State and Local Government Supplemental Retirement Plans

Transcription

1 State and Local Government Supplemental Retirement Plans ACHIEVING 100% PARTICIPATION Findings from the Spring 2005 Meeting Nationwide Retirement Education Institute (REI) Presented October 5-6, 2005 Nationwide Retirement Education Institute (REI) NRM-3212AO.1

2 Supplemental Retirement Plans / Deferred Compensation Plans Achieving 100% Participation Increasing employee participation rates in governmental deferred compensation plans was the theme for the spring 2005 meeting of the Panel of Advisors of the Nationwide Retirement Education Institute. Panel members had previously identified this topic as a top priority for public sector employers in consideration of the low participation rates 30% to 50% of eligible employees in deferred compensation programs. Because most public sector employers provide defined benefit plans to their employees, they normally consider their Section 457, 401(k) or 403(b) plans to be a supplemental benefit. They make this program available to employees but generally take a very low key approach in regard to employee participation. Because of the lack of involvement by the employer to promote this benefit, employees often perceive these supplemental plans to be optional and low priority. As a result, employees also have a tendency to consider participating later in their career or if they have extra money that they can put aside for retirement. Although the benefits that employees receive from their primary pension and Social Security (if available) may meet basic retirement needs, there is growing concern that it likely will be insufficient to provide a comfortable lifestyle throughout retirement years. To address this, Panel members: Discussed the reasons why public sector employers should consider adopting a more proactive approach to encourage employee participation in supplemental plans Identified several approaches that should be considered by state and local government employers to promote participation This paper explores the reasons why state and local government employers should be concerned about employees taking little interest in, or responsibility for, their retirement future. It also identifies the Panel members findings as to how participation rates in supplemental plans could be improved to help workers be better financially prepared for their life after career employment About the Nationwide Retirement Education Institute Nationwide Retirement Solutions launched a retirement education institute to evaluate the degree of retirement readiness of public sector employees. The Institute s mission is to provide a credible, unbiased forum for thought leadership and research that improves the state of public sector employees retirement. Through their research efforts, the institute provides a forum to this industry to: Identify trends and issues that are important to the future ability of employees to achieve financial security in retirement Present reports and findings to plan sponsors, policy makers and others to help guide the future design and structure of public sector defined contribution plans Establish dialogue among industry experts to develop new initiatives and opportunities to enhance the retirement security of employees through their employer sponsored plans Create community-driven programs that will raise awareness of the need for financial, retirement and investment education for all individuals throughout the United States The Institute is lead by a Panel of Advisors who are selected based on their position and experience in the industry. The Panel includes 20 members that represent both practitioners and academicians in the fields of retirement, public policy, investing and aging. 2

3 Table of Contents Employee Participation in Supplemental Plans Should employers be concerned...page 4 METHODS TO ACHIEVE 100% PARTICIPATION: Employer Branding and Advocacy..Page 8 Automatic or Active Enrollment Policies Page 10 Employee Incentives.Page 13 Simplified Plan and Enrollment Process.Page 14 Simplified Education to Matches Personal Preferences.Page 16 Total Retirement Counseling..Page 18 3

4 Employee Participation in Supplemental Plans Should employers be concerned? When state and local government employers provide defined benefit plans to their employees, they normally consider their Section 457, 401(k) or 403(b) plans to be supplemental benefits. These programs are made available to employees who determine when, or if, they should participate. Employees generally perceive these benefits as optional, and not necessary as a means to secure sufficient retirement income. Since generally 100% of employees are covered by a primary defined benefit plan, employers have not been overly concerned if the participation rates in supplemental retirement plans (usually Section 457 plans) are only 30 50% of eligible employees. 1 These plans are generally categorized as second tier benefits, along with optional dental, long-term care and catastrophic insurance programs. Employer advocacy to participate in the supplemental plan, particularly at the time of hire, is minimal or non-existent. But is this the right approach to take for these benefit programs? Personal savings has always been a recognized part of a well-funded retirement plan, which means that workers should not be totally dependent on employer benefits and federally funded programs for their financial future. The three legged stool has long been an illustration of retirement planning with the legs representing employer pension, Social Security and individual or personal savings. Today, this stool has become increasingly unstable as Americans continue to forgo saving for their future to focus on spending today. Considering the potential changes to Social Security and the difficulties state and local government employers are facing in continuing to fund defined benefit plans, there is increased importance on the third leg personal responsibility for stability in attaining retirement security. According to the Commerce Department s Bureau of Economic Analysis reported in August 2005, the U.S. personal savings rate has reached an all-time low dropping to almost zero percent! Although some experts say this savings rate is understated because it excludes realized and unrealized capital gains from stocks, homes and other investments, it definitely is on a downward trend 11.4% in 1975, 9.5% in 1985, 4.4% in 1995 and 0.4% in May Research Provides Insights Several studies have been conducted that are exploring the reasons why people aren t saving for retirement, including the 2005 EBRI Retirement Confidence Survey. 2 The results of this survey indicate that worker perceptions about their retirement planning and confidence in being financially prepared do not really match their actions. For example, the statistics show that the majority of 1 Statistics from America s Retirement Voice, Public Sector Retirement: Yesterday, Today and Tomorrow published by Nationwide Retirement Education Institute; 2 The Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc. and underwritten by Nationwide; EBRI Issue Brief No. 280, April 2005; 4

