The Honeymoon Effect 8/13/2014. How to Create a Lifetime of Plan Sponsor and Participant Bliss

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1 Continuing Education Credits Be sure to sign the Sign In/Sign Out sheet outside of the room when applying for Continuing Education Credits for the following certifications. (Check the appropriate certification) CPE You do not have to sign in and out for InFRE credits InFRE tracking forms were included in conference registration materials. The Honeymoon Effect: How to Create a Lifetime of Plan Sponsor and Participant Bliss Julia Durand, City and County of San Francisco Retirement Wendy Carter, The Segal Company Kevin McGarry, Nationwide Financial Retirement Institute Rick Rodgers, Innovest Portfolio Solutions The Honeymoon Effect Julia Durand Moderator Director Deferred Compensation City and County of San Francisco Retirement System 1

2 Understanding the Evolving Landscape Rick Rodgers, AIFA Vice President, Director Innovest Portfolio Solutions LLC Evolving Landscape of DC Plans Opinions and thoughts concerning retired DC participants changing with evolving landscape Plan Sponsors Industry Legal Professionals Plans Sponsors: Renewed focus concerning retirees Demonstrating greater paternalistic responsibility Recognizing benefits to Plan and all participants (active and retired) Legal Professionals: Shifting perspectives Limiting liability and administrative burdens through force outs vs. providing safe havens via post employment participation Plan document modifications Mutually Beneficial Plan Sponsor Retain large balance participant assets Entire Plan may benefit through economies of scale May reduce liability by providing access to ongoing oversight, objective process, features and services Participant Avoid investment industry fraud Access to ongoing objective oversight Access to Plan provided services May benefit from institutional pricing Eligible for other tax and estate planning opportunities 2

3 Evolving Plan Document and Options Historically, Plans were often written to effectively force out inactive and retired participants Intended to limit plan sponsor liability and reduce administrative burdens Limit distribution options to lump sum/rollover Evolving landscape prompting plan sponsors and legal professionals to consider revisions to underlying provisions Modifications to plan document to encourage and support continued participation of retirees Addition of installment distributions Modifications not limited to plan document Trustee/custodian capabilities Record keeper capabilities Retirement Income Considerations Retirement Age Age 55 59½ Rollover or In Plan Distribution Distribution Type Installments Annuity (fixed, variable, equity indexed, GMWB) Combination Investment Management DIY Advisor or Broker Plan provided options/oversight Retired Public Safety Officer Insurance Eligibility? Pros & Cons for Plan Sponsors and Participants 3

4 Should They Stay or Should They Go? Numerous benefits for retired participants Many benefits for Plan Sponsor Additional responsibilities for Plan Sponsor Is it the right thing to do? Benefits to Retired Participants Cost effective, potentially lower expense for: Investment management fees via institutional pricing Counseling and advice Portfolio management Annuities Avoid Financial Services Fraud Ongoing, objective oversight for investment selection and monitoring Committee never dies Regulatory requirements of Plan Sponsor Legal requirements of fiduciaries Ensure professionals are experienced in practice area Benefits to Retired Participant (cont d.) Continuity Investment options Services People Avoid tax consequences or distribution limitations for those retiring between age 55 59½ Public Safety Officer access to $3,000 annual tax free distributions for certain insurance premiums Enhanced bankruptcy protection compared to IRA 4

5 Plan Sponsor Considerations May require amending Plan Document Administrative burden Additional liability Fiduciary responsibility Annuity product due diligence Custom retirement income portfolios Retirement income mutual funds Pre retirement and Post retirement Education Retirement Income Products/Vehicles Plan Sponsor Pros Retain assets generally, large balance participants Additional assets, particularly large balance participants, help subsidize Plan administrative expenses Additional assets may help Plan qualify for lower price breakpoints and institutional minimums Investment management Record keeping Trust & Custody Plan Sponsor Pros (cont d.) Large balance participants help increase the entire Plan average balance Reduce cost of fee based services as percentage of assets Investment Consulting Legal Participant Education, Counseling, Advice Record keeping Auditor 5

6 Quantifying the Benefits Wendy Young Carter DC Practice Director, Public Sector Segal Group Plan Administration Cost Drivers Service Primary Driver Investment management Assets Recordkeeping Participants Trust/Custody Assets Education Participants Professional (e.g., legal) Plan Plan staff and support Plan/Participants Plan Administration Cost Drivers Absolute plan size influences each factor Shifting services to internal staff can shift from more plandriven to more participant driven Revenue sharing can impact fee equity Plan design features can have large effect Auto enrollment Small balance cash outs Other 6

