Revealing Financial Risk. Solution to help improve financial strength Viability Data and Evaluation: Sample Report (1,000 lives)*

Transcription

1 EMPLOYER Revealing Financial Risk Solution to help improve financial strength Viability Data and Evaluation: Sample Report (1,000 lives)* *Subject to change.

2 TABLE OF CONTENTS Today s reality@work... 1 Sample report: Analysis of actual employee data... 2 Actual employee data... 2 Retirement readiness results... 3 Marginal costs of delayed retirement... 4 Projected average annual individual costs of delayed retirement... 5 Sample report: Forecasts of potential liability... 6 Employer first-year delayed retirement costs... 6 Five-year potential liability of delayed retirement... 7 Estimated age band improvements in retirement readiness... 8 Improved retirement readiness s impact on potential liability... 9 Model assumptions and data inputs for Viability report... back cover

3 Today s reality@work Employers face a daunting combination of factors that without action may affect employer viability over the long-term. Converging factors, new opportunities Demographic shifts and rising healthcare costs Financially unprepared workforce Fragmented employee benefits experience Demand for simple, holistic solutions Yesterday Employer as Benefits Funder SHIFTING ROLES Today Employer as Benefits Facilitator Funding Employer s share Employee s share Employer s share Employee s share Risk A funded liability for benefits Potential liability of a financially unprepared workforce Health Protection Retirement Solving for the new reality@work QUANTIFYING THE POTENTIAL LIABILITY Model retirement age ranges Earliest 62 Funded 65 Latest 70 Funding sources Current retirement plan account balances Annual retirement plan contributions Annual rate of increase in retirement Projected Social Security Goals Readiness target: 75% replacement income in retirement Project the potential liability of a financially unprepared workforce Help advisors identify opportunities to mitigate the potential liability Lens #1 Data/measurement Lens #2 Prescriptive solutions Lens #3 Integrated fulfillment 1

4 Analysis of actual employee data Actual employee data Below is an age banded cost summary of your company s workforce by head count, benefit costs and income used in our analysis based on our model assumptions and the data inputs applied for your workforce. 1 Age band Employees Average workers compensation costs 2 Average healthcare costs 3 Average income Age $1,992 $3,393 $40,907 Age $2,250 $4,073 $47,601 Age $2,469 $4,520 $54,773 Age $2,613 $4,748 $60,813 Age $2,867 $5,150 $67,436 Age $3,384 $6,155 $74,235 Age $4,244 $7,645 $80,411 Age $5,298 $9,709 $83,197 Age $6,121 $11,219 $84,480 Totals or Averages 1,000 $3,535 $6,407 $66,832 Average age of workforce: Costs on this chart and charts that follow do not reflect other factors such as productivity, absenteeism and turnover costs. 2 Average workers compensation costs are based on the client s location and industry code. 3 Average healthcare costs reflect the employer-paid portion of employee-only expenses. Our analysis revealed these costs for your employee workforce by age bands. 2

5 Retirement readiness results The charts below show the workforce distribution of two plan readiness levels and how the distribution correlates to expected retirement readiness. 100% readiness is defined as the ability to replace 75% of projected income at age 65 through anticipated life expectancy. CURRENT PLAN RETIREMENT READINESS DISTRIBUTION 1 Degree of readiness 100% 90% 80% 70% 60% <60% % of employees Expected retirement age Head count by age band All Age Age Age Age Age Age Age Age Age PROPOSED PLAN READINESS DISTRIBUTION 2 Degree of readiness 100% 90% 80% 70% 60% <60% % of employees Expected retirement age Head count by age band All Age Age Age Age Age Age Age Age Age Based on a plan design with an employer match of 100% up to 4% and without auto-enrollment and auto-deferral increase. 2 Based on a plan design with an employer match of 50% up to 6%, auto-enrollment at 6%, and an annual auto-deferral increase of 1% capped at 10%. Projections assume a continuance of employee funding behavior and do not factor in loans, withdrawals nor deferral changes. 3

