DC IT S A NEW WORLD IN RETIREMENT

Transcription

1 Planet DC IT S A NEW WORLD IN RETIREMENT TM Issue 4 Winter 2016 Liberate Your Thinking on Defined Contribution DESIGNING PLANS DIRECTING INVESTMENTS OPTIMIZING ADMINISTRATION ENGAGING PARTICIPANTS Metamorphosis Creating the DC plan of the future. The Collective Movement The rising popularity of collective investment trusts. Fortified Decision-Making Structure your plan committee meetings for success. Navigating the Next Stage Start the transition conversation with pre-retirees now.

2 Be a retirement changemaker. Lead the conversation. As DC plans continue to make strides in accumulation strategies with increased automatic features and higher default rates, there is a distinct tipping point toward decumulation strategies and education that are needed to meet the longevity challenge head on. We believe that having Brave Conversations among plan advisors, sponsors, providers and the broader industry is critically important in this effort. In this issue of Planet DC, we look at a shift toward the institutionalization of DC plans of all sizes. Drawing from our research of 20 of the leading Fortune 500 DC plan sponsors, we discuss how plans can include collective investment trusts to help lower plan fees and increase pricing flexibility, we offer plan committees a quarterly meeting agenda checklist that covers current and emerging issues, and we provide insight to help pre-retirees make the transition to retirement. BNY Mellon s Vince Pacilio also shares highlights from the firm s Generation Lost: Engaging Millennials with Retirement Savings survey. With each issue, Planet DC offers guidance and actionable steps to help maximize a plan s effectiveness. We strive to offer insight into DC plan best practices and emerging trends to begin your own Brave Conversations, and to provide a roadmap to understanding and implementing these ideas to evolve plans to the next level. To learn more about our Brave Conversations on Defined Contribution program for plan sponsors and their advisors, reach out to your BNY Mellon Consultant, your plan advisor or visit im.bnymellon.com/dc. To view past Planet DC issues, visit im.bnymellon.com/planetdc. DESIGNING PLANS DIRECTING INVESTMENTS Targeted Outcomes OPTIMIZING ADMINISTRATION ENGAGING PARTICIPANTS It s time to have Brave Conversations on the four key plan aspects that impact participants targeted retirement outcomes. Mark R. Browne, Managing Director Head of North American Channel Marketing and Retirement Insights BNY Mellon Investment Management Learn more To discover more about retirement plan best practices and BNY Mellon Retirement solutions: Visit: im.bnymellon.com/dc Call: Plan Advisors: Institutional Clients: Follow #BNYMretire BNY Mellon

3 Connect with our perspectives. ARTICLES DESIGNING PLANS Metamorphosis Creating the DC plan of the future. p4 OPTIMIZING ADMINISTRATION Fortified Decision-Making Structure your plan committee meetings for success. p14 DIRECTING INVESTMENTS p8 ENGAGING PARTICIPANTS p17 The Collective Movement The rising popularity of collective investment trusts. Navigating the Next Stage Start the transition conversation with pre-retirees now. EXECUTIVE INSIGHTS Engaging a Generation Lost Q&A with Vince Pacilio Executive Vice President and Global Head, Insurance Client Segment at BNY Mellon p12 Planet DC is proud to be honored by the retirement industry for creating thought leadership that will help transform the way Americans retire. PLAN SPONSOR COUNCIL OF AMERICA 2016 FIRST PLACE WINNER Plan publications designed for plan sponsors and advisors 2016 WINNER 3

4 ETA DESIGNING PLANS MOR Creating the DC plan of the future PHOSIS As defined benefit (DB) plans continue to be frozen or terminated, a greater number of American workers will rely on defined contribution (DC) plans to provide for their retirement. Estimates of the U.S. retirement market indicate that with a projected market value of more than $8.5 trillion in 2018, DC plans will be larger than their DB equivalents by $1.3 trillion. 1 Even with the growing number of workers covered through such plans, however, there is mounting evidence suggesting that DC plan participants are not on track to sufficiently fund their goals. 2 For insight, BNY Mellon sponsored research that involved in-depth interviews with 20 of the leading Fortune 500 DC plan sponsors in the U.S., including leaders and innovators in technology, manufacturing, healthcare and other sectors. They represent organizations with billions or even tens of billions in DC assets; many have even larger DB plans. As such, their complexity and buying power provide the need and the wherewithal to fuel innovation and cost savings, and to better ensure favorable retirement outcomes. RESEARCH HIGHLIGHTS 30% of sponsors surveyed plan to add hedge funds in some form (either limited partnerships, or in a mutual fund/liquid alternatives format) 55% of sponsors cited the need to address longevity risk by generating retirement income 95% of mega-market sponsors expect to see greater unbundling with less reliance on revenue sharing The interviews provided insight as to how these organizations are responding to the evolutionary change underway, and what best practices are being utilized to increase the efficiency of their plans. THREE COMMON THEMES EMERGED: 1 THE INSTITUTIONALIZATION OF DC PLANS 2 EDUCATION AND AUTOMATION WORKING TOGETHER 3 UNBUNDLING AND TRANSPARENCY: SHINING A LIGHT ON FEES This article is a recap of BNY Mellon Asset Servicing team s white paper, The DC Plan of the Future: DB Principles for the DC Generation. To read it in full, please visit bnymellon.com/us/en/our-thinking/the-dc-plan-of-the-future.jsp. 1 Cerulli Associates, The Cerulli Report Retirement Markets 2015: Growth Opportunities in Maturing Markets. 2 Employee Benefit Research Institute (EBRI), 2015 Retirement Confidence Survey. 4

5 1 The Institutionalization of DC Plans Since the introduction of the first private pension plan in 1875, pensions have evolved into a highly sophisticated institutional industry. With the need to meet pension obligations, DB plans and their sponsors have looked at many different ways to achieve these objectives (e.g., leveraging broad asset allocation and investment structures and other techniques). While acknowledging that maintaining DB plans was either too expensive or too burdensome, many of the interviewed sponsors wanted to be able to replicate some of the efficiencies they utilized when running DB plans. Comparing the DB experience to the more typical approach on the DC side, a number of shortcomings are often identified with DC plans: Higher costs Limited access to alternative investments, limiting their potential to increase returns and reduce risk through diversification Uncertain financial benefit with participants bearing investment risk Plan sponsors have sought to address the limitations of DC plans by borrowing best practices from the DB arena. While stopping short of a full-scale return to the pension model, the so-called institutionalization of DC plans relies on the following approaches. EXPECTED CHANGE IN INVESTMENT VEHICLE USE BY 2020 Increase Stay the Same Decrease Hedge funds 95% 5% Mutual funds 10% 35% 55% Liquid alternative funds 25% 5% 70% Collective investment trusts 30% 70% Separately managed accounts 35% 65% Source: BNY Mellon, The DC Plan of the Future, Increased use of low-fee, institutional vehicles When seeking to make their DC plans more DB-like, the use of institutional vehicles provides plan sponsors with low-hanging fruit. Mega-market sponsors interviewed, defined as plan sponsors with at least $1 billion in DC assets, expect a 65% increase in their use of alternatives to mutual fund vehicles, such as separately managed accounts (SMAs) or collective investment trusts (CITs). Costs or fee advantages can offer a clear benefit of SMAs and CITs over the mutual fund investment approach. Since these vehicles are not subject to oversight from the U.S. Securities and Exchange Commission (SEC), they do not incur some of the expenses associated with compliance and regulatory reporting.3,4 In addition, there is also no need to support the marketing and distribution of the fund into the retail space (e.g., producing prospectuses and retail call centers). Further, retirement participants are more typically buy and hold type investors, reducing portfolio trading costs. This can all result in both lower initial and ongoing operational costs. 3 Mutual funds are registered with the SEC and are subject to the provisions of the Investment Company Act of CITs are regulated by the Office of the Comptroller of the Currency (OCC), which can offer the benefits of lower costs and fee advantages over mutual funds. 4 Towers Watson, Defined Benefit Plans Outperform Defined Contribution Plans Again, July

