2014 Retirement Webinar Series

Transcription

1 2014 Retirement Webinar Series

2 Emerging Trends in DC Investments: Learning from the Leaders Alison Borland, Clinton Cary, Winfield Evens Retirement Webinar Series February 19,

3 Agenda Section 1 Section 2 Section 3 Current Landscape Best Practices in DC Plan Lineup Tailored Solutions Appendix A Aon Hewitt Affiliates Retirement Webinar Series February 19,

4 Agenda Tracker Section 1 Section 2 Section 3 Current Landscape Best Practices in DC Plan Lineup Tailored Solutions Retirement Webinar Series February 19,

5 Issues Facing DC Participants and Sponsors The Real Deal Retirement Income Adequacy for DC-Only Participants x 4x 7x Income Gap Many participants not on track Plan investment menu not meeting needs Holistic optimization is required for many DC plans 0 Needed Reality Multiple of ending salary at age 65 Source: Aon Hewitt The Real Deal, 2012 Retirement Income Adequacy at Large Companies Retirement Webinar Series February 19,

6 DC Plan Sponsors Under Pressure Scrutiny plan fiduciaries face today Level of scrutiny over the past two years 100% Increased Remained the Same 80% 60% 30% 5: Highly Scrutinized % 40% 49% 2 82% 20% 17% 1: Not Scrutinized 0% Source: Aon Hewitt s 2013 Trends and Experience in Defined Contribution Plans Retirement Webinar Series February 19,

7 Barriers and Benefits to DC Plan Optimization The challenges associated with plan sponsorship can be addressed and the benefits to the organization are material Barriers Lack of clarity of path Cost constraints Time constraints Fiduciary concerns Benefits Retirement readiness Position competitively Time for strategic topics Fiduciary risk Retirement Webinar Series February 19,

8 Investment Design Diagnostic Just Starting Mutual funds Multiple fund choices per asset class Fees bundled into revenue sharing Target risk or balanced funds On the Journey Non-mutual funds introduced Single fund per asset class Off-the-shelf target date Brokerage window Scaled pricing Leading Edge Leverage pension managers Custom target date funds with real assets Streamlined fund-of-fund approach Retirement Webinar Series February 19,

9 Agenda Tracker Section 1 Section 2 Section 3 Current Landscape Best Practices in DC Plan Lineup Tailored Solutions Retirement Webinar Series February 19,

10 Best Practice in DC Plan Investments 1 Leverage purchasing power 2 Maximize participant help 3 Governance is crucial 4 Plan design as a force multiplier 5 Distribute costs equitably Retirement Webinar Series February 19,

11 Purchasing power is a license to purchase power - Raoul Vaneigem Retirement Webinar Series February 19,

12 Leveraging Purchasing Power Already Done Very Likely to Do Somewhat Likely to Do 1 Plans moving to institutional 2 Comprehensive review of funds investments offered 40% 87% 89% 22% Less than $1 billion $1 billion or more Less than $1 billion $1 billion or more 3 Change some or all funds to passive 37% 29% Less than $1 billion $1 billion or more Source: Aon Hewitt s 2014 Hot Topics in Retirement Retirement Webinar Series February 19,

13 Benefits of Lowering Fund Expenses Decreasing fees by 25 basis points can increase the retirement account by more than: $200,000 Example assumes an investor with a starting salary of $75,000, 3% salary growth, 6% deferrals, 6% match, and asset growth of 8% per year versus 7.75% per year. Investment horizon is 40 years. Retirement Webinar Series February 19,

14 Follow the money - Deep Throat Retirement Webinar Series February 19,

15 Maximizing Participant Help Already Done Very Likely to Do Somewhat Likely to Do 1 Online guidance offered 2 Online advice offered 71% 75% 68% 51% Less than $1 billion $1 billion or more Less than $1 billion $1 billion or more 3 Managed accounts offered 68% 45% Less than $1 billion $1 billion or more Source: Aon Hewitt s 2014 Hot Topics in Retirement Retirement Webinar Series February 19,

16 Target Date Funds Growing in Importance Target date funds serve a critical role in most DC plans 100% Frequency of Availability (bars) Premixed (TD +TR) as % of Plan Assets, when offered (line) 20% 80% 60% 86% 15% 10% For plans with automatic enrollment, target date funds serve as the default option 85% of the time 40% 20% 0% 11% Target Date (LHS) Target Risk (LHS) Balance in Premixed (RHS) 5% 0% Target date funds have grown their share of total DC asset significantly in recent years, the only popular asset class to do so Retirement Webinar Series February 19,