5 workers who responded are very confident (25%) or somewhat confident (40%) that they will have enough money to live comfortably throughout retirement. However, when you look at other statistics, it is questionable that this confidence is based on actual planning, as: More than half (about 6 in 10 workers) have not tried to calculate retirement needs A majority (almost 6 in 10) believe they are behind schedule in saving for retirement Of those who are very confident, 20% aren t currently saving for retirement at all and 37% haven t calculated how much they will likely need (which means they are guessing!). This EBRI study also indicates that employees may have an unrealistic expectation of the level of income they will need for a comfortable retirement. The box on the right shows that workers are expecting to need much less income in retirement than today s retirees indicate they use to support a comfortable lifestyle. Historically, the general standard for retirement income replacement ratio was between 50% and 70% of pre-retirement income. Studies today are showing that this percentage should be considerably higher and is increasing each year. For example, a recent AON Consulting study 3 suggests that this replacement ratio should be between 75% and 89% with the higher percentage being needed for employees with annual incomes that are $50,000 and lower. This means that the gap between income from pension and Social Security and the amount that will be needed to support a comfortable retirement lifestyle is also increasing. Many public employees, however, continue to believe that their primary benefits will meet their entire financial needs in retirement. They don t recognize that an income gap will likely exist and they need to adequately plan and prepare through personal retirement savings and investing to make up this difference. Survey Says: The EBRI Retirement Confidence Survey illustrates that workers may be significantly underestimating retirement income needs. 41% of workers expect to need between 50% and 70% of pre-retirement income in retirement, compared to only 17% of retirees who have income needs at this level Only 13% of workers expect to need 85% to 105% (or more) of preretirement income in retirement, while 54%...over half of retirees have income needs at this level Although retirees from public sector employment may be doing okay today, tomorrow s retirees will have additional challenges that they will face in securing a comfortable retirement, such as: The number of years in retirement may actually equal or exceed years in career employment. Although people are living longer, they generally are not delaying retirement dates. Some may expect to continue working into retirement, such as in a bridge or transitional job, and find that health or job availability will limit or make this impossible. Pensions and Social Security may cover the basics, but it is questionable that it will adequately meet the demands of a more youthful retiree population that likely will have a more active lifestyle than their parents and grandparents. 3 AON Consulting 2004 Replacement Ratio Study TM 5