6 DESIGNING PLANS Alongside the rise in use of CITs and SMAs, sponsors are reducing their reliance on off-theshelf mutual funds. With billions or even tens of billions in assets, sponsors of mega-plans have both the need and the ability to demand custom solutions. A number of sponsors in the study are assembling white-labeled options in an effort to simplify their investment offering and reduce fees. Plan sponsors see this as offering the best of both worlds: improving underlying diversification while minimizing participant confusion by limiting the number of investment options. Greater use of alternative strategies In addition to lower-cost vehicles, DC plan sponsors are also looking to increase their use of alternative strategies. Large plan sponsors witness firsthand what studies have shown: their DB plan investments typically outperform their DC offerings, sometimes by as much as two percentage points per year. 5,6 Providing access to asset classes that participants did not previously have may allow them to get closer to the level of returns for DB plans and also to embrace other characteristics of alternative investments such as downside or inflation protection. Many sponsors have overcome the operational challenges and are delivering a true institutional investment platform. One approach is to use more liquid strategies, sometimes in the form of 40-Act registered mutual funds which strike net asset values (NAVs) and meet redemptions on a daily basis. Sponsors interviewed are also looking to include alternatives within multi-asset portfolios, such as a target date fund (TDF). Doing so provides improved liquidity, while allowing participants to potentially realize the benefits of diversification. Generating an income stream during retirement Taking an institutional approach to investing may improve results, but any serious discussion of institutionalization must consider lifetime income. When asked to identify the greatest driver of DC change over the next five years, 55% of plan sponsors cited the need to address longevity risk by generating retirement income. GREATEST DRIVER OF CHANGE BY % 20% 4% 55% Provision of retirement income Regulation/ litigation Innovation Volatility Source: BNY Mellon, The DC Plan of the Future, Whereas actuarial formulas provide clarity for DB participants, it is hard to get DC participants fully engaged when there is uncertainty not only about the amount of asset accumulation (a function of market performance, contribution rate, etc.) from retirement savings, but also how that will translate into retirement income. In the same way that people know the monthly payments of their pension (DB) and social security, the same thing can be done with DC plans. Improved reporting and retirement income calculators are more prevalent to help educate the workforce. Moving beyond this to implementing a retirement income strategy is an area where forward-thinking plan sponsors are taking action. They are engaging with their plan s advisors/consultants, insurers and other providers to formulate ways to provide participants with sufficient retirement income. 2 Education and Automation Working Together Given the emphasis that DC plans place on individuals the majority of whom have little or no investment knowledge how best to engage the workforce to plan for retirement has long been a focus for HR and other plan professionals. While automation has proven to be a scalable solution for engaging most participants, it has not ensured adequate savings rates, it does not address participants unique circumstances, and it fails to provide a post-retirement roadmap. To address these limitations, plan sponsors are combining automation with focused education. The need for increased savings While auto-enrollment has increased participation rates, many participants are not on track to meet their goals. Automatic enrollment is often implemented with new employees only, stopping short of full-scale re-enrollment of all employees, which some sponsors view as opening them up to increased liability. More importantly, default rates under auto-enrollment tend to correspond with the company match threshold often between 3% and 6% despite the fact that many experts recommend a target of 10% or higher. For many employees, there is still a disconnect between their projected retirement savings, income and needs, and their behaviors such as taking loans and reducing contributions that only compound the risk of falling short. When asked how their EXPECTED CHANGES TO SPONSORS AREAS OF FOCUS Will your time allocation to administering your plan change in the next five years? 60 % YES, expected to change 40 % NO, not expected to change Expected areas of additional attention 4% 17% 17% 63% Education Compliance Investments Plan design Source: BNY Mellon, The DC Plan of the Future, time allocation will change, 63% of plan sponsors say that they expect to spend more time on participant education. Meeting demographic challenges Education remains relevant given the wide disparity in participant demographics. Even at similar income levels, participants of varying ages and tenure face different risks. Retirement s new beginning Plan sponsors also cite the need for education that targets retiring employees. Particularly for participants in mega-market plans with significant buying power, rolling out of the plan at retirement often means shifting into higherpriced products that will eat into participants retirement income. Often, the TDFs or standalone investment options in the DC plan will not be available in a retail setting. The need for retirees to revisit their asset allocation and develop a decumulation strategy may necessitate hiring an advisor, which will incur additional fees. Communications targeted at participants nearing retirement can highlight the fact that staying in the plan is a compelling option. In addition, it could potentially stave off large asset rollovers out of the plan, which could lead to decreased economies of scale and higher fees for remaining participants. 5 Towers Watson, Defined Benefit Plans Outperform Defined Contribution Plans Again, July Center for Retirement Research, Boston College, Investment Returns: Defined Benefit vs. 401(k) Plans, September

