April, Prepared for a lifetime. Managing your plan to drive retirement readiness

Transcription

1 April, 2013 Prepared for a lifetime Managing your plan to drive retirement readiness

2 Plan sponsors today carry a heightened responsibility. They continue to be stewards of the institution s retirement plans and the assets that are critical to their employees future. Yet they must now do so with fewer resources of their own, in a tough new regulatory environment, under harsh economic conditions. It s important to note that protecting the plan s assets is only one part of the equation. As employees grapple with a challenging economy and the growing burden of retirement decisions, plan sponsors should give equal attention to ensuring that employees will be ready for retirement. That means your retirement plan should: It s natural for participants to look to plan sponsors for help in this new retirement landscape. Encourage enrollment and adequate contribution levels Include in-plan investments that generate lifetime income Provide genuine advice, beyond guidance, that drives action and outcomes Offer accessible, streamlined participant communication and education tailored to an individual s unique situation and goals for financial well-being Monitor progress toward retirement readiness and set benchmarks for success Today s employees need a plan that achieves those objectives as they feel the stress of retirement readiness. According to the 2012 Retirement Confidence Survey conducted by the Employee Benefits Research Institute, Americans confidence in their ability to retire comfortably is at a historically low level. Only 14% are very confident and 38% somewhat confident that they will have enough money to reach this milestone. 1 Among employees in higher education, the numbers are significantly better but still reflect a strong concern about retirement readiness, with 25% feeling very confident and 50% feeling somewhat confident. 2 The best way for a plan sponsor to meet this challenge is to take a hard, critical look at the plan. Reviewing plan investments and fees is a good first step. But you should also work with your provider or your plan s advisor to see if the plan has the best design, the best advice and the best provider support you can give to your participants. This paper will give you some clarity about those issues. And it may help you make decisions about how to prepare your participants for retirement while doing the best for your institution and meeting your duties as a plan fiduciary. This is especially relevant in light of recent court cases in which a failure to make prudent decisions around investment selection, recordkeeping and other key aspects of plan policy have had costly consequences for institutions and individuals. We will explore three aspects of plan management that have a significant impact on retirement readiness and plan outcomes: 1. Building a strong foundation with a purposeful plan design 2. Delivering outcomes-based education and advice 3. Maximizing value for fees paid It s natural for participants to look to plan sponsors for help in this new retirement landscape. Amid the noise and confusion in the marketplace, armed with the right information, you can be a genuine source of confidence as they pursue lifelong retirement security. 2 Prepared for a lifetime

3 1. Build a strong foundation with a purposeful plan design Many plan sponsors are embracing the concept of plan design with purpose, which makes an explicit effort to better guide participants to positive outcomes. This approach requires a plan that works for its participants both during their working years and after they leave the institution. When building your foundation, it is critical that you give careful consideration to designing a plan that helps participants receive an adequate income to meet life s basic needs in retirement. There are three key considerations in evaluating plan design: plan features, the investment menu, and the service model. All three should serve the best interest of the institution and all its participants. Plan design: plan features Studies show that a number of features can be built into plan design to increase the odds of achieving better participant outcomes. 3 Plan sponsors can boost the possibility of success by making it easier for participants to enroll and keep their money in the plan, increase their contributions, allocate their investments, and generate a steady stream of lifetime income. Implement automatic enrollment to expand plan coverage and encourage contributions. On average, plans with automatic enrollment have a participation rate of 86%, which is 21% higher than those without. 4 While getting participants into the plan is a critical first step, it is not enough: Convincing employees to contribute an amount that is likely to improve their retirement security is just as important. In their book Nudge: Improving Decisions About Health, Wealth and Happiness, authors Richard Thaler and Cass Sunstein note that automatic enrollment programs do work, but employers typically adopt a relatively low default savings rate of 2% or 3%. As it turns out, many employees continue saving at that default rate which is far too low to provide enough money for retirement. 5 According to UCLA s Shlomo Benartzi in Save More Tomorrow, an employee might take the default rate as tacit advice, and simply stay with it. 6 Consider a higher default contribution rate of 4% to 6%, and let participants opt out if their compensation does not permit that rate. Prepared for a lifetime 3