6 Health care and its costs are a growing concern. By 2013, healthcare is projected to account for almost 19% of the U.S. economy versus 14%, where it stands today. 4 The cost of health care is continuing to increase and even if employers provide retiree health care benefits today, shrinking public employer budgets and sky-rocketing costs of benefits may eventually result in retiree health benefits being reduced or eliminated. Pensions and Social Security will likely change: Although the public sector continues to have strong defined benefit programs, there are growing concerns that employers may not always be able to maintain today s benefit levels. In addition, for employees covered by Social Security, the future of this program is in doubt as well. The above shows that, despite the availability of primary retirement benefits, employees also need personal savings to supplement future retirement income. The 2005 EBRI study 5 showed that employees are more likely to save through a workplace plan than on their own. With a little effort, public employers can change employee perception about supplemental plans from optional to necessary and help ensure they are adequately planning for a financially secure and comfortable retirement. Achieving 100% Participation Employers spend considerable time and energy establishing the supplemental plan and selecting and monitoring the plan s administration and investments. Because only 30% to 50% of their employees benefit from this program (the average participation rate), is this really a good return on investment? It s time to elevate the importance of the supplemental plan and help employees recognize that it is no longer optional to ensure a financially comfortable retirement. The Panel of Advisors of the Nationwide Retirement Education Institute has identified the following methods to improve participation in state and local government employers supplemental retirement plans to help employees be better prepared to meet their retirement income needs. Each of these ideas are discussed in more detail in the following sections of this paper. Introduce employer branding and in-house plan advocacy Since most supplemental plans are administered by outside contractors, it is important to identify this as an employer sponsored benefit. This can be accomplished by elevating the profile of the supplemental plan and designating human resource and/or other internal personnel as plan advocates charged with encouraging employee enrollment. Establish automatic or affirmative enrollment processes for the supplemental plan This addresses the inertia and procrastination of employees to begin saving and investing for retirement. Automatic enrollment is gaining considerable momentum in private sector 401(k) plans. Several federal legislative proposals have been introduced this year to encourage employers to adopt this more proactive approach to employee participation in defined contribution plans. 4 National Coalition on Health Care, The Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc. and underwritten by Nationwide; EBRI Issue Brief No. 280, April 2005; 6

7 Provide employee incentives Financial incentives, such as an employer match, are a known factor to increase participation rates. Public sector employers often find these difficult to offer, but there are other types of incentive opportunities that could be instituted to motivate employees to save and invest for retirement. Simplify the plan and enrollment process Plans are becoming more complicated and investment options are confusing. Instituting a simple enrollment form, with a single check the box election (selecting a standard deferral amount and investment portfolio) reduces these complexities and provides a single choice decision. Simplify employee education and match it to employee personal preferences and attitudes Education is vital in helping employees understand the importance of investing, how to find the dollars to invest, and the best way to structure their retirement portfolio. Effective education, however, is personalized to the employee audience and is developed to address their money attitudes. Provide consolidated benefits counseling as part of the total benefits package Counselors are needed to help employees understand why, and how, they should be saving and investing for retirement. This service should be provided at the time of hire and on an on-going basis. The following sections of this report provide more detailed information about the ideas from the Panel of Advisors to help supplemental retirement plans achieve 100% employee participation. Employers should consider how these different approaches could be incorporated into their plan design to help employees be better financially prepared for their retirement years. 7

8 Employer Branding and Advocacy Problem: Public sector employers often take a low key approach to their supplemental retirement plan and delegate most if not all responsibility for enrolling employees to contractors. This has helped to perpetuate employee perception that this benefit is not an important part of their total benefits package and participation is an available option if there is extra money left over from paychecks. Solution: Creating a program identity and taking a more proactive employer role by establishing plan advocates will help change employee perceptions that supplemental means = optional, which could lead to increased participation. Elevating the Importance of the Supplemental Plan When supplemental retirement plans [457, 401(k) or 403(b) plans] are adopted by the employer, administration and services are typically delegated to an outside contractor. The program s identity, although it may contain the employer s logo or name, is generally that of the contracted company (or companies). Outside of this generic branding, there may be no other indication that the employer sponsors the plan, or identification that it is an important part of the employees total benefits package. As long-term public servants, many state and local government employees rely on their employer to take care of their needs in retirement, through employer sponsored health insurance and primary retirement benefits. However, it s important that the supplemental plan not be overlooked as a critical component of the total benefits package. There are several inexpensive approaches, both in regard to time and cost, which can be adopted by the employer to raise employee awareness and demonstrate the value of participating in this plan. Employer Branding Branding is more than labeling or identifying the employer in the supplemental plan s name. The ability to customize plan material is usually defined in service agreements and may not be possible or cost effective. There are other ways, however, to accomplish branding without altering communication materials and changing the plan name, such as: Provide information about the supplemental plan on the employer s Intranet Web site and in internal newsletters distributed by the employer. Include a message from the employer communication letter with enrollment brochures and plan materials. Present information about the plan through the human resource office and during employee orientations. 8

9 Locate plan representatives (internal or outsourced) and/or program materials at the employer s office. Employer Advocacy Employer advocacy takes branding to the next level by using internal resources to motivate employee involvement in the supplemental plan. There are several ways to create an advocacy environment at the work site, such as: Identify increasing plan participation as a priority for the human resource department. Encourage mid and upper level management to include a discussion of the importance of this benefit in staff meetings. Hold benefits fairs and informational seminars at the work site to provide information about the plan and an opportunity to network with peers about this benefit program. Recruit recent retirees to talk with employees (e.g., lunch time session) about their retirement life and how they used the supplemental plan (or wish they used) to help them achieve financial security for their retirement years. Develop in-house campaigns and contests to provide a fun way to motivate employee participation. 9