7 3 Unbundling and Transparency: Shining a Light on Fees Although they have come a long way from being wholly reliant on proprietary fund lineups, DC pricing models continue to evolve. Bundled pricing arrangements whereby investment management, recordkeeping and potentially other administrative fees are all included together can potentially limit transparency, inflate costs and introduce conflicts of interest. Plan sponsors are increasingly looking to overcome these challenges through unbundled pricing models and adopting buying behaviors just as they would in the DB world. Increasing transparency The DC plan of the future will have a more transparent fee structure, particularly on the investment side. The vast majority (95%) of mega-market sponsors expect to see greater unbundling with less reliance on revenue sharing. Whether driven by regulators, lawsuits or voluntary changes, sponsors anticipate a decreased reliance on marketing and distribution fees (e.g.,12(b)-1 fees) and related payments. Fees will become more competitive once sponsors can see what they are paying for. Reducing conflicts of interest Beyond their desire to negotiate fair fees at the plan level, plan sponsors are concerned that the activities of certain participants are being subsidized by others. When the cost of these services is not itemized, but rolled into the total cost of the plan, a conflict of interest is created. Accordingly, almost one-third (30%) of surveyed plan sponsors expect to see some increase in per-use service fees charged to the participant. Implementing this type of fee structure requires insight from service providers such as recordkeepers and an in-house consensus on who pays for what. This analysis may be straightforward when user fees are already in place, but may require additional work if such charges were previously eschewed in favor of the all-in bundled fee arrangements common in the DC space. Lowering overall costs Plan sponsors see increased transparency not only as a goal in itself, but also as a means to an end. The majority of those surveyed believe that unbundling will continue to bring down fees: with clear segregation in investment costs and recordkeeping costs, sponsors will be able to comparison shop and negotiate a better deal with their providers. Keeping Pace With the DC Evolution Taking a page from several forward-thinking organizations that were interviewed, plan sponsors in conjunction with their advisors/ consultants and ERISA attorney should ask themselves the following questions: Have the plan s investment options been assessed in the past 12 months? Is the plan sponsor confident that plan participants have the right tools to prepare them for retirement? Does the plan sponsor actively manage costs within the DC plan? In order to stay ahead of the curve, the following provides plan sponsors with a roadmap for suggested actions. The Institutionalization of DC Plans Evaluate existing mutual fund products against lower-cost vehicles (SMAs, CITs, institutional class mutual funds) KEY TRENDS TO MONITOR AND SUGGESTED ACTIONS Incorporate best practices of bellwether plans with respect to alternative strategies Work with insurers and other service providers to assist in developing a retirement income strategy Education and Automation Working Together Identify potential gaps in the automation strategy (e.g., near-retirement and low-salaried employees) Work with recordkeepers and consultants to determine how other sponsors have implemented successful targeted campaigns Augment traditional methods (seminars, boilerplate documents) with technology (video, apps) to reach the unengaged Unbundling and Transparency: Shining a Light on Fees Push for full disclosure on underlying costs; dig deeper on anything offered for free Revisit non-core services to determine which are truly must-haves Align fees with those receiving the benefits, so as to minimize participant cross-subsidization and avoid conflicts of interest 7

8 DIRECTING INVESTMENTS THE collective MOVEMENT The rising popularity of collective investment trusts CIT 54.3% Investment Vehicle CITs REPRESENT MORE THAN HALF OF THE INVESTMENTS USED BY THE 100 LARGEST CORPORATE DC FUNDS CIT MUTUAL FUND SEPARATE ACCOUNT ETF 54.3% 35.0% 10.6% 0.1% 8

9 In DC plans of all sizes, the use of collective investment trusts (CITs), also known as commingled funds, collective investment funds or collective trust funds, is growing. A long-time popular choice of defined benefit (DB) plans, CITs have increasingly become a choice of defined contribution (DC) plan sponsors in recent years. As investment expense is generally the largest single expense associated with a retirement plan, lowercost vehicles, including CITs, provide plan sponsors and participants the potential for considerable savings as the industry becomes more focused on driving down plan costs to enhance performance and avoid fee litigation. Collective Investment Trusts POOLED INVESTMENT VEHICLES The potential pricing flexibility and cost advantages that CITs offer when compared with other investment vehicles are translating into greater demand in the DC market: CITs in DC plans have grown by 68% since 2008, with assets rising to more than $1.5 trillion by the end of Of the 100 largest corporate DC funds by vehicle in 2016, CITs make up 54.3%, more than mutual funds, separate accounts and ETFs combined. 2 Understanding the potential benefits of CITs, and how they differ from traditional mutual funds, can help DC plan committees determine if transitioning to CITs would be to a plan s advantage. CIT BASICS CITs are tax-exempt, pooled investment vehicles maintained by a bank or trust company exclusively for qualified plans, including 401(k)s, as well as for certain types of government plans. They are similar to mutual funds, but with important differences. Like mutual funds, CITs are designed to facilitate investment management by combining assets from eligible investors into a single investment portfolio (i.e., a fund ) with a specific investment strategy. However, collective trusts are exempt from the investment company registration requirements of the Investment Company Act of 1940 and the securities registration requirements of the Securities Act of These exemptions apply since collective trusts can only be offered by a bank to certain qualified employee retirement plans, and are not available to the general public. This does not mean that CITs are unregulated; CITs and respective bank trustees are supervised by the Office of the Comptroller of the Currency (OCC), or a state banking regulator, depending on the type of bank. CITs can include any of the investment assets that are in mutual funds, they can be actively managed or index funds, funds of funds (FOFs), or nontraditional, such as REITs. CITs are particularly useful in single-manager or multi-manager FOFs, such as asset allocation (target risk or balanced) and target date funds (TDFs). These investments are growing in popularity due to their designation as Qualified Default Investment Alternatives (QDIAs) under the Pension Protection Act (PPA). Today, the CIT structure is increasingly deployed in TDFs often in an open-architecture approach giving plan sponsors a means of creating custom glide paths for their participant population at an affordable price. 3 Like other investment vehicles, CITs must follow ERISA regulations and are subject to rules of the Department of Labor (DOL). Each fund is managed and operated in accordance with the applicable trust s governing documents, which generally include a declaration of trust (or plan document) and the fund s statement of characteristics. Under ERISA, plan sponsors must disclose their arrangements with CITs on their 5500 forms and participants must receive at least quarterly notification of their positions. FEE & FLEXIBILITY ADVANTAGES Lower costs or fee advantages are a clear benefit of CITs over the mutual fund approach. In comparison to mutual funds, CITs typically have lower administration, marketing and distribution costs: 4 because CITs are not subject to oversight from the U.S. Securities and Exchange Commission (SEC), they do not incur some of the expenses associated with compliance and regulatory reporting. There is no need to support the marketing and distribution of the fund into the retail space (e.g., producing prospectuses and maintaining retail call centers). Participant recordkeeping generally is at the plan level, rather than the CIT level, which can allow greater flexibility on recordkeeping structure and costs. This can all result in both lower initial and ongoing operational costs. As a result, CIT fees can be 20 to 25 basis points less than mutual fund fees. 5 USED ONLY IN CERTAIN QUALIFIED RETIREMENT PLANS HAVE BANKS OR TRUST COMPANIES AS FIDUCIARIES REGULATED BY THE OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC) OR INDIVIDUAL STATE BANKING AUTHORITIES OVERSEEN BY THE IRS AND DOL (ERISA) Requires Form 5500 Fee Disclosure to Plan Sponsors (Rule 408b-2) Participant Reporting Requirement (Rule 404a-5) ELIGIBLE STRUCTURE FOR QDIA WITHIN APPROVED CATEGORIES (TARGET DATE/ TARGET RISK, BALANCED) DAILY NAV AVAILABLE TO PARTICIPANTS THROUGH PLAN PHONE NUMBER AND WEBSITE 1 Pensions & Investments, Use of CITs in DC Plans Booming, February 22, Pensions & Investments, Assets of the P&I DC 100 Increase 5.1% to $1.12 Trillion, March 7, ³Planadviser, Growth in CIT Use Driven by Familiar Market Factors, March 30, The Coalition of Collective Investment Trusts, Benefits of CITs, Cerulli Associates, Institutional Markets,

