductin driven, accumulated retirement savings, can accrue t tday s plan participants ver the next 30 years. IMC bases this estimate n expected reductins in investment csts acrss each market segment, resulting frm a cmbinatin f the fllwing: 1) Market buying pwer, demgraphic based influences, and full disclsure and transparency (PPA 2006) Wider variety f investment cst prducts are cming int the market filling in current ffering alignment gaps, acrss the DC market segment spectrum. The increased use f DB-like, attractively priced, glide path investments. Increased use f cmpetitive cst index chices in plans belw $100 millin. Bigger DC psitive cash flws frm DB spnsrs, shifting primary retirement prgram emphasis t their DC plans, and mre invlvement f crprate finance departments investment experts in DC plans. Smaller than previusly frecast rllut attritin, as baby bmers wrk/stay n the jb lnger. Use f aut enrllment and deferral increase prgrams. Greater cnsideratin is being given t the use f excess revenue accunts that put mney back in the hands f plans and participants. Full transparency and disclsure will bring csts t the surface and require decisin maker attentin. 2) The prspective intrductin f market based, real plan, fees reasnableness benchmarking Fees reasnableness benchmarking is defined as the intrductin and brad adptin f third party, independent, market based, real plans data; fr the purpse f enabling plan spnsrs t d apples t apples measuring f cst reasnableness within the cntext f what yu get fr what yu pay fr. The infrmatin, analysis, and prjectins presented in this and each cmpnent f IMC s 5 part series n DC/401(k), assume that DC plans will cntinue t ffer tday s wide range f investment chices and appraches t paying fr services. We therefre are cncentrating ur analysis n practical imprvements that are dable in the DC marketplace tday. As readers will see, the pssibilities fr significant imprvements in cst and ther imprtant areas are wrth thinking abut. Our 5 part series is designed t stimulate that thught prcess. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 1 f 6

2 IMC Table I The DC Market Defined The United States Defined Cntributin Plan System Brken ut by Plan Size Segments (12/31/2006) (number f sub-segments in each) # f Plans % f Ttal DC plans # Participants (millins) % f Ttal participants Average participant balance these segments (billins) % f Ttal assets $500 millin $5.0 billin+(4) 1,000 Under 1% $ millin (3) 5,700 Under 1% 4% % $75k-135k 1,582 50% % 68% $43k-64k % $10 50 millin (2) 20,800 3% % $40k-45k % 81% $5 10 millin (1) 26,200 4% 3.5 6% $44k 153 5% $1 5 millin (3) 170,300 23% 96% % 32% $35k-43k % 19% Under $1 millin (3) 503,000 69% % $10k-29k 135 4% Ttals (16) 727, % 55.1 millin 100% Over $58,000 $3.2 trillin 100% Observatins and analysis The underlying distributin f plans, participants and assets varies dramatically. Larger plans capture the vast majrity f plan assets (81%), while smaller plans represent the vast majrity f plans in existence (96%). 1/3 f participants reside in smaller plans and 2/3 in large plans. The DC marketplace is nt mnlithic and cannt be understd r imprved withut a fundamental understanding f the characteristics, distributin mdels, csts, and service realities f each market segment. Ntes: This is an apprximatin f all DC plans in the US. Surces include IMC database, Frm 5500 filings, Larkspur Data, Plan Spnsr Magazine, the ICI, GAO, and thers. IMC cmpiled this data frm and aggregated it int the market segments shw here. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 2 f 6