10 Automatic or Active Enrollment Policies Problem: Inertia and procrastination are two significant reasons for the low participation rate in voluntary employee directed retirement plans. Solution: Establish automatic (negative) election or active decision (affirmative) enrollment processes within government sector plan designs Automatic (negative) enrollment With this approach employees are automatically enrolled in the supplemental retirement plan, unless they opt out. It requires the employer to select a default deferral amount and investment choice for employees who do not make personal decisions. Research is showing that automatic enrollments have a very positive impact on participation rates in defined contribution plans. Survey Says The 2005 EBRI Retirement Confidence Survey 6 found that 66% of workers not currently enrolled in a retirement plan would be very or somewhat likely to remain in their employer s plan if automatically enrolled (see box at right). Another study conducted by EBRI 7 found that automatic enrollment increased participation rates in certain 401(k) plans (private sector) from 66% of eligible workers to 92%, with the impact on lower income workers being the most significant. The EBRI Retirement Confidence Survey finds that 2 of 3 nonparticipating workers would be likely to stay in a defined contribution plan if automatically enrolled. 40% are very likely 26% somewhat likely 11% not too likely 22% not at all likely In a 2004 National Tax Journal report entitled Plan Design and 401(k) Savings Outcomes 8, automatic enrollment is shown to have a dramatic increase on employee participation, particularly in lower tenure and income employees. Automatic enrollment is effective because it replaces the natural inertia and procrastination within the employee population with mandated action. This is most important for younger and lower income employees, who generally do not consider the supplemental plan a necessity, as current income demands overshadow a retirement savings need and result in delaying participation until closer to retirement age or never. Research is showing that few employees stop participating in the plan after they are automatically enrolled. This likely is also because of inertia as well as the fact that it shows employees how painless saving for retirement (on a tax-deferred basis) can actually be. 6 The Retirement Confidence Survey, conducted by the Employee Benefit Research Institute (EBRI) and Mathew Greenwald & Associates, Inc. and underwritten by Nationwide; EBRI Issue Brief No. 280, April 2005; 7 The Influence of Automatic Enrollment, Catch-Up and IRA Contributions on 401(k) Accumulations at Retirement; EBRI Issue Brief No. 283, July 2005; 8 Plan Design and 401(k) Savings Outcomes, written for the National Tax Journal Forum on Pensions, June 2004, authors: James, J Choi, David Laibson, Brigitte C. Madrian 10

11 Fiduciary concerns may be an issue for some employers. However, there are several bills that have been proposed in Washington to provide direction for setting default choices (deferral amounts and investments) and to identify fiduciary safe harbors. This measure has considerable bipartisan support and, although it specifically pertains to private sector plans covered by ERISA, would provide guidance for public sector plan fiduciaries establishing automatic enrollment default policies. If an employer decides to institute an automatic enrollment approach, it would need support from labor and employee groups to be successful. If there are multiple deferred compensation plan providers, the employer has an additional decision as to how to handle the default contributions (e.g., is one provider selected for all default elections). In some states, legislation may also be required to permit automatic payroll deductions without an employee signature. It is important to recognize, however, that automatic enrollment does not eliminate the need for employee education about this benefit. One drawback for this approach is that employees who are automatically enrolled, but may otherwise have participated on their own, may retain these predetermined default choices and fail to take more appropriate action to increase deferrals or select different investment options to meet their personal long-term needs. This issue can be handled with periodic, personal communications to employees who were automatically enrolled to remind them that default choices should be reviewed and adjusted to meet their retirement income goals. Active decision (affirmative) enrollment Employers who are uncertain about establishing automatic enrollment in the supplemental plan should consider active decision enrollment, which is a less aggressive approach to increase employee participation in the supplemental retirement plan. This process requires employees to affirmatively elect or waive participation in this plan within a specified time period after hire. If employees choose to waive participation, this does not mean that they cannot elect to participate at a later date. An active decision requirement makes employees sign on the dotted line to enroll or indicate that they are not interested in participating in the plan at that time. This helps to address procrastination and inertia by requiring them to, at a minimum, consider the benefit and take immediate action. Although not as effective as automatic enrollment, research is showing that an active decision can positively impact employee participation. The 2004 National Tax Journal report 9 identifies that this process markedly increases enrollments and motivates employees to begin participating earlier than under a standard enrollment process. Today, general information about the plan may be included in new employee orientations, but rarely do employers monitor or follow-up to see if decisions (to enroll, or not) have been made. Public sector employers often use an active decision approach for other employee benefits, such as health or life insurance plans, but rarely (if ever) for the supplemental retirement program. If this also applied to the supplemental plan, it would encourage employees to take immediate action, instead of putting off the decision to a future time that may never come. 9 Plan Design and 401(k) Savings Outcomes, written for the National Tax Journal Forum on Pensions, June 2004, authors: James, J Choi, David Laibson, Brigitte C. Madrian 11