10 DIRECTING INVESTMENTS Median Fee Comparison (basis points) MUTUAL FUND COLLECTIVE INVESTMENT TRUST MEDIAN FEE DIFFERENCE U.S. FIXED INCOME LARGE-CAP EQUITY EMERGING MARKETS EQUITY ALTERNATIVES Data is specific for a mandate size of $25 million and includes active and passive products. Fees are generally subject to a sliding scale. Source: Cerulli Associates, Institutional Markets 2014: Gaining Marketshare as Shifting Portfolio Construction Presents New Opportunities and Challenges. Plan sponsors interested in securing lower plan fees are also attracted by an ability to negotiate investment management fees and, in most cases, plan asset (or TDF asset size) minimums. As CITs do not have 12(b)-1 fees, DC plans looking to reduce or eliminate revenue-sharing and shift to a per-person administrative fee model are gravitating to this investment vehicle option. Both factors help to drive CIT growth: according to Callan Associates, 71% of DC plans offered at least one CIT in 2015, up from 60% in The shift to collective trusts offers additional benefits beyond lower fees. While CITs are by definition collective vehicles, they can be created specifically for large institutional investors. Plan sponsors also like the flexibility CITs can offer in terms of pooling together assets across multiple plans, often a common goal of large organizations with a history of M&A activity. THE EVOLUTION OF CITs While CITs have been used for more than 75 years, improved features have helped fuel their rise in DC plans. In 2000, CITs began trading on the National Securities Clearing Corporation (NSCC) Fund/SERV platform, allowing automated trading and daily valuation, putting CITs on an equal footing with mutual funds for ease of investment. The PPA s designation of CITs as accepted QDIAs gave a tailwind to the investment vehicle in Over the past few years, providers have addressed many of the early limitations of CITs, including lowering qualifying plan minimums to allow smaller plans access to the feeadvantaged investment option, and enhancing fund information with fee, risk and performance transparency to participants. In the past, plan sponsors were hesitant to consider CITs due to a perceived lack of information for participants on the risks and performances of holdings (CIT investors do not receive an SEC-required prospectus, CITs do not have ticker symbols, and ratings from independent research firms were generally not available). In comparison to mutual funds, CITs typically have lower administration, marketing and distribution costs. On average, CIT fees can be 20 to 25 basis points less than mutual fund fees. While CITs generally have less frequent and less complex shareholder reporting requirements, DOL Rule 404a-5 requires plan administrators to standardize strategy, risk, performance and expense disclosures of all investments (including CITs) to help participants make betterinformed decisions. With advances in technology and increased usage, CITs have evolved to offer greater transparency and education to participants via third-party data aggregators (such as Morningstar ) and enhanced CIT provider data reporting and fund fact sheets available online and through plan call centers. CONSIDERATIONS CITs continue to grow in popularity for a variety of reasons, including recordkeeper acceptance, consultant familiarity, pricing flexibility, daily valuation, NSCC Fund/SERV compatibility and improved reporting and transparency as a result of compliance with DOL disclosure requirements under ERISA. Plan sponsors also appreciate that CIT trustees are subject to ERISA fiduciary standards with respect to ERISA plan assets invested in CITs. 7 Together with the plan s advisor/consultant and ERISA attorney, plan sponsors should consider the following questions to determine whether transitioning to CITs within the plan s investment lineup would benefit the plan and participants: Is the plan provider s current investment universe appropriate? Is the cost structure appropriate given the plan size, the services provided and the scope of desired investment options? Is there an opportunity to customize fees based on plan needs? Would the plan benefit by switching some asset categories to CITs due to cost- or feeadjusted performance? What type of data and/or reporting will be supplied to the plan? What communications, education and information will be supplied to plan participants? In what format? Are there any liquidity boundaries, trading issues or operational considerations? How experienced is the asset manager, and what is the firm s reputation in the marketplace? Given all available information, is the investment vehicle the best fit for the plan participants and their beneficiaries? 6 Callan Associates, 2015 Annual Survey. 7 Pensions & Investments, Assets of the P&I DC 100 Increase 5.1% to $1.12 Trillion, March 7,

11 THE EVOLUTION OF CITs Early CITs Lack of pricing flexibility at the plan level Limited product offerings Quarterly valuation Manual processing of investor contributions and withdrawals Limited performance calculations based on quarterly valuations Limited availability of fund data Used almost exclusively in DB plans Modern CITs Plan-level pricing flexibility often available Expanded universe of investment objectives Daily valuation Potential for more standardized and automated daily processing Performance generally available due to daily valuations Fund fact sheets and enhanced data reporting Used in both DB and DC plans Source: Coalition of Collective Investment Trusts, Collective Investment Trusts white paper, Stacking up MUTUAL FUNDS vs. CITs similarities & differences Regulated by the Securities and Exchange Commission under Investment Company Act of 1940, as amended; subject to numerous restrictions and limitations Overseen by bank regulators and subject to ERISA/DOL regulation TRANSACTIONAL OPERATIONAL Publicly available performance information; performance information published in newspapers and online; most are Morningstar rated (if 3 years old) Single management fee charged; investors in different share classes may pay different amounts for other services or distributions May include 12b-1 fees Generally restrict access to, or require high minimums for, lower-cost institutional share classes** Employee may be able to roll over mutual fund holdings from some retirement plans to another retirement plan or to an IRA Funds are more substantively regulated, making portfolio management and operations more complex May be subject to redemption fees* T+1 settlement NSCC clearing available Ready liquidity and daily valuation standards*** Can access performance information through retirement recordkeeping website; distribution of more uniform performance information;* some CITs are Morningstar rated (if 3 years old) Different fee structures based on services and size of plan No 12b-1 fees Commonly have no or low minimums When employee leaves plan, CIT cannot be rolled over into an IRA Generally subject to fewer investment and operation regulations Generally no redemption fees T+1 settlement NSCC clearing available Daily valuation and ready liquidity available on many CITs offered in DC plans**** *Rule 404a-5 requires standardized disclosure on fee and performance for all investment options offered in participant-selected retirement plans. **This comparison is general in nature only and is not an exhaustive list of distinguishing features. It also does not account for retirement plan relationships where features of these products may be different (e.g., applicability of redemption fees). ***Mutual fund shares are redeemed at current NAV, which may be more or less than original cost. ****This comparison is general in nature only and does not account for retirement plan relationships where features of these products may be different (e.g., applicability of redemption fees). CIT units are generally redeemed at current NAV, which may be more or less than original cost. 11