3 IMC Table II Where investment csts are tday Estimate f DC plans investment cst reasnableness market segment Inside the Reasnableness investment Cst Range Nt Reasnable Lwer Cst Mid Cst Higher Cst Highest Cst (number f sub-segments in each) % f Plans at gruping (billins) % f plans at gruping (billins) % f Plans at gruping (billins) % f Plans at gruping $500 millin $5.0 billin+(4) 30% % % 158 5% 79 $ millin (3) 30% % % % 67 $10 50 millin (2) 30% % % 71 15% 53 $5 10 millin (1) 25% 38 30% 46 30% 46 15% 23 $1 5 millin (3) 20% 62 30% 92 35% % 46 Under $1 millin (3) 15% 20 30% 41 40% 54 15% 20 (billins) All 16 market segments 28% / $902b 46%/$1,474b 17% / $536b 9% / $288b Observatins and analysis Between 45% and 85% f plans within each DC market segment fall in the lw t mid end f IMC s investment cst reasnableness range. This leaves 15% t 55% at levels deemed high r unreasnable. Plan size is a primary factr in this relatinship - with the largest plans having bth fewer high priced experiences, and mre lw priced experiences relative t the market as a whle. 5.5 millin participants are in plans with unreasnable investment csts relative t their market segment s investment cst reasnableness range. Ntes: The distributin f plans acrss each cst range is reflective f IMC s data, research, analysis, and pinin n investment pricing by market segment. Pricing in the Lwer Cst range is reflective f bth belw market and lw priced plans. Mid Cst pricing is reflective f the middle cluster f plan pricing. Higher Cst pricing is reflective f higher csts at the tp f ur reasnableness range. Highest Cst pricing reflects plans whse investment csts are utside the reasnableness range. Dllar assets by cst range segment were estimated by applying IMC s pricing market research and applicatins t ttal plan dllars in each segment. IMC reviewed and built preliminary data frm ver 2000 retirement plans, then cmpiled the findings fr peer review by 30 tp service prviders and independent expert cnsultants, wh submitted their accept r mdify pinin. The cnsensus data was further reviewed with investment management firms having expertise in the area fr their feedback. The final data standards resulting frm this 3 year prcess (ending Nvember 2006) underlies IMC s reasnableness ranges. By yearend 2007, IMC expects t build its crss sectins f data frm mre than 10,000 plans. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 3 f 6

4 IMC Table III Investment Cst Reductins IMC s estimate f the effect n investment csts resulting frm a cmbinatin f market based frces, full disclsure and transparency PPA requirements, and the implementatin f fees reasnableness benchmarking. Table reflects the amunt f cst reductin prjected and where. Inside the Reasnableness investment Cst Range Nt Reasnable Lwer cst Mid cst Higher cst Highest cst (number f sub-segments in each) Investment Cst Effect Investment Cst Effect $500 millin $5.0 billin+(4) 0 t 5% lwer 0 t 6% lwer 8 t 10% lwer 10 t 15% lwer $ millin (3) 0 t 7% lwer 0 t 10% lwer 10 t 15% lwer 10 t 20% lwer $10 50 millin (2) 0 t 10% lwer 5 t 12% lwer 10 t 15% lwer 10 t 20% lwer $5 10 millin (1) 5 t 10% lwer 5 t 15% lwer 10 t 20% lwer 15 t 25% lwer $1 5 millin (3) 5 t 10% lwer 10 t 15% lwer 10 t 20% lwer 15 t 25% lwer Under $1 millin (3) 5 t 10% lwer 10 t 15% lwer 15 t 25% lwer 20 t 35% lwer Observatins and analysis Investment cst reductins will vary by market segment. In market segments where pricing is mre efficient ($50 millin and up) reductins frm 0-20% are expected. In cntrast, smaller plan segments will see reductins frm 5-35%. (Due t higher current csts, the resulting basis pint reductins culd be significant.) Investment pricing fr new business is benefiting nw. IMC expects parity t ccur acrss the DC marketplace ver the next 2-3 years thrugh the implementatin f fees reasnableness benchmarking. Cst reductins illustrated abve can be accmmdated using tday s investment vehicles and structures. All investment styles and types are expected t experience imprvements in csts. Ntes: Fees reasnableness benchmarking is defined as the intrductin and brad adptin f third party, independent, market based, real plans data fr the purpse f enabling plan spnsrs t d apples t apples measuring f cst reasnableness within the cntext f what yu get fr what yu pay fr. The base investment csts frm which savings are measured, are inclusive f the basis pint cmpnents used by advisrs and recrdkeepers t ffset the csts f their services. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 4 f 6