12 Unlike automatic enrollment, this approach does not require the employer to designate default deferral amounts or investment choices and, therefore, would not add fiduciary concerns. Also, since employees are merely required to make an election within a specified time, it likely would not be an issue for labor or employee groups. The most straightforward approach to implement an active decision policy is to have plan representatives available (by phone or in person) to provide information to new employees about the plan and their decisions. This could be established as part of new employee orientations. If this is not possible, new employees could either elect to be contacted by the plan representative about enrolling in the plan, or waive participation at this time. This simple form (see sample below) would then be forwarded to the plan administrator to contact employees (as they request) to inform them about the supplemental plan and enroll those who are interested. Sample Active Decision Enrollment Form THE SUPPLEMENTAL DEFERRED COMPENSATION PLAN IS IMPORTANT TO HELP YOU PLAN FOR YOUR RETIREMENT. THIS PROGRAM PROVIDES YOU WITH AN OPPORTUNITY TO SET ASIDE PRE-TAX INCOME TO INVEST IN YOUR FUTURE. BECAUSE OF THE POWER OF COMPOUND EARNINGS, THE EARLIER YOU START THE EASIER IT IS! DON T WAIT! ENROLL TODAY AND PAY YOURSELF FIRST, BEFORE TAXES! Employee Name Best way to be contacted: Telephone Home: Work: Address Home: Work: I would like more information to enroll in this plan I am not interested in this program at this time 12

13 Employee Incentives Problem: Public sector employees do not feel a sense of urgency to participate in the supplemental plan, as they expect primary benefits (pension and Social Security) to be sufficient to fund their future retirement and are not motivated to participate by the employer. Solution: Incentives, such as employer matching contributions, are one of the most effective means to encourage employee participation. It should be no surprise that an employer matching contribution has a tremendous impact on participation rates in defined contribution plans. Research studies, such as Plan Design and According to the 2005 EBRI Retirement Confidence Survey, 72% of employees not participating in their employer plan would be much more or somewhat more likely to participate if their contributions were matched. 401(k) Savings Outcomes 10, show that an employer match increases employee participation and the likelihood that they will start investing earlier. The dollar amount of the match, or increasing its value once it has been offered, is less a factor. A 2003 study conducted by Nationwide Retirement Solutions 11 focused on public sector Section 457 deferred compensation plans. This report showed that, on average, 31% of eligible employees participate in the supplemental plan, but when an employer provides a small matching contribution, such as to a Section 401(a) account based on employees deferrals, the participation rate jumps to an average of 50%. Currently there are few state and local government employers that provide an employer match, as it can be difficult from a budget and/or political standpoint to introduce this into their supplemental retirement plan. Encouraging employees to take more personal responsibility in planning for their retirement future, however, should be a priority and can be achieved through small incentives that may be less costly and controversial to accomplish. Sample approaches to incentives include: Provide a performance bonus that an employee has earned as an employer contribution to the supplemental plan, instead of a cash payment. Give a small signing bonus to employees when enrolling in the supplemental plan, at their one year anniversary of participation, and/or other target participation points (e.g., 5, 10, 15, 20 years, etc.). Establish a frequent saver program, where employees earn points that can apply towards extra time off. This could be based on dollars deferred (adjusted to employee annual earnings) or length of participation in the plan. Work with local merchants to provide prizes or discounts based on employee participation in the plan. 10 Plan Design and 401(k) Savings Outcomes, written for the National Tax Journal Forum on Pensions, June 2004, authors: James, J Choi, David Laibson, Brigitte C. Madrian 11 America s Retirement Voice: Public Sector Retirement Yesterday, Today and Tomorrow, published March