12 EXECUTIVE INSIGHTS Engaging a Generation Lost Q&A with Vince Pacilio Executive Vice President and Global Head, Insurance Client Segment at BNY Mellon Vince s responsibilities include working with BNY Mellon s Investment Services and Investment Management business in establishing priorities and strategies specific to the insurance segment to create long-term client value. In addition, he leads the Insurance Global Client Management team focusing on the firm s top insurance clients and is personally responsible for developing strategic relationships with several key platinum clients. Planet DC sat down with Vince to discuss how best to engage millennials with retirement saving efforts, as part of BNY Mellon s Global Client Management team s second annual global Generation Lost: Engaging Millennials with Retirement Savings study done in conjunction with the University of Cambridge s Judge Business School in To begin, what role does BNY Mellon play Q: in helping clients of all ages plan, and save, for retirement? A: BNY Mellon is committed to providing services and solutions to a variety of retirement market participants. This ranges from individuals through our Wealth Management platform and our Pershing business unit, to plan sponsors, to recordkeepers and retirement platform providers, to consultants and state and federal retirement experts. This diverse client base provides us with insights and perspectives that help us be better strategic partners within our client community. The annual Generation Lost millennials survey is a perfect example of our efforts, designed to help financial services providers better understand the needs and motivators of this generation. Another initiative is BNY Mellon s annual Retirement Summit, which brings together industry-leading experts, companies and plan sponsors for a full-day summit on best practices and new perspectives for addressing the challenges we are facing in the retirement industry. Tell us about the Generation Lost Q: retirement study and its impact on financial services. A: The BNY Mellon Generation Lost annual study explored millennials understanding of the financial choices available to them to help advance their personal financial situation. More than 1,200 millennials (those born between 1980 and the turn of the century) were surveyed across six key markets Australia, Brazil, Japan, the Netherlands, the U.K. and the U.S. Not surprisingly, millennials face considerably greater challenges than their parents when it comes to providing for their retirement. However, we found that millennials do not have a true understanding or appreciation of the massive challenge in front of them. For example, ongoing advances in healthcare and technology over their lifetime may lead to increasing lifespans, and while this is a positive thing, it can also be a hindrance if they have not saved enough to cover their needs in retirement. Each generation faces challenges different from the last. Demographic changes and a trend away from pensions mean the cost of retirement provision is rising. High student debt, low job certainty and a low-growth global economy mean millennials have a completely different set of financial challenges from those of Baby Boomers and Generation X. Millennials would allocate an average of 42% of their portfolio to social finance products. We discovered that financial services providers (such as life insurers, banks and asset managers) are not engaging as much as they could with this generation of potential new customers; in fact, more than 40% of millennials surveyed say they receive no financial information from their workplace or educational establishment and half of survey participants admit relying on a blind guess to estimate their required retirement fund. As the financial responsibility for retirement increasingly shifts to the individual across the globe, the need for truly targeted, impactful financial education that speaks to millennials in a way that they best relate to is paramount. Time is on their side: helping them understand and act upon the two most significant variables affecting their ability to retire well (the power of compounding and investment returns over time) should be important considerations for financial services providers. 12

13 To read the complete Generation Lost survey report, visit bnymellon.com/us/en/our-thinking/generation-lost.jsp What findings were particularly Q: insightful? A: We discovered four key insights that apply to financial services providers, but by extension, also to U.S. plan sponsors, as they strive to better engage with this demographic. First, millennials have little understanding of just how big a task they face in providing for their retirement. This lack of knowledge is not due to a lack of interest; rather, it is due to limited (or nonexistent) financial education, especially in school curriculums. It s critical that they understand that this issue is not going away: they need to pay attention now and start saving early and often. Second, most millennials want financial services providers (and by extension, plan sponsors) to be brutally honest with them regarding the obstacles they will face if they do nothing to build an adequate retirement income. They want providers to use more shocking messaging and to speak to them in language they understand. Third, social finance or the use of socially responsible investments has a very strong appeal to millennials, yet they do not feel that adequate impact-oriented investment options are accessible. However, just offering these products is not enough: the industry has a responsibility to ensure that the social finance products created not only meet socially conscious goals, but also produce positive returns for the investor. Lastly, millennials feel today s financial service products are not tailored to their needs. They want new products that dovetail with the paths their lives are likely to take, not the paths of their parents. It s important for the industry to develop investment products that reach millennials in terms of what they are interested in, in conjunction with the goal of their retirement security. More U.S. companies are now focusing Q: on the concept of holistic wellness, which incorporates general health, mental health and financial health. How does this help both employees (of all ages) and their companies? A: In the U.S., the retirement industry has just begun to broaden its thinking around a holistic approach to wellness and its impact on a company s bottom line. For example, if an employee is stressed about debt or other financial obligations, not only does it impact their ability to save for their retirement, but studies show that it also negatively impacts work productivity. For companies that incorporate holistic wellness into their benefit plans, the advantages for both employees and employers can be profound. The merging of general health, mental health and financial health puts an even greater responsibility on the industry and employers, but with greater potential outcomes for all. The rise of in-plan financial wellness programs in the U.S. helping plan participants understand and manage debt and other financial obligations can lead to a healthier and more productive workforce overall. Most millennials want financial services providers (and by extension, plan sponsors) to be HONEST BRUTALLY with them regarding the obstacles they will face if they do nothing to build an adequate retirement income. How does the move from defined Q: benefit to defined contribution impact millennials across the globe? A: The world of the defined benefit (DB) pensions is effectively closed to millennials in the private sector, and the defined contribution (DC) landscape is complex and challenging. DC market structure and product offerings vary from country to country because they have been molded by the nature of different nations state provision, political and fiscal drivers, and the structure of the labor market. Thus, individually led approaches in the U.S. and U.K. create different challenges from those experienced in countries such as Sweden, Denmark and the Netherlands where collective DC arrangements exist. In both cases, engagement and education remain critical since parents in DB plans may not be the best mentors for their children in this area. In particular, as this generation has so much more competition for their savings, the proposition for retirement savings must be compelling since planning for life in 40 years is an understandably low priority item to most. Clearly, we know that those who save early can significantly increase the probability of their retirement readiness due to the benefits of compounding there is no more significant variable than time. Therefore, reaching this cohort early is vital. It is also likely that there will need to be continued structural changes to the workplace to accommodate more part-time, higher-skilled work in retirement to allow more people to have rewarding employment into their 70s if their savings prove inadequate. Talk about social finance and its appeal Q: to millennials. A: Social finance has a strong appeal to millennials, yet it is an option that is virtually inaccessible through today s mainstream retirement savings products. We found that millennials would allocate an average of 42% of their portfolio to social finance products. As mentioned earlier, it s critical that the social finance products created not only meet socially conscious goals, but also produce positive returns for the investor. Social finance involves investing for a financial return and a social/environmental impact. One of the many tracks within social finance is socially responsible investing (SRI), which can take the form of either positive screening (selecting firms with overall positive socially responsible performance ratings or involved in positive social activity, such as green energy, food security, human rights or helping growth in less developed countries) or avoidance screening (avoiding firms with negative socially responsible performance ratings or involved in socially damaging activities such as fossil fuel production, gambling, adult entertainment or tobacco products, weapon manufacture, child labor and animal testing). The global research shows that 95% of millennials feel that pension funds and insurers only provide limited, poor or no options for investing in social finance products. Attitudes to social finance vary from country to country, but across the world this growing area offers a unique opportunity for financial services providers to connect with millennials. How can U.S. plan sponsors benefit from Q: the survey recommendations? A: The research leads me to believe that plan sponsors can achieve engagement with millennials in four ways: 1) by promoting financial education for all employees, tailored to their demographic profile and stage in life; 2) by speaking to millennials in language they understand, with more honest, direct messaging around retirement readiness; 3) by working to shape policy and design products that meet the changing needs of today s young people; and 4) by engaging with social finance products through implementing or putting their existing socially responsible in-plan investment options at the forefront. 13