4 For your plan to be truly effective, it s important to target an appropriate income replacement rate. Introduce an automatic annual increase program to help improve overall savings levels. TIAA-CREF, along with other financial institutions, recommends an annual retirement savings rate in the range of 10% to 15%. (Note that some provisions of the Pension Protection Act may limit contributions under certain conditions. 7 ) In addition, consider annual increases of 3% or 4%, instead of the 2% generally used. Although some plan sponsors may be concerned that higher default rates will lead to increased opt-outs or lower participation rates, research indicates that this is not the case. 8 Integrate an employer match to enhance participation and maximize employee contributions. An employer match is the single most significant factor in determining whether or not employees contribute to a defined contribution plan, nearly tripling the odds of participating. 9 To encourage employees to contribute as much as they can, offer a clear and simple formula. Note that employees will consider an employer match as free money, which they will be reluctant to lose if they don t contribute. They will also take the match as a signal of how much they should save. In either case, they will have a strong incentive to contribute up to the amount matched. So if an employer matches x% of contributions up to y% of salary, y impacts behavior more than x. The implication is that employers should consider increasing y (and decreasing x ) to keep their expenses from increasing. For example, instead of matching 100% of worker contributions up to 4% of salary, match 50% on the first 8% contributed. The latter will result in a higher level of employee contributions. Note also that too low a match under 50% may not be seen as attractive nor inspire enrollment. Implement guardrails to protect retirement assets from early depletion. Consider placing limits on the number of loans participants can take against their retirement assets. This will reinforce a commitment to long-term planning, rather than employees treating the retirement plan as a source of funds during the accumulation years. Limiting loans can also keep down plan expenses and have a positive impact on overall plan fees. While they may sometimes be necessary, loans are inconsistent with the objectives of the plan. Limiting them to no more than three per participant is advisable, and sponsors might consider eliminating them completely to ensure greater efficiency and better outcomes for participants. In any case, loans should be taken from participant contributions, rather than sponsor contributions which are designed to provide retirement income security. Allowing participants to borrow from their own contributions is consistent with the reality that it is their money. Establish income replacement goals and encourage annuitization. Plan features such as an employer match to encourage accumulation are fairly straightforward. But plan provisions around the distribution or spend-down stage and the policy implications for the institution s retirement plans can be more complicated. For your retirement plan to be truly effective, it s important to target an appropriate income replacement rate typically in the range of 70% to 90% of preretirement income, from all sources, including Social Security. This typically requires a total combined employer/employee contribution rate in the 10% to 15% range, depending on assumed investment returns and the time horizon to retirement. More and more participants in employer-sponsored plans are looking for ways to reduce the financial risk they carry into retirement. Yet most plan investment options don t address the retirement income gap the shortfall between what people can expect to receive from Social Security and what they will actually need to meet basic living expenses once they retire. Providing plan participants the opportunity to invest in a guaranteed income product during 4 Prepared for a lifetime

5 accumulation, when combined with Social Security and other income sources, will create a guaranteed income floor in retirement. By a floor we mean a level of guaranteed income that s adequate to cover life s necessities food, shelter, clothing and other nondiscretionary items no matter how the markets perform or how long the individual lives. The appropriate amount for an income floor will vary depending on the individual s retirement needs and expenses. As a starting point, individuals could target 40% to 50% of preretirement income for their floor (including the guaranteed income to be received from Social Security). For most people, this would entail annuitizing enough of their retirement savings to generate lifetime income for approximately 20% to 30% of their overall income needs. This target is based on market research and analyses of consumption behavior, spending patterns and sources of retiree income. On the plan level, plan sponsors might consider requiring that some or all of the participant s accumulation that s attributable to the employer s contribution be annuitized from, or automatically directed into, a guaranteed income product upon a participant s retirement to help create the income floor. It s revealing to note that, among private institutions with a primary defined contribution plan, 100% offer annuitization as a retirement payout option and 11% require some degree of annuitization. 10 Making in-plan annuities available supports the view that sponsored plans are for the purpose of providing retirement security. And including such provisions demonstrates a sponsor s fiduciary commitment to helping participants achieve that security. To learn more about the value of including annuities during accumulation, see In plan annuities a closer look in the highlighted feature entitled Shifting the focus: the role of retirement income on page 8. Making in-plan annuities available supports the view that sponsored plans are for the purpose of providing retirement security. Prepared for a lifetime 5