17 Plan Sponsor Focus on Target Date Funds Already Done Very Likely to Do Somewhat Likely to Do 1 Review the glide path Change fund manager 69% 33% 60% 23% 2 Less than $1 billion $1 billion or more Less than $1 billion $1 billion or more 3 Target risk funds: Approach to customization 4 Move to custom target date 26% 69% 64% Custom 14% 31% 36% Prepackaged Less than $1 billion $1 billion or more Less than $1 billion Sources: Aon Hewitt s 2014 Hot Topics in Retirement and 2013 Trends and Experience in Defined Contribution Plans Retirement Webinar Series February 19, $1 billion or more

18 Employee Lifecycle of Risks Age 25 to to to Phase Early-to-Mid career Mid-to-Late Career Retirement Old Age Concerns Competing financial priorities Prepare for Retirement Ability to Support Lifestyle Dependency Model of DC participant s account using a typical Target Date Fund Fixed Income Growth Assets Key Investment Risk Return Shortfall Capital Market Volatility Unexpected Inflation Longevity Other Risks Insufficient savings Leakage Life Events Retirement Decisions Overspending Healthcare costs Healthcare costs Estate planning Retirement Webinar Series February 19,

19 The only thing that interests me is history - reviewing the past and making something out of it. - Leon Redbone Retirement Webinar Series February 19,

20 Governance Highest Standard Under the Law Committee, Corporate and Advisor Roles Fiduciaries have personal liability Not an honorary role Process is key Considerations and commitments Serve as a fiduciary to the plan, not representative of the firm Prudent Expert Expectation Plan Admin Members are typically finance or HR professionals Solutions Always have a thoughtful response to why Plan Design Committee Document Plan Investments Retirement Webinar Series February 19,

21 For all of its uncertainty, we cannot flee the future. - Barbara Jordan Retirement Webinar Series February 19,

22 DC Plan Design as a Force Multiplier Plan sponsors can leverage the structure of DC plans and solutions offered, to greatly benefit participants DC Plans Access Institutional Pricing Simplicity Spending Support Investment Simplicity Goals & Solutions Tax Diversification Roth Provisions Income Solutions Personalized Advice Managed Accounts Fund-of-Funds Holistic Planning Financial Wellness Retirement Webinar Series February 19,

23 Approaches to Turn Assets into Lifetime Income 8% In-plan annuity or insurance product 14% In-plan managed payout (No guarantee) + 2% very likely + 2% very likely 14% Facilitate annuity product purchase outside of plan 20% In-plan managed account (with drawdown) + 1% very likely + 8% very likely Note: Additional percent based on those who do not already have the feature and are very likely to add to the plan in 2014 Source: Aon Hewitt s 2014 Hot Topics in Retirement Retirement Webinar Series February 19,

24 Fund-of-Funds Fund-of-funds (FoF) allow for: Streamlined fund lineups Continued utilization of specialized managers Concise communication materials Seamless replacement of underlying subadvisors Various plan sponsors have been using this approach for decades, either independently or with the help of their investment consultant Example Combine three subadvisors into a single plan option Large Cap Value Large Cap Blend Large Cap Equity Large Cap Growth When implemented across entire fund lineup as appropriate, it results in a streamlined set of institutional funds Retirement Webinar Series February 19,

25 Price is what you pay. Value is what you get. - Warren Buffet Retirement Webinar Series February 19,

26 Fees: Delivering Equity and Long-Term Value 21% Making administrative fees more equitable + 6% very likely to Over a full career, changing from a percent-of-asset fee to a flat fee can increase the retirement account by more than $200,000 Example assumes a flat fee of $50 per year versus an annual charge of 0.25 percent of assets. Investor s starting salary is $75,000 with 3% salary growth, 6% deferrals, 6% match, and asset growth of 8% per year. Investment horizon is 40 years. Source: Aon Hewitt s 2014 Hot Topics in Retirement Retirement Webinar Series February 19,

27 How Administrative Fees are Assessed Plan participants typically bear plan expenses, but the approaches utilized are evolving 100% % 83% 77% 60% 52% 40% 20% 0% Via mutual funds with revenue sharing 28% 23% 25% 26% 14% 11% Via accruals added to institutional funds Participants charged discrete $ amount 10% 4% 0% 0% 0% 0% Participants charged discrete % of balance Other Source: Aon Hewitt s 2013 Trends and Experience in Defined Contribution Plans Retirement Webinar Series February 19,