6 Marginal costs of delayed retirement ASSESSES YOUR COMPANY S WORKFORCE COSTS Driver Average new hire employee 1 Average retirement age employee 2 Marginal difference Average age 38 years 65 years Wages $60,200 $84,480 $24,280 Healthcare $4,870 $11,219 $6,349 Workers compensation $2,689 $6,121 $3,432 Other 3??? Total $67,759 $101,819 $34,061 1 Average new hire age, wages and benefit costs are the average of all company employees ages in the workforce. 2 Average retirement age, wages and healthcare costs are the average of all company employees ages in the workforce. 3 Other: Costs do not reflect other factors such as productivity, absenteeism and turnover costs. This cost differential is key to establishing the employer s potential cost of an employee delaying retirement. 4

7 Projected average annual individual costs of delayed retirement Assumptions Marginal cost of delay $34,061 Discount rate 2.35% Healthcare inflation 7.00% Wage inflation 2.39% Workers compensation inflation 3.00% Discounted projected marginal cost of delay $34,380 1 Retirement age Wage Healthcare Workers compensation Total 2 Value in age 65 dollars 3 62 $72,869 $19,911 $10,361 $103,141 $105, $48,579 $13,274 $6,907 $68,761 $69, $24,290 $6,637 $3,454 $34,380 $34, $(24,290) $(6,637) $(3,454) $(34,380) $(34,380) 67 $(48,579) $(13,274) $(6,907) $(68,761) $(67,971) 68 $(72,869) $(19,911) $(10,361) $(103,141) $(100,791) 69 $(97,158) $(26,548) $(13,815) $(137,521) $(132,857) 70 $(121,448) $(33,185) $(17,268) $(171,901) $(164,187) 1 Reflects wage, benefits and worker compensation growth forward one-year then discounted back to today's dollars. 2 Total multiyear effect of the decision to retire at a given year, compared to the benchmark retirement before the end of the year the employee turns The present value in terms of age 65 dollars of the decision to retire; retirements before 65 earn interest and delayed retirements are discounted back to 65, using the discounted rate. 5

8 Forecasts of potential liability Employer first-year delayed retirement costs These charts show a first-year calculation of projected employer savings from early retirement along with the projected costs from delayed retirement. 1 year Expected retirements 32 Delayed retirements 69 Retirement age employees 101 Age Beginning head count Expected retirements Delayed retirements Early retirement savings Delayed retirement costs Total retirement savings Total retirement costs Potential liability $100,791 $151,187 $151, $67,971 $95,159 $95, $34,380 $(34,380) $68,760 $(304,420) $(240,660) $(34,380) $(247,536) $(247,536) $(34,380) $(364,428) $(364,428) $(34,380) $(319,734) $(319,734) $(34,380) $(226,908) $(226,908) $(34,380) $(206,280) $(206,280) $1,359,200 (Net potential liability) This model uses probability-based retirement estimates to predict future employee behaviors and potential related employer costs. Actual net potential liability (using parameters to 8 decimal places) is $1,356,700. At age 64, there are both savings for employees who retire and costs for employees delaying retirement. All employees 70 years and older at the beginning of the year are automatically retired with no projected liability applied. 6

9 Five-year potential liability of delayed retirement Year 1 Year 2 Year 3 Year 4 Year 5 Delayed retirements Expected retirements Potential net cost $1,356,700 $933,718 $924,195 $1,049,901 $1,401,540 Cumulative potential liability $2,290,418 $3,214,613 $4,264,514 $5,666,054 Cumulative present value of net potential liability $5,666,054 7

10 Estimated age band improvements in retirement readiness Below is a summary of the current average retirement readiness by age band and the suggested plan readiness distribution estimates based on proposed changes to plan design. WITHOUT EXPECTED EMPLOYEE BEHAVIOR Projections below assume a continuance of employee funding behavior and do not factor in loans, withdrawals nor deferral changes, which could have a relevant effect on younger workers readiness: Age band Employees Current average readiness 1 Suggested average readiness 2 Age % 100% Age % 100% Age % 100% Age % 99% Age % 86% Age % 73% Age % 61% Age % 58% Age % 58% 1,000 70% 80% WITH EXPECTED EMPLOYEE BEHAVIOR Projections incorporate the expected employee behavior outlined in the model assumption page: Age band Employees Current average readiness 1 Suggested average readiness 2 Age % 100% Age % 98% Age % 91% Age % 88% Age % 83% Age % 73% Age % 66% Age % 57% Age % 58% 1,000 65% 78% 1 Based on a hypothetical plan design with an employer match of 100% up to 4% and without auto-enrollment and auto-deferral increase. 2 Based on proposed plan design changes to an employer match of 50% up to 6%, auto-enrollment at 6% and an annual auto-deferral increase of 1% capped at 10%. 8