7 Per Participant Asset Based Incremental Types of Fees Asset based Fee Illustration Average Account % of Total Plan % of Total Plan Illustrative Per PPT Cohort's Per PPT Cost as a % of Total Comparable Asset based Cohort's Per PPT Asset based Fee Paid Ratio of Asset based Fee Paid to Cost As a % Age Balance PPTs Assets Plan Cost Plan Cost Fee of Total Cost Incurred <31 $ 5,500 5% 0.5% $75 5% 0.14% 1% 10% $ 17,000 10% 3.7% $75 10% 0.14% 5% 30% $ 37,500 25% 14.7% $75 25% 0.14% 15% 70% $ 65,000 35% 36.8% $75 35% 0.14% 40% 120% 60+ $ 80,000 25% 44.4% $75 25% 0.14% 40% 150% Total % 100% 101% Incremental Revenue Illustration Retaining higher average account balances generates incremental revenue Assume average rollover retiree is paying 150% of his/her actual cost Incremental loss would increase costs for all plan participants Average Rollover Retiree Account Balance Asset based Fee Revenue Generated By Rollover Retiree Rollover Retiree Incremental Loss Cost $80,000 $112 $75 $37 7

8 Promote Your Advantages Your advantages don t stop with the power of lower costs Promote services that appeal to retirees Advisory services Prudently selected investment options Place to consolidate all retirement account assets Plan loans/flexible withdrawals Other Capitalize on Advantages Captive audience during their working career Your knowledge of Public sector employees Public sector DC plan expertise, e.g. no 10% The participant s primary retirement plan, e.g., DB plan Maximize your retiree focused opportunities Pre retiree workshops Retiree organizations Tailor to Retiree Needs Consider services tailored to retired participants Personal advisory services Expanded retiree focused education/counseling Investment solutions focused on those in de cumulation Spend down assistance/guaranteed features Other 8

9 Properly and Effectively Communicating the Benefits of Your Plan Kevin McGarry, CIMA, CRPC, CLTC Director Nationwide Financial Retirement Institute Nationwide Financial Participants unpreparedness for retirement... 28% of workers have less than $1,000 saved for retirement Fewer than 12% of workers have more than $250k saved for retirement 57% of workers are currently saving for retirement 38% of workers are participating in an employersponsored retirement plan Longer life spans, rising healthcare costs and longterm care expenses are putting pressure on how much is enough... is being popularized by the mass media Workers saving too little for retirement (March 2013) The greatest retirement crisis in American history (March 2013) Have Americans given up on retirement? (March 2013) The Retirement Gamble (April 2013) Category ad spend at an all time high Source: Employee Benefit Research Institute. Ad spend source: Ad Age, Properly and effectively communicating the benefits of your plan are critical in helping America prepare for and live in retirement 27 9

10 Plan communications should reach employees at all stages of the plan life cycle to drive successful outcomes and engagement during retirement years Participant Lifecycle Phases Enrolling Saving Near/In Retirement 0 6 mos 6 mos age 55 or trigger Age 55 or trigger Key Needs Why should I enroll? How much should I contribute? How should I invest? How do I get and/or stay on track to achieve my retirement goals? Should my plan change given changes in my life? When will I be able to retire? How do I retire? How much income do I need? Should my plan change given changes in my life? Communication Objective Establish credibility by providing a personalized Welcome experience to guide their plan to the right start. Consistently enhance the relationship by providing ongoing personalized guidance and support as their needs change. Guide a successful retirement by providing personalized support and tools leading up to retirement. 28 Enrolling 0 6 mos Highlighting the Services & Options Saving 6 mos age 55 or trigger Estate Planning College Segmented messaging on relevant topics promotes further engagement during the saving years Dollar Cost Averaging Young Savers Asset Allocation Mid Career Savers Investment Management Strategies Mature Savers Diversification Debt Costs of Retirement Pre Tax vs. After Tax Rebalancing 30 10

11 Near /In Retirement Age 55 or trigger Near and at retirement communications should help participants increase their focus on critical topics that will impact them Inflation Healthcare Social Security Outliving resources 31 Plan services should work together to drive better participant outcomes as they prepare for retirement Digital Face to Face Plan information On site representatives Account management Participant 1:1s Forms and documents Workshops Interactive tools Seminars Social media Print Lifecycle materials Environmental collateral Statements Newsletters Needs based content Phone Customer service Account management Education & guidance Lifecycle support 32 But how are you engaging retirees via ongoing communications to help them live in retirement and continue to manage their portfolio? Retirees look to us. Many times, their plan services, options and support structures are the best and most dependable tools available

12 You should be working with a partner that shares this focus and offers broad support and resources for this important segment 34 Examples of retiree population tactics to utilize in your plan 35 12

13 Contact Information Julia Durand Deferred Compensation Manager San Francisco Employees' Retirement System Wendy Young Carter DC Director, Public Sector SEGAL Rick Rodgers, AIFA Vice President, Director Innovest Portfolio Solutions LLC Ext. 326 Kevin McGarry, CIMA, CRPC, CLTC Director Retirement Institute Nationwide Financial