28 Case Study DC Plan Institutionalization ABC Company Upon joining their firm, the new plan fiduciary assessed their legacy approach, and then adopted current best-practices regarding investment design and plan expenses Previous State Over 15 core funds Over 10 target date funds Investment options primarily mutual fund vehicles 25% of plan options contained embedded revenue sharing Under 5% of population was generating over 33% of total plan revenue Current State Streamlined core of 5 options All core funds are subadvised by multiple underlying managers Custom target date funds, leveraging the core funds Embedded revenue sharing eliminated All participants contribute equitably towards plan expenses *Investment advice and consulting services provided by Hewitt EnnisKnupp, Inc. an Aon Company and SEC registered investment adviser. Retirement Webinar Series February 19,

29 Case Study Re-Enrollment XYZ Company Implementation of the new approach combined investment re-enrollment with annual benefits process, resulting in significant improvement of investment alignment for participants Previous State Low allocations (15%) to target date funds Most participants were invested in fewer than 4 mutual funds Previous default option of stable value continued to get the largest contributions Allocation to stable value fund was more than 24% of plan assets Current State Vast majority of participants defaulted or select TDF (93%) TDF allocation is 84% of assets Stable value allocation reduced to 3% Guide Me or DIY investors represented only 13% of assets Individual participant accounts are significantly more diversified *Investment advice and consulting services provided by Hewitt EnnisKnupp, Inc. an Aon Company and SEC registered investment adviser. Retirement Webinar Series February 19,

30 Agenda Tracker Section 1 Section 2 Section 3 Current Landscape Best Practices in DC Plan Lineup Tailored Solutions Retirement Webinar Series February 19,

31 Light a candle. Don t curse the darkness. -Peter Benenson Retirement Webinar Series February 19,

32 Two Potential Paths to Success Plan fiduciaries are different and their paths will be too Empower Me Confident with retention of decision-making rights Feels closely connected to participant investment needs Partners with multiple expert resources Delegate Selects and monitors the Expert* Relies on Expert for implementation of investment strategy Focuses time on strategic design considerations Financial Security Institutional Scale Best-in-Class Providers Risk Management *Investment advice and consulting services provided by Hewitt EnnisKnupp, Inc. an Aon Company and SEC registered investment adviser. Retirement Webinar Series February 19,

33 Empower Me Facilitated by a New Solution DC Nexus Built to meet the needs of plan fiduciaries Interwoven with Aon Hewitt s existing approach to DC plan administration No additional cost Provides detailed tools to create and manage an institutionalized DC plan Creates a proprietary, industry-first, investment exchange Drives down fees for participants Brokerage Services are offered through Hewitt Financial Services, LLC, member FINRA and SIPC Retirement Webinar Series February 19,

34 Delegate Introducing SimPlus Savings Ease of Bundling One stop shop Single point of contact for investments and administration Integrated communications, investment information Benefits of Unbundling Best-in-class investment managers selected by leading investment consultant Unbiased help for participants and plan sponsor Full transparency No retail bias Plus Hewitt EnnisKnupp acting as expert investment manager (3(38) fiduciary) Institutional pricing The combined strength of Investment Management and Administration Investment advice and consulting services provided by Hewitt EnnisKnupp, Inc. an Aon Company and SEC registered investment adviser. See Appendix A for a list of Aon Hewitt affiliates that provide plan sponsor and participant services Retirement Webinar Series February 19,

35 Questions & Answers Retirement Webinar Series February 19,

36 Contact Us Alison Borland Vice President, Retirement Solutions and Strategies Aon Hewitt Clinton S. Cary, FSA Head of US Delegated Investment Solutions, Chief Investment Officer Hewitt EnnisKnupp, Inc., an Aon Company Winfield Evens Director of HRO Investment Solutions & Strategies Aon Hewitt Hewitt EnnisKnupp Retirement Webinar Series February 19,

37 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Retirement Webinar Series February 19,

38 Appendix A Aon Hewitt Affiliates Through SimPlus Savings, Aon Hewitt offers plan sponsors a variety of services for their DC plans and can assume responsibility for implementing investment strategy, and plan investment management (including selection of plan investment menus). SimPlus Savings also features comprehensive administration solutions, such as DC plan recordkeeping, daily operations and transaction processing, and participant services (including online investment advice, managed accounts, brokerage and customer service). DC plan investment management and investment consulting is offered through Hewitt EnnisKnupp, Inc., an SEC registered investment adviser Recordkeeping, customer service, daily operations and other plan benefit administrative services are offered through Hewitt Associates LLC and other affiliates Brokerage services are offered through Hewitt Financial Services, LLC, member FINRA and SIPC Online investment advisory and managed investment advisory account services are offered through Aon Hewitt Financial Advisors, LLC with subadvisory services provided by Financial Engines Advisors L.L.C., both SEC registered investment advisers Investment advice and consulting services provided by Hewitt EnnisKnupp, Inc. an Aon Company and SEC registered investment adviser Retirement Webinar Series February 19,