Opportunities in the state and local government market. Retirement plan support for consultants and advisors

Transcription

1 Opportunities in the state and local government market Retirement plan support for consultants and advisors

2 State and local governments have specific needs. Governments generally face decreasing revenues while absorbing increasing responsibility for community works and projects. This challenge in turn means that competitive, high-quality benefits programs including retirement plans are more important than ever to help attract and retain critical staff. There are a number of dynamics impacting state and local governments that present unique challenges: Government employment not following larger trends Overall, the economy recently added almost 300,000 new jobs while the unemployment rate has dropped to 5.5%. Despite continued meager wage gains, the recovery appears to be on solid ground, with over 3.2 million jobs added over the past year. 1 But the optimism doesn t carry over into the government sector. Hiring by government continues to be remarkably weak. Although about 15% of employed Americans work for the government (about 90% at the state and local level), government hiring accounted for only 1% of the job gains in February 2015 and less than 3% over the past year. 1 Budgetary constraints and the outsourcing of government jobs to the private sector are among the factors expected to continue to dampen job growth. Pension funding declines despite asset management gains. The funded status of the largest 100 U.S. public pension plans declined by $131.3 billion in 2014 as plan liability increases overwhelmed robust asset management gains. Equity allocations in the pension portfolios dropped to 37.3% by the end of 2014, marking their lowest concentration in the 15-year history of the Milliman Pension Funding Study. 2 Looking ahead, many governments will continue to make tough decisions as the interest rate environment continues to be uncertain. Government employee retirement income outlook Only 18% of public sector workers are very confident in their retirement income prospects, compared with 21% in Concerns include retiree healthcare costs, future Social Security and Medicare benefits, and personal savings. Not surprisingly, nearly 50% of employees expect to work for pay after retiring. 3 Rising healthcare costs are a concern. The latest Labor Department figures indicate wages and salaries make up about 64% of state and local government employee compensation, down from between 68 and 69% a decade ago. Health insurance accounts for about 12% of total employee costs, compared to 10% in 2004.* With Americans living longer and healthcare costs rising, many state and local governments have shifted part of that bill to retirees or, in some instances, cut retiree coverage altogether. 4 * Governing.com; The Biggest Drivers of Public Employees Rising Health Costs, December 3,

3 A strong voice in government... For government TIAA-CREF has offered expertise on key financial and retirement security issues facing the public sector since our founding in Our strong voice in government testifying before congressional committees and presidential panels, engaging with legislators, advocacy groups, business leaders, state insurance departments and agencies, as well as coordinating public policy positions also gives us the unique perspective needed to help shape highly effective retirement programs on behalf of state and local government plan sponsors. 3

4 Retirement plan redesign: The importance of a risk-managed Defined Contribution plan In today s environment of strained budgets, uncertainty about future economic growth and burgeoning costs of entitlement programs, government plan sponsors and those who serve them are incorporating Defined Contribution plans into retirement programs to reduce their singular reliance on the traditional Defined Benefit plan. TIAA-CREF offers four types of Defined Contribution plans: Core; TIAA-CREF Income Focus, our hybrid solution; Supplemental which includes 457(b), 401(a) and 401(k); and Retiree Healthcare Savings. While each plan comprises unique components depending on its primary purpose, all share a two-pronged objective: To mitigate risk investment risk, inflation risk and longevity risk while at the same time provide employees with lifetime financial security. The approach, which has been successful for millions of TIAA-CREF participants since 1918, is based on the following core principles and plan design elements. Core Principle #1 Design primary benefit plans to help employees to and through retirement. Workers who want to maintain a standard of living close to what they enjoy at the end of their working years should be aiming to replace 70% 90% of their final salary in retirement from all sources, including Social Security, which means that they should save at least 10% 15% of their gross annual income. This figure represents the combined contribution of both employers and employees and assumes Social Security coverage. Of course, retirement age and other factors should be reviewed to determine specific contribution rate targets, which could be as high as 18% 20%. Plan design elements Loan guardrails. Consider placing limits on the number of loans participants can take against their retirement assets, which will reinforce a commitment to long-term planning. Limiting loans can also keep down plan expenses. Annuitization as a payout option. Require that a portion of the accumulation perhaps 20% 30% attributable to the employer s contribution be annuitized from or automatically directed into a guaranteed-income product.** This will help create a guaranteed income floor to cover life s basic necessities no matter how the markets perform or how long the individual lives. Core Principle #2 Construct investment menus to reduce inertia and manage risk. Selection and monitoring of investment options with prudence is a key responsibility for fiduciaries. Best practice steps for the approach include: Designing and managing a competent fiduciary process in the best interests of all employees; adopting long-term investment strategies that support successful retirement investing; and building an investment menu that includes options appropriate for both growth and lifetime income. Plan design elements Simplified menu, diversified across investment choices. Research indicates that a maximum of 20 low-cost investment options should give plan participants the ability to make decisions and diversify their portfolio. More options can be confusing, resulting in inertia or the employee making unsuitable choices a risk for both themselves and the fiduciary. ** Guarantees are subject to the claims paying of the issuing company. 4