14 OPTIMIZING ADMINISTRATION FORTIFIED DECISION-MAKING Structure your plan committee meetings for success. AGENDA CHECKLIST Q1 Q2 Q3 Q4 Review minutes of last committee meeting and report on action items Review minutes of last committee meeting and report on action items Review minutes of last committee meeting and report on action items Review minutes of last committee meeting and report on action items Quarterly and annual investment reviews Annual review of service provider operations and issues Annual review of investment policy statement (IPS) Annual report to board of directors Open items Quarterly investment review Review of participant-related issues Review of participant disclosures and notices Open items Quarterly investment review Report on legal changes Report on industry trends Plan design review Review of plan policies Review of participant issues and complaints Review of insurance and bonding Open items Quarterly investment review Review of costs and compensation for service providers and plan operation Review of mutual fund share classes Report on revenue sharing Open items 14

15 DC plan committees face increasing scrutiny on the myriad of decisions they make for their respective plans. During quarterly committee meetings, it s no longer enough to run through an agenda of basic responsibilities; now, more than ever, leading plan committees recognize that they need to address all of the issues that they are responsible for, including emerging issues. As such, committee decisionmakers need to strategically plan meeting agendas that cover both the micro job of looking closely at each issue affecting the plan today, and the macro job of ensuring emerging issues that may impact the plan in the future are considered over the course of the year. With the help of the plan s advisor/consultant and an ERISA attorney, committees should develop holistic meeting agendas that keep them informed and compliant. Since most committee members do not spend the majority of their time in the DC marketplace, they should regularly ask experts to describe new and emerging issues, and/or older issues that they may not have addressed, but should. To begin the discussion, the checklist found on the opposite page covers current and emerging agenda items that plan committees should consider over four quarterly meetings, covered in detail below. Q1 The First Quarterly Meeting of the Year Ordinarily, the purpose of this meeting would primarily be to review the prior year and to make decisions based on events that have occurred during the prior year and the prior quarter. REVIEW MINUTES OF LAST QUARTERLY COMMITTEE MEETING AND REPORT ON ACTION ITEMS Committee minutes usually cover action items and information items. An information item is one that educates the committee, but does not require a decision (e.g., it could be a report about the performance of the stock market). An action item is one that requires a decision. An obvious example is the repeated underperformance of an investment and a recommendation by the plan s consultant that the investment be removed and replaced. Some action items require follow-up. For example, if one of the plan s investments is placed on the watch list at a meeting, a report is needed at subsequent meetings about the investigation into that investment. And, at some point, a decision to either remove the investment from the plan or to take it off the watch list is also needed. CONDUCT QUARTERLY AND ANNUAL INVESTMENT REVIEWS Most committees are familiar with their responsibilities for monitoring their plan s investments, especially for investments that have been put on a watch list. When an investment is placed on a watch list, committee members have decided, for one reason or another, to more closely investigate the investment. But that means that someone a committee member or the investment consultant is doing an investigation, perhaps talking to the investment manager or looking into the reason for the underperformance. The results of that investigation should be reported at each meeting, when the investments are discussed. ANNUAL REVIEW OF SERVICE PROVIDER OPERATIONS AND ISSUES Plan committees have a responsibility to oversee the operations of their service providers. The first meeting of each year is a good time to review those operations in terms of quality and adequacy. For example, is the service provider doing a good job for the company and are they performing the services that are needed for the plan? A good approach would be to have someone from the human resources or benefits staff report on the services of the recordkeeper during the preceding year. ANNUAL REVIEW OF INVESTMENT POLICY STATEMENT (IPS) Unfortunately, some plan committees don t periodically review their IPS and, as a result, they may make decisions that are inconsistent with it. To avoid that problem, the committee should go through the IPS once a year, just to re-familiarize themselves with its provisions. Keep in mind that the IPS is owned by the committee. If it says something that is no longer appropriate, or that could be improved, the committee should amend the document. ANNUAL REPORT TO BOARD OF DIRECTORS Plan committees are usually appointed by the board of directors of the company. Even if they aren t formally appointed by the board, the responsibility for the prudent selection and monitoring of committee members usually belongs to the board of directors (or, perhaps, to the board s compensation committee). Committees can help the board of directors satisfy their duty to prudently monitor the committee s operation by providing an annual report. This report does not need to be a detailed discussion of the committee s operations. Instead, it should provide enough information to enable the board to determine that the committee has operated in a manner that fulfilled its responsibilities during the preceding year. Q2 Quarterly Meeting Agenda REVIEW MINUTES OF LAST QUARTERLY COMMITTEE MEETING AND REPORT ON ACTION ITEMS QUARTERLY INVESTMENT REVIEW REVIEW OF PARTICIPANT- RELATED ISSUES Participation Deferrals Participant investing Retirement readiness While not a fiduciary responsibility, there are obvious benefits for committees to ensure that individual participants are ready to retire with adequate benefits, or that they are investing well, deferring enough or even participating in the plan. For example, low participation or inappropriate investing patterns may indicate that the plan s education programs and communication materials are not making an impact. As a result, committees should consider benchmarking the performance of their plan against the plans of their competitors (i.e., other similarly situated companies). That could provide the committee with the information it needs to better direct the efforts of its service providers or, for a larger company, its benefits staff. REVIEW OF PARTICIPANT DISCLOSURES AND NOTICES Plan committees have the responsibility of overseeing the delivery of legally required participant information and disclosure materials. That ranges from summary plan descriptions to investment information. A committee member, or perhaps someone on the benefits staff, should review those materials and report to the plan committee. The oversight of those materials is a fiduciary responsibility, and the committee needs to have a basis for knowing that they are fulfilling their responsibilities. However, not every committee member needs to be an expert on those requirements. 15