6 Research indicates that 72% of participants surveyed are interested in contributing to an investment option that focuses mainly on generating a guaranteed monthly income in retirement. Plan design: the investment menu Investment menu design does not have to be complicated. Yet, the demands on plan fiduciaries to regularly evaluate investment options while managing employee demand for investment choice can add complexity to this important responsibility. There are a number of ways that plan sponsors, working with their plan s advisor, can ensure that the investments in their plans are reasonable and effective. Include low-cost, lifetime income options to increase confidence in employees ability to retire. With the continuing shift to greater employee responsibility for investments in defined contribution plans, products that generate income should be a key ingredient of today s retirement plans. As discussed in the income replacement and annuitization section above, helping employees establish an income floor enough income to meet the basic necessities of life through investments in the plan is critical to employee confidence and success in retirement. Research indicates that 72% of participants surveyed are interested in contributing to an investment option within their 401(k), 403(b), or 457 plan that focuses mainly on generating a guaranteed monthly income in retirement. 11 See the highlighted feature, Shifting the focus: the role of retirement income (Page 8) for more about this important plan sponsor responsibility. Carefully build a menu designed to help participants get to and through retirement. A prudent approach to menu construction should help ensure a safe and secure retirement for all participants. That is, the 80% who require a simple menu and the 20% who want a variety of choice so they can build their own portfolio. At the same time, it should provide 100% of participants with easy access to choices for lifetime income as well as asset accumulation. That s why it makes sense to offer an easy-to-choose Qualified Default Investment Alternative (QDIA), as well as a lifetime income option, as soon as the employee begins to engage with the menu. Then, you can offer core options for investors who want to build their own portfolios, and possibly a brokerage window for even more expansive choice and alternative investments. The key is to provide a simple menu, with basic building blocks, that reflects the way people make decisions and makes it easy for them to understand their options and make choices that make sense for them. This is an area where a strong communication and education program can help participants stay engaged and vigilant about their retirement readiness. For every ten new options offered, enrollment drops by between 1.5% and 2%. Avoid investment option overload. Too much complexity can also lead to participant inertia and indecision, and requires greater fiduciary rigor and administrative process to manage. Too many options may also lead participants to be overly conservative, to allocate too many assets to cash, or to chase hot funds and incur additional risks and costs. Columbia Business School Professor Sheena Iyengar, author of many studies on choice overload, has demonstrated in her research that for every 10 new options offered, enrollment drops by between 1.5% and 2%. 12 A simplified menu of carefully screened investment choices can increase the odds of retirement plan success. What is the right number of choices? In 2011, the TIAA-CREF Institute surveyed a number of experts in the areas of behavioral economics, actuarial science, decision making and financial education on this very question. The findings indicated that the appropriate number of investment options lies in the range of 5 to 10. The general consensus is that this number can result in an appropriately diversified portfolio for the typical participant without making it too difficult to make investment decisions. 13 It also still provides enough flexibility to include investment options designed to provide guaranteed lifetime income. Note that when moving from a menu that has a large number of options, 15 to 20 investment options may be a more appropriate transition strategy. (Target date funds are counted as one option.). 6 Prepared for a lifetime