14 Simplified Plan and Enrollment Process Problem: The supplemental plan and its policies and procedures can be complex and confusing. Employees who don t have the energy or inclination to take time to learn about the plan often decide to do nothing. Solution: Providing a simple plan and enrollment process will make it easier for employees to understand the decisions they need to make to enroll in the plan and positively impact employee participation. Many people find the act of making decisions difficult. When money and investment matters are added to the decision, it becomes overwhelming. Research is showing that the most effective plans are the simplest plans fewer investment choices with more automated decisions. Too many investment choices, although attractive on the surface, can motivate employees in the opposite direction i.e. they may not take action because they are rendered unsure and burdened by the responsibility of choosing. A report How Much Choice is Too Much? 12 explored studies that have been conducted on individuals ability to make decisions when faced with a multitude of choices. The findings demonstrated that an excessive number of options may result in choice overload, in turn lessening both the motivation to choose and the subsequent motivation to commit to a choice. Simplified Plan Design The understanding that too many choices has a negative effect on participation in defined contribution plans is causing a trend to reduce the number of investment options that are made available. Offering a program with a simple menu of investments, with perhaps expanded choices for the more sophisticated investors through a brokerage account or mutual fund window, is becoming more common as a standard plan design. Asset allocation funds (see box) and managed accounts are becoming an attractive choice to provide employees an option for a single investment decision. Studies, such as the 2005 EBRI Retirement Confidence Survey show that employees not currently participating in the employer plan are more likely to do so if these simplified choices are available. 66% of non-participating workers said they would be much more (or somewhat more) likely to participate if the plan offered lifecycle funds; Lifecycle funds are investments that automatically provide workers a more conservative investment allocation as their retirement date approaches. 49% said they would be much more (or somewhat more) likely to participate if the plan offered lifestyle funds. Lifestyle funds are a set of mutual funds with a pre-set mix of conservative, moderate and aggressive investments. 12 How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans; Sheena S. Iyengar Wei Jiang, Gur Huberman, PRC WP , Pension Research Council Working Paper 14

15 Simplified Enrollment Process In addition to a more simplified plan design, the enrollment process should also be made easier. When employees are first electing to participate in the supplemental plan, portfolio theories and using asset allocation to control volatility is not that important until their account balance starts to grow. If the process is too complex and/or the decisions too difficult, then it often results in employees doing nothing. For employees who do make a decision to enroll, however, sometimes it s their last one. Research has shown that a significant percentage of defined contribution plan participants never change the initial selections that are made at the time of enrollment, and the original deferral amounts and investment selections are retained throughout their participation in the plan. To address these issues, employers should consider adopting a simplified enrollment approach for their supplemental plan that would focus communications on a few basic points and automate future decisions to help employees prepare for retirement. For example, an enrollment campaign communication effort should cover: Small deferrals today will provide meaningful income for retirement because of the power of compound interest. Periodic increases to deferral amounts, such as with pay raises, are a positive way to secure sufficient retirement financial resources. Selecting an asset allocation fund, such as a lifestyle or lifecycle fund, is a good way to manage your retirement investments for the long-term. The actual enrollment form could be modified to include a simple check the box option for a packaged, default solution that employees can select for their participation in the supplemental retirement plan. For example, by checking a single box on the enrollment form, the employee would elect: a deferral amount which is based on a percent of earnings or a flat dollar minimum deferral an asset allocation investment option, such as a lifecycle fund based on the employee age an annual (or other periodic target) deferral increase, of a certain minimum amount or percentage increase This standard election would ease employees concerns about their initial decision and ensure, if they take no further action, that they are investing appropriately for their age (as lifecycle funds are based on a target retirement date) and deferrals will increase with their income. 15