16 OPTIMIZING ADMINISTRATION Q3 Quarterly Meeting Agenda REVIEW MINUTES OF LAST QUARTERLY COMMITTEE MEETING AND REPORT ON ACTION ITEMS QUARTERLY INVESTMENT REVIEW REPORT ON LEGAL CHANGES, INCLUDING ISSUES OF FOCUS FOR IRS AND DOL GUIDANCE AND AUDITS, AND FIDUCIARY LITIGATION ISSUES The committee should have its benefits attorney report on legal changes during the preceding year (and perhaps on anticipated legal developments). Every year seems to bring new court decisions, legislative changes, regulations and other guidance. Committees should keep abreast of those changes, with a focus on how the changes impact the committee s responsibilities. REPORT ON INDUSTRY TRENDS Representatives from the investment consultant and the recordkeeper should report industry trends to the committee. In particular, the report should focus on new developments. As a part of that report, committee members should be asking whether they should be considering those new developments for their plan. An example of a new trend is the projection of retirement income. Some plans are providing their participants with projections of the retirement income that will be provided by their account balances and future deferrals. In some cases, those plans are also providing benchmarks for retirement readiness for a typical participant and estimates of the deferral levels that would be needed to reach that goal. REVIEW OF PLAN DESIGN While it may not be necessary for the committee to review the design of its plan every year, it is a good practice to occasionally step back and ask if the design is aligned with the company s objectives. For example, in recent years many plan sponsors have added auto-enrollment and auto-deferral increases to their plan design, and some have also added Roth deferrals. REVIEW OF PLAN POLICIES, INCLUDING QDRO AND LOAN POLICIES While committees are not responsible for the hands-on administration of participant activities, such as Qualified Domestic Relations Orders (QDROs) or participant loans or hardship withdrawals, committee members are responsible for ensuring that those activities are being properly administered. As a result, it s helpful to have benefits staff and/or providers report to the committee each year about those operations. The report should include any changes that are being made to adapt to new requirements. REVIEW OF PARTICIPANT ISSUES AND COMPLAINTS From a risk management perspective, committees should have a procedure for handling participant concerns and complaints. Ordinarily, those issues are resolved at the staff level and committee members do not need to be involved. However, if the matter is not fully resolved at the staff level, it should be brought to the attention of the committee at the next meeting (or, depending on the seriousness of the issue, possibly before the next meeting). Participant complaints are an early warning sign for possible problems with plan operations: they are valuable if the committee is aware of them and takes actions to respond appropriately, yet can be threatening if the committee is not informed of the issue. REVIEW OF INSURANCE AND BONDING Every plan needs to have an ERISA bond; it s the committee s responsibility to make sure a compliant bond is in place. Unfortunately, some committees aren t aware of that duty. As a result, some plans aren t bonded or, if they are, the bond doesn t satisfy ERISA s requirements. Q4 Quarterly Meeting Agenda REVIEW MINUTES OF LAST QUARTERLY COMMITTEE MEETING AND REPORT ON ACTION ITEMS QUARTERLY INVESTMENT REVIEW REVIEW OF COSTS AND COMPENSATION FOR SERVICE PROVIDERS AND PLAN OPERATION Committees are required to review the costs for plan services and to determine that they are no more than reasonable. Committees must also review the compensation of service providers and determine that it is reasonable. The difference between cost and compensation is that the latter includes payments from third parties. For example, a recordkeeper may receive payments from mutual funds in addition to its direct charges. To evaluate costs and compensation, committees need to obtain market data about the charges and compensation for similar services for similar plans. REVIEW OF MUTUAL FUND SHARE CLASSES As a result of recent court decisions, plan committees need to know which mutual fund share classes they are using, why they have selected those share classes and whether they appropriately reflect the plan s purchasing power. Because of the importance of this issue, it s a good practice to have the plan s investment consultant prepare a written report about the share classes used by the plan (and the other share classes of the same mutual funds that might be available) and to deliver that report to the plan committee with a recommendation to keep the same share classes or to make changes. The report should be attached to the minutes and retained in the plan committee s due diligence file. REPORT ON REVENUE SHARING Plan committees must decide whether to select mutual funds or other investments that pay revenue sharing. Typically, investments that pay revenue sharing are more expensive than those that don t. It is legally permissible to select investments that pay revenue sharing and use the revenue sharing to pay for plan expenses; however, those decisions cannot be made without the committee examining specific information. For example, which investments pay revenue sharing? How much? How does that affect participants? What is the total dollar amount of revenue sharing paid to the recordkeeper and is that reasonable? Some plan committees have adopted fee and expense policy statements to help them address the revenue-sharing issues for their plans. Q1-Q4 Unscheduled Items There are other issues that require a committee s attention. However, not all matters need to be reviewed every year, and in other cases the issues are driven by events, including provider changes, 404(c) compliance, required plan amendments and amendments to service provider agreements. 16

17 ENGAGING PARTICIPANTS Navigating ext the tage Start the transition conversation with pre-retirees now. With the youngest Baby Boomers in their 50s, plan sponsors are increasing their focus and actions related to an aging workforce. According to Aon Hewitt s 2016 Hot Topics in Retirement and Financial Well-Being survey, 70% of employers surveyed believe their workforce will experience an increase in the retirement-eligible population over the next three years. With the rise of financial wellness programs, more plan sponsors are expanding their financial wellness services, tools and engagement and education campaigns in an effort to build confidence and reduce stress among participants as they make the transition to and through retirement. 1 56% of employers indicated they are very likely to focus on the financial well-being of employees in ways that extend beyond retirement decisions, placing it in the top spot of employer initiatives in One in five of these employers increased the level of automation, self-service and/or Web access to their retirement plans so workers can more easily start their retirement process. Making the shift to taking income in retirement can be a complex proposition, both emotionally and financially. Saving money is half the battle; figuring out how to generate a steady paycheck throughout retirement can be just as daunting. Many employees procrastinate until the final few years prior to retirement to create a plan or make significant decisions. In a time of increasing longevity and rising healthcare costs, starting the conversation earlier with pre-retirees (beginning at age 50+) via segmented communication plans that leverage multiple touchpoints is critical. Plan sponsors should look to their retirement plan partners and advisors/consultants to review the plan s demographics and create an appropriate retirement transition and education plan. Many offer comprehensive transition programs that include educational workshops and on-demand webinars, robust planning tools and calculators and guidance via call centers, 1:1 consultations and online/mobile platforms. 1 Aon Hewitt, 2016 Hot Topics in Retirement and Financial Well-Being. 17