5 Asset allocation option. For employees who do not have the desire or knowledge to build their own portfolios, a one-decision, age-based target date fund is easiest and effective. Low-cost annuities. Inclusion of an annuity on the investment menu and annuitization as a payout option enable employees to cover, at a minimum, their core living expenses in retirement. A life annuity, however, is the only financial vehicle that maximizes periodic income while guaranteeing an individual will not outlive his or her retirement benefit. 5 Core Principle #3 Provide education and advice that inspires confidence and action. To ensure employees are taking full advantage of their retirement program, plan sponsors need to provide them with the right educational resources and tools to understand their plan options, make informed choices and keep retirement planning top of mind. Plan design elements Fund-level advice. Many plan participants seem to lack well-informed investment preferences. This underscores the need for reliable, personalized advice that yields specific investment recommendations, and which can be implemented quickly and easily. Among employees who tapped in-person retirement advice, 71% chose to either save more, change their future allocations or rebalance their portfolios. 6 Employees who used an online advice service likewise made changes, with 57% saving more, changing their future allocations or rebalancing their portfolios. 7 Financial education. To help employees move confidently to and through retirement, it is important to understand who they are and what matters to them most at every stage of their financial journey. Relevant, tailored communication and educational tools, delivered through the channels in which they prefer to interact, are critical to this engagement. In addition, tools should be interactive, allowing employees to chart, evaluate and experiment with various scenarios, which will help them set retirement readiness goals. Many plan participants seem to lack well-informed investment preferences. This underscores the need for reliable, unbiased advice that yields specific investment recommendations, and which can be implemented quickly and easily. 5

6 Working with consultants and advisors TIAA-CREF is an organization plan sponsors trust to manage their 401(a), 403(b) and 401(k) plans in the nonprofit market. And since we expanded our offering and services to include 457(b), many traditional municipalities and states are choosing TIAA-CREF. Consultative guidance and plan sponsor support Dedicated Relationship Managers coordinate the high level of service that plan sponsors expect in an ever-changing marketplace. Working closely with plan sponsors and their consultants/advisors, our Relationship Managers can provide effective outsourcing of administrative services, as well as plan compliance and competitive pricing. High-impact employee services Personalized, objective advice services and customized education are available to employees and through a variety of convenient channels to meet their preferences: On site, by phone, in a local office or via the web. 8 We also offer a full complement of communications with personally relevant messages based on where employees are in their lives and careers. Together, our distinctive approach maximizes engagement and inspires confident action. Investment menu flexibility While we believe that retirement plans should be optimized for both accumulation and retirement income that lasts a lifetime, we offer fully open architecture so that plan sponsors can structure their menu with the investments they choose. As part of our investment fiduciary service, TIAA-CREF also offers support with recommended best practices on investment policy statement (IPS) development, as well as a sample IPS template and sample investment menus. TIAA-CREF Income Focus While some states are considering a more radical approach of freezing their Defined Benefit plan, the middle ground is where most are landing establishing a Defined Contribution plan (some just for new employees) and scaling back their Defined Benefit offering. TIAA-CREF Income Focus can offer plan sponsors a balanced approach to reduce singular reliance on, and help avoid the financial risks associated with, the traditional Defined Benefit plans of the past, while still preserving the positive features of those plans. A closer look at Income Focus investment platform A properly designed Defined Contribution investment platform is integral to the success of the Defined Contribution portion of a hybrid plan. The goal is to have an adequate income stream in retirement while minimizing cost and risk. Income Focus offers an outcomes-based model in which target income replacement ratios are established then monitored. The ability to determine income replacement ratios can provide peace of mind for employees and an opportunity to proactively address any potential shortfall. 6

7 Collaborating with plan consultants and advisors to deliver turnkey, cost-effective solutions Recognizing that plan consultants and advisors play a pivotal role in helping government plan sponsors make prudent retirement plan decisions, TIAA-CREF is committed to supporting your business efforts and helping you succeed in delivering the most effective retirement programs. Our Government Market Team has an average of 20 years industry experience, and will work closely with you in evaluating current benefit programs to identify appropriate, cost-effective solutions within a new structure aimed at meeting your plan sponsors goals and objectives. One of the best total values TIAA-CREF stands the test of time because we align our offer to meet the unique business and workforce objectives of not-for-profit government plan sponsors who seek: High-value products and services with a low-cost fee structure A dependable, trusted provider with which to do business Ease in performing day-to-day administrative responsibilities Timely compliance with regulations and fiduciary obligations Flexibility of investment choice when building menus Communication, education and advice that strengthen retirement readiness We invite you to learn more about our extensive public market offer by calling: Name: <Name> Title: <Title> Phone number: <Phone number> < > 7

8 1 Robust job gains despite lackluster hiring by governments, March 6, Milliman 2015 Public Pension Funding Study Retirement Confidence Survey of the State and Local Government Workforce, a joint research project of the Center for State and Local Government Excellence and the TIAA-CREF Institute, August Governing.com; Health-Care Cuts Driving Public Workers Retirement Delays, August 20, Guaranteed lifetime income is subject to the issuing insurance company s claims-paying ability. 6 TIAA-CREF Advice analysis of 66,617 TIAA-CREF participants who received retirement plan advice or guidance and took action in the 12 months ending 3/31/2015. The overall action rate of 71% includes 20.5% who chose to save more and 61.5% who chose to change their future allocations and/or rebalance their portfolio. 7 TIAA-CREF Advice analysis of 19,357 TIAA-CREF participants who used the TIAA-CREF Retirement Advisor online advice tool and took action in the 12 months ending 3/31/2015. The overall action rate of 57% includes 17% who chose to save more and 48.6% who chose to change their future allocations and/or rebalance their portfolio. 8 Objective (unbiased) advice refers to the third-party advice that we deliver to plan participants with respect to their employer-sponsored plan options under applicable Department of Labor guidance where approved by the plan fiduciary/sponsor. Please note that TIAA-CREF does not and cannot provide legal advice and that we recommend that you consult with your own legal counsel for such advice. 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. 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 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY For Institutional Investor Use Only. Not For Use With Or Distribution To The Public. C