11 Improved retirement readiness s impact on potential liability This chart illustrates net improvement due to improved employee retirement readiness. This is an aggregate forecast using a hypothetical 40-year summary of potential long-term financial liability. Projections below assume a continuance of employee funding behavior and do not factor in loans, withdrawals nor deferral changes, which could have a relevant effect on younger workers readiness: Years WITHOUT EXPECTED EMPLOYEE BEHAVIOR Current plan retirement readiness Suggested plan retirement readiness Improvement Years 1 5 $5,666,054 $5,606,642 $59,412 Years 6 10 $10,643,351 $10,460,776 $182,575 Years $13,631,116 $13,153,641 $477,476 Years $9,613,364 $7,652,280 $1,961,084 Years $10,127,935 $1,136,292 $8,991,642 Years $9,002,217 $4,945,819* $13,948,036 Years $4,634,335 $7,298,758* $11,933,093 Years $1,655,368* $8,791,971* $7,136,604 Present value liability $61,663,004 $16,973,082 $44,689,922 WITH EXPECTED EMPLOYEE BEHAVIOR Projections incorporate the expected employee behavior outlined in the model assumption page: Years Current plan retirement readiness Suggested plan retirement readiness Improvement Years 1 5 $6,232,659 $6,167,306 $65,353 Years 6 10 $12,772,021 $12,552,931 $219,090 Years $17,720,450 $17,099,733 $620,717 Years $13,458,709 $10,713,192 $2,745,517 Years $15,191,902 $4,704,438 $10,487,464 Years $14,403,537 $1,816,242 $13,948,036 Years $7,878,369 $2,345,945* $10,224,314 Years $2,334,189 $5,291,971* $7,626,160 Present value liability $89,991,836 $45,515,926 $44,475,910 * A forecasted reduction in liability would represent a positive benefit to the company financials. 9

12 Model assumptions and data inputs for Viability report Variable Input Description Healthcare costs Average new hire Average retirement age Income levels Annual separation rates Age % Age % Age % Healthcare inflation Healthcare costs are age banded average premiums, adjusted by state using data provided by the Department of Health and Human Resources database. They reflect the employer-paid portion of employee-only costs. Average benefit and wage expenses for ages in the new-hire range of Average benefit and wage expenses for retirement-aged employee, age Average income by age calculated from client data. Rate at which employees separate from service prior to retirement. 7.00% Rate of inflation used to compute nominal payments for future healthcare premiums. Wage inflation 2.39% Rate of inflation used to compute nominal payments for future wage costs. Workers compensation inflation 3.00% Rate of inflation used to compute nominal payments for future workers compensation premiums. Discount rate 2.35% Rate used to compute the present value of nominal expenditures occurring in the future, taken from the U.S. 10-Year Treasury, as of July Analysis of employee data: Employees with salaries below $11K were excluded from the analysis. Employees with salaries above $265K had their salaries scaled to $265K for the analysis. Compensation data for 2016 hires was scaled up to reflect a full year. Modeled healthcare costs for the state of California were used in the analysis. Modeled workers compensation costs for the state of California, industry code 8833 (Hospital: Professional Employees), were included in the analysis. Expected behavior impact: Readiness and resultant liability projections have been impacted as follows to reflect the impact of loans, hardship withdrawals, QDRO distributions, deferral suspensions, etc. dependent upon age band. Age band Sources: Percentage of Employees in Age Band Impacted Annual Impact on Each Impacted Employee Age 25 20% 30% Age % 30% Age % 25% Age % 15% Age % 15% Age % 10% Age % 5% Age % 3% Age >62 0% 0% Average 12.2% 14% Depart of Labor, Patterns of Marriage and Divorce Employee Benefits Research Inst. 401(k) Loan Activity American Benefits Inst., Trends in 401(k) Plans National Bureau of Economic Research, Hardship Withdrawals from 401(k) Savings 2018 Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA All rights reserved. RS C: RS