18 ENGAGING PARTICIPANTS Adapting to an aging workforce Today s workers are expecting to work longer and retire at an older age: 2 67% 54% 67 % plan to work past age 65 or do not plan to retire, with a median expected retirement age of % plan to continue working, at least on a part-time basis, after they retire. AGE 50+ WORKERS Delaying retirement creates potentially higher plan costs, leaving plan sponsors to look for ways to adapt to an aging workforce, including accommodating longer working lives, creating job opportunities for older workers and enabling them to transition into retirement by shifting from full-time to part-time. In addition to bettermanaged employment costs and succession planning, it can encourage increased productivity by employees who are less worried about their finances. For employees, the anxiety of moving to a new life stage can be stressful and overwhelming. They are not only worried about future retirement income/expenses, but they are also concerned about significant life changes that may last up to 30 years. Helping pre-retirees develop a plan to pay themselves in retirement (including calculating expenses, identifying investments that generate income and determining which tax-advantaged assets to draw down first) can help reduce the anxiety. In addition, helping them envision what their future part- or full-time retirement lifestyle will look like is just as critical. Starting the conversation early According to the Aon survey, employers are planning to increase their communication efforts to workers regarding the retirement process. By the end of 2016, it is likely that 89% of employers will have taken some step to reach out to near-retirees about the necessary steps in the retirement process. 3 Plan sponsors can play a crucial role in helping improve their employees retirement outlook through three key opportunities: Opportunity 1 Offer pre-retirees enhanced levels of assistance in planning their transition into retirement, including education about distribution options, retirement income strategies, required minimum distribution (RMD) calculations, risks in retirement, access to financial counseling and the need for a backup plan if forced into retirement sooner than expected (e.g., health issues, job loss, family obligations). Identify pre-retirees who are not on track in-plan to retire on time. Create a targeted campaign to remind them of age 50+ catch-up contributions and the impact of increasing their deferral rate, while also highlighting income-planning tools and resources. Help pre-retirees understand how five key risks in retirement (replacement income risk, longevity risk, sequence-of-returns risk, withdrawal rate risk and cognitive risk) could impact their income stream and what they can do to offset these potential obstacles. Consider adding a managed account option to the plan to address the needs of pre-retirees. Participants who benefit most from opting in to a managed account service tend to be middle-aged, nearing retirement, and have an increasingly complex financial picture, including outside assets. 4 Opportunity 2 Provide education about Medicare and Social Security claiming strategies to help employees determine the impact Social Security will have on their monthly income, including what age they should begin collecting payments, and how to make informed decisions about when and how to apply to maximize the value of their benefits. Opportunity 3 Offer access to retirement-oriented lifestyle and transition planning resources to help pre-retirees envision their life in retirement and find purposeful ways of spending their time, including encore careers, earning supplemental income and giving back to their communities. Enhancing income-planning tools While income-planning tools are just one aspect of the retirement transition discussion, when designed well, they can be an important way to help pre-retirees identify income gaps, increase savings via increased deferral rates and provide an interactive way to track their progress. A 2015 Empower Institute survey found that just 28% of respondents have access to incomeplanning tools that show how changes to their savings rate affect their outcome; of those, only 15% actually use these tools for those purposes. 5 Interestingly, when looking at why they are not used, the top three reasons speak to simplicity and accessibility in some form or fashion: both on the Web and in a mobile environment. Built correctly and intuitively retirement income-planning tools that include social security REASONS PEOPLE DO NOT USE PLANNING TOOLS 35 % 31 % 19 % Too complicated Requires digging up too much information It s hard to find these tools on the website Source: Empower Institute, Lifetime Income Score V: Optimism and Opportunity, March estimations tailored to each individual, and based on demographic data and individual inputs, can add value. For plan sponsors reviewing their current income-planning tool, or looking to incorporate one into the plan, consider the following: They should be intuitively designed with simple, interactive components that make it easy for people to model different scenarios. They should include pre-populated data relative to each individual using the tool whenever and wherever possible. They should be in the forefront of the individual s experience, being easily accessible both in the Web and mobile environments. 2 The Transamerica Center for Retirement Studies, The Current State of Retirement: Pre-Retiree Expectations and Retiree Realities, December Aon Hewitt, 2016 Hot Topics in Retirement and Financial Well-Being. 4 Cerulli, Retirement Markets 2015: Growth Opportunities in Maturing Markets, Empower Institute, Lifetime Income Score V: Optimism and Opportunity, March

19 Converting savings into lifetime retirement income As the industry evolves, and more individuals approach retirement, plan sponsors are turning their attention to ways participants can convert their savings plan balances into lifetime income within the plan (see Top 5 In-Plan Retirement Income Options chart below). Prior to beginning the conversion of retirement savings to income, pre-retirees need to understand and determine complex topics, including: When to start withdrawing assets (their retirement date ); Which in-plan strategy offered by the plan is best for their assets, financial picture and needs; Which withdrawal strategy (fixed percentage, fixed dollar, investment earnings or a bucket withdrawal strategy) would be best for them when considering the pros/cons of each; Which assets to draw from first for taxadvantaged planning; Optimal asset allocation that matches income needs, risk tolerance and ability to weather inevitable market declines. To help with this pivotal but potentially confusing conversation, plan sponsors should consider adding a professionally managed account offering and/or an in-plan financial wellness program. Each of these options offers access to holistic financial planning guidance and 1:1 consultation with financial professionals to help put a personalized plan in place toward transition, although their approach is different. Financial wellness programs help to provide the nudge many pre-retirees need by leveraging financial behavior research, targeted demographic communications and digital approaches. Managed account service providers create customized portfolios for plan participants for an additional fee. They are usually based on the stand-alone funds already available in the plan s investment menu and savings data gleaned from a plan s recordkeeper or direct input from participants. Services can include: specific investment portfolio recommendations, a savings rate recommendation, ongoing professional portfolio management and rebalancing and an estimated retirement income for each participant. Lastly, re-evaluate the plan s current communications strategies and consider segmented strategies based on age and comfort level with technology. For example, investors aged 55 to 64 are most likely to use laptop computers (69%) to access financial account information versus other devices: tablet (39%) and smartphone (42%). 6 Top 5 In-Plan Retirement Income Options Already offer Very likely to offer in Online modeling tools or mobile apps to help participants determine how much they can spend in retirement 66 % 26 % 2 Plan distribution option allowing participants to select an automatic payment from the plan over an extended period of time 45 % 13 % 3 Professional management (managed account) with draw down feature within the plan 4 Facilitation to purchase annuities outside of the plan 5 Managed payout funds within the plan 30 % 10 % 12 % 2 % 9 % 7 % Source: Aon Hewitt, 2016 Hot Topics in Retirement and Financial Well-Being. 6 The Wall Street Journal, Devices and Dollars, September

20 Achieving targeted outcomes takes a big picture view. PRESENCE IN COUNTRIES AROUND THE 35world 3rd LARGEST manager U.S. of DEFINED MARKETS AROUND THE GLOBE LARGEST Global U.S. asset asset manager 2 manager 3 BENEFIT assets 1 6 th LARGEST wealth 7 th U.S. Active 100 across manager 4 LIBERATE YOUR THINKING. BNY Mellon leverages the unique perspectives of our autonomous investment boutiques to address America s daunting retirement challenge. With intellectual diversity encompassing a range of specialties and geographic strengths, we seek to deliver the new DC solutions plan participants need to help achieve their targeted outcomes. Put the power of the world s sixth largest global asset manager to work, and help transform the way America retires. 1 Pensions & Investments, May Pensions & Investments, May Institutional Investor, September Barron s, September Learn more To discover more about retirement plan best practices and BNY Mellon Retirement solutions: Visit: im.bnymellon.com/dc Call: Plan Advisors: Institutional Clients: Follow #BNYMretire BNY Mellon BNY Mellon Retirement personnel act as licensed representatives of MBSC Securities Corporation (a registered broker-dealer) to offer securities, and act as officers of The Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds as well as to offer separate accounts managed by BNY Mellon Investment Management firms. This material is not intended as an offer to sell or a solicitation of an offer to buy any security, and it is not provided as a sales or advertising communication and does not constitute investment advice. MBSC Securities Corporation, a registered broker-dealer, FINRA member and wholly owned subsidiary of The Bank of New York Mellon Corporation, has entered into agreements to offer securities in the U.S. on behalf of certain BNY Mellon Investment Management firms and as distributor of the above mutual funds. BNY Mellon Investment Management is one of the world s leading investment management organizations, and one of the top U.S. wealth managers, encompassing BNY Mellon s affiliated investment management firms, wealth management service and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. The material contained is for general information and reference purposes only and is not intended to provide, or be construed as, legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. Plan sponsors should work with their ERISA attorneys, advisors and/or consultants with respect to their plan MBSC Securities Corporation The Dreyfus Corporation and MBSC Securities Corporation are subsidiaries of The Bank of New York Mellon Corporation. MBSC Securities Corporation, a registered broker-dealer, is the distributor for the Dreyfus funds. BNYMR-PDCW MARK