5 IMC Table IV Beneficial Individual Participant Level Impact IMC s estimate f the percentage increase in accunt balances, and additinal dllars accumulated, fr the 5.5 millin participants currently invested at unreasnable cst levels. DC Plan Prfile 1 Prfile 2 Prfile 3 Starting balance $10,000 Starting balance $50,000 Starting balance $100,000 Initial annual cntributins^ $1,000 Initial annual cntributins^ $3,500 Initial annual cntributins^ $5,000 Segments In 20 years In 30 years In 40 years In 20 years In 30 years In 40 years In 20 years In 30 years In 40 years $500 mil $5.0 bill 1.9% $1, % $7, % $23, % $7, % $26, % $76, % $12, % $44, % $126,270 $ millin 2.4% $2, % $9, % $26, % $8, % $31, % $88, % $15, % $51, % $144,977 $10 50 millin 3.5% $3, % $12, % $37, % $12, % $43, % $122, % $21, % 72, % $200,981 $5 10 millin 4.4% $4, % $15, % $46, % $15, % $54, % $154, % $26, % $90, % $252,973 $1 5 millin 4.6% $4, % $15, % $45, % $17, % $58, % $163, % $29, % $98, % $267,807 Under $1 millin 6.0% $5, % $19, % $55, % $18, % $63, % $172, % $32, % $105, % $282,663 Observatins and analysis Fr the individual DC participant, cst savings culd result in an accunt balance that at retirement is 10% larger, equating t an additinal $20,000 t $105,000 in savings ver a 30 year time frame. In the smaller plans marketplace (where the mst pprtunity exists t reduce cst) cst savings t emplyees f 2:1 r mre versus thse prduced fr participants in lager plans are realized. The results IMC illustrates d nt target any particular market segment fr emphasis. They are based n applying practical reasnableness cst standards acrss the entire DC system (401(k), 401(a), 403(b), and 457 DC plans). Ntes ^ Initial cntributins were assumed t stay at the same levels fr 5 years. Over the next 15 years increases (typical) in cntributins were assumed every five years. assumes each participant started in the middle f the highest cst range, then migrated t the mid cst segment ver a 10 year perid. reflects the average experience f the market sub-segments within the DC plan segment shwn. A 7.25% grwth rate n investments was used. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 5 f 6

6 IMC Table V Fees Reasnableness Benchmarking is the Key IMC s estimate f per segment and ttal verall prjected investment cst savings (1,10, 20, 30, and 40 year perids.) (number f sub-segments in each) Distributin f dllar savings by plan segment First year savings (billins) ver 10 years (billins) ver 20 years (billins) ver 30 years (billins) ver 40 years (billins) $500 millin $5.0 billin+(4) 21% $ millin (3) 18% $10 50 millin (2) 15% $5 10 millin (1) 8% $1 5 millin (3) 25% Under $1 millin (3) 13% Ttals (16) 100% $3 billin $63 billin $279 Billin $1 trillin $2.7 trillin Observatins and analysis Lng-term perids are illustrated because these are retirement plan dllars that will be invested ver lifetimes. $1 trillin dllars in cst reductin driven accumulated retirement savings can accrue t tday s plan participants ver the next 30 years. If relying n market frces alne, the additinal savings is reduced by half r mre. If fees reasnableness benchmarking regimens are adpted, and the full added savings amunt is achieved, everyne benefits. Nearly half f the $1 trillin will accrue t participants in small plans (i.e. thse belw $10 millin). Part 2 f IMC s series n 401(k) will mve frward frm here t illustrate the ptential shake ut that will result in the 401(k) industry frm the intrductin f fees reasnableness benchmarking. Ntes: Dllar savings illustrated are reflective f investment cst reductins resulting frm the intrductin f market reasnableness benchmarking. Based n IMC s prprietary investment cst cmpetitiveness standards, a 60% stck and 40% bnd typical cre funds allcatin was used. Csts and savings were calculated fr each f IMC s 16 market segments and aggregated fr the market grupings shwn. Dllar savings were assumed t cmpund at a grwth rate f 7.25%. A 1.5% additinal plug in rate was assumed t reflect net new cntributins ver rll uts and cash uts. 401(k) By the Numbers - Part 1 in a Series f 5 Investment Management Cnsultants, Inc. 111 SW Clumbia, Ste. 1080, Prtland, Oregn 97201, Rn Eisen, President reisen@imc-inv.cm 6 f 6