16 Simplified Education that Matches Personal Preferences Problem: Investor education has become too complex and confusing for the average employee and technology is often replacing the human interactions that employees prefer. Solution: Focus education on the basics to provide information that is relevant and useful to employees and offer this in multiple forms that meet employees high-touch to independent learning preferences. Today, educational programs are an important part of the public sector supplemental retirement plan. The problem, however, is that the education being delivered is often too detailed and complicated, rather than focused on basic topics that are most important for employees to understand. As a result, employees experience information overload, which causes more inaction than action. Employers and plan administrators instead need to focus on the education that is essential for employees to help them make the important decision to participate in their supplemental plan. For example, the topics that should be the centerpiece of an enrollment campaign are: Value of compound earnings: how participating in the tax-deferred savings program as early as possible, with regular contributions, can benefit their financial future in retirement Calculation of an income gap: how the supplemental plan can fill the gap between income from primary benefits (pension and Social Security) and retirement income needs Budgeting and debt management: how to manage income and find dollars today that can be deferred into the supplemental plan for their future retirement To be effective, education needs to be delivered in methods that meet individual learning preferences. Internet and Intranet delivery is being used more often as a preferred method of providing education as a cost-effective alternative. However, research often shows that a majority of workers prefer a more high-touch approach through face-to-face meetings, group seminars or print communications. As to content, effective education is relevant to employees personal situations. Because of content management systems, it is now possible to tailor educational messages to meet the specific needs of the employee audience. Using employment and plan data and demographics, targeted messages can be structured to address specific behavior, such as: For younger employees, demonstrating the power of compound earnings on small deferrals For participants with all assets in one investment option or class, the importance of asset allocation to reduce market volatility 16

17 For participants and employees nearing retirement age, how consolidating assets can help them meet retirement income needs A relatively new field of research is focusing on behavioral finance to provide additional insights into another effective educational approach that targets messages based on attitudinal segmentation. This defines the employee audience in terms of their psychological characteristics about money. For example, the report Using Money Attitudes to Enhance Retirement Communications 13 classified employees in five basic categories: Successful Planners individuals with a strong interest in financial and retirement planning Up & Coming Planners they take an interest in planning, but are not as confident as successful planners Secure Doers generally disciplined savers who are not necessarily interested in retirement or financial planning Stressed Avoiders those perplexed by money matters and are generally stressed, confused and anxious about saving and investing Live-for-Today Avoiders individuals who are preoccupied with current needs and aren t anxious about future money because they are focused on today This type of audience segmentation provides insights into the educational messages that need to be developed to reach the employee population. Looking at today s comprehensive education material, it predominantly is focused on the needs of the two planner groups. Topics that would be effective for employees in the remaining three categories (e.g., those who likely don t want to learn about investment decisions and asset allocation) are likely being overlooked, or not as effectively addressed, in most investor educational programs. 13 Using Money Attitudes to Enhance Retirement Communications The Vanguard Center for Retirement Research, July

18 Total Retirement Counseling Problem: Public sector employees typically receive separate information and counseling about the primary pension/defined benefit plan and their participation, or lack thereof, in the supplemental retirement plan. This provides an incomplete picture of their retirement planning options and status. Solution: Providing employees with comprehensive counseling, either from in-house staff or contract providers, will help them understand how the primary and supplemental plans work together to allow them to meet their financial needs in retirement. Within the public sector, the primary retirement benefit (defined benefit plan) is usually administered and communicated separately from the supplemental retirement plan. This typically occurs because the primary plan is handled by the employers in-house benefits staff and the supplemental plan is outsourced to contract provider(s). This approach often results in employees never really getting a complete or accurate picture of their total retirement benefits and how these plans complement each other. To achieve a more complete assessment of needs and how available benefits can be maximized to their fullest potential, benefits counselors should be knowledgeable about all of the benefits that employees are eligible to receive in retirement. To accomplish this and provide appropriate counseling, representatives for both retirement plans should have access to information about the benefits that employees have accumulated (or haven t accumulated) at the time of counseling sessions. The employer must be willing to share data with the contract vendor and vice versa. In addition, counseling staff should be cross trained to ensure they understand both the primary and supplemental plans to adequately advise employees on their benefits and any decisions that need to be made for their financial future. Some suggestions to accomplish this include: Provide consolidated statements that show all retiree benefits that they have accumulated with projections of what they will mean for their future retirement income Provide joint training for the primary plan and supplemental plan benefits counseling staff Allow employer s benefits staff to sit in on counseling sessions with supplemental plan participants and contractor s counseling staff to participate in primary retirement plan sessions, when appropriate (by phone and/or in person) Hold combined group workshops with employees to learn about both primary and supplemental plans and how they work together to meet retirement income needs 2005, Nationwide. All Rights Reserved. Nationwide Retirement Education Institute is a service mark of Nationwide Life Insurance Company. Nationwide and the Nationwide framemark are federally registered service marks of Nationwide Mutual Insurance Company. NRM-3212AO.1 18