7 Two words about advisors: use one Stricter compliance regulations and more complex administrative duties have many plan sponsors turning to advisors to help manage their responsibilities. If you ve retained an advisor for your plan, be sure to engage them as you assess the information in this paper to ensure you benefit from their valuable insight. Make sure your provider is committed to partnering with you and your advisor to help you deliver the best retirement solutions for your participants, and will share the data you need to properly assess plan outcomes. Plan design: the service model In addition to including plan features that will boost outcomes and designing an effective investment menu, it s critical that you evaluate whether your current service model still meets your needs. While multi-vendor models provide choice, both classic multi-vendor and multi-vendor coordinator models require continuous oversight of more than one provider. They also entail multiple plan reporting sources and multiple procedures for activities such as remittance, distribution and plan audit. Most important, both types of multi-vendor platforms can present participants with a variety of confusing investment options and compound that confusion with uncoordinated advice and education offerings that make it harder, rather than easier, for participants to make retirement savings decisions. And under any multi-vendor arrangement, participants with investments on each platform will have a degraded experience. They will still need to go to multiple web sites, receive multiple statements, and talk to multiple phone centers to execute multiple transactions for one movement of money. There s no way around it. The benefits of streamlined, sole recordkeeping. Choosing the right service model can help to simplify plan management, manage costs, mitigate risk, and create a better employee experience. There was a time when a number of 403(b) plan sponsors believed that provider choice and provider competition at their institution were desirable because they helped ensure that they received the maximum benefits available from each provider for their employees. This led to a proliferation of multi-vendor plans over the years which many consultants and plan sponsors are now reconsidering, in light of new fiduciary regulations. Sole recordkeeping delivers the most streamlined and simplified experience for sponsors and participants alike. Sole recordkeeping delivers the most streamlined and simplified experience for sponsors and participants alike. It provides one point of contact for all needs. It offers consistent messaging, with a single set of communications, education and advice. With all plan investments delivered on a single platform, this model also provides improved fiduciary oversight and offers a comprehensive, single source for reporting and compliance activities, often with lower plan pricing. Although, historically, sole recordkeeping was unable to offer multiple options from different providers, the prevalence of open architecture eliminates this shortcoming. Participants can also take action more easily on advice provided on a sole recordkeeping platform, because a single transaction with a single vendor is all that s needed to execute a decision. What s more, the advice they receive can be more tailored and relevant to them when dealing with a single provider that has a holistic picture of the individual s situation. In short, sole recordkeeping can be a powerful force to drive improved plan efficiency and positive, more measurable participant outcomes. Prepared for a lifetime 7

8 A phased approach. Many plan sponsors may not be in a position to make the change to a sole recordkeeper model in a single step. In these cases, a phased approach that enables the sponsor to take more manageable, intermediate steps toward sole recordkeeping can be a viable alternative. This can help sponsors absorb changes within their payroll and benefits office and IT environment, as well as give them the time to properly align constituencies and resources necessary for this type of transition. It also gives them time to deal with the practical and psychological challenges of moving to sole recordkeeping on their own terms and timeline. Retirement income is the key ingredient of success for a retirement plan, and more plan sponsors and their plans advisors are providing this component. Shifting the focus: the role of retirement income The movement away from defined benefit (DB) plans toward defined contribution (DC) retirement plans among corporations and public employers is well documented. This trend is also driving a similar change in thinking about what a DC retirement plan is all about. For decades, the 401(k) industry and its providers in the 403(b) space have focused on asset accumulation. However, a growing interest in making certain aspects of DC plans function more like DB plans has led to noteworthy developments such as automatic enrollment, automatic deferral and default investment options. The next step is to ensure that retirement plans incorporate both accumulation and income guarantees as a foundation of individual retirement planning and execution. Participants in defined benefit plans had confidence that their money was being professionally managed and would provide an income floor to cover basic expenses that would last throughout their retirement. Today, that confidence is giving way to uncertainty about whether the choices they make in their DC plan will result in enough income to see them through retirement. And they re measuring success by how well their plan generates an income stream for them during retirement not simply large account balances during their working years. Individuals are more than twice as likely to annuitize in retirement if they save through an annuity in a DC plan during their working years. As a result, employers must consider lifetime income products for their retirement plans to complement their investment options. And it s not enough just to put retirement products on the menu. Employers must also provide participants with objective advice to help them understand the pros and cons of available options and select investments based on their needs and risk tolerance; to understand how much they will need in retirement; and to understand exactly how to turn their savings into income they won t outlive. The key to providing lifetime income Retirement income is the key ingredient of success for a retirement plan, and more plan sponsors and their plans advisors are providing this component. In a comprehensive report from law firm Drinker Biddle & Reath LLP, Lifetime Income in Defined Contribution Plans: A Fiduciary Approach, the authors note that when considering lifetime income products, employers face two issues: the terms of the product and the ability of the provider to meet those terms. Only an insurance company can offer a product that is guaranteed for life. 14 The fiduciary challenge is to prudently select one that offers a sound product and that demonstrates long-term stability. Although a fiduciary is not expected to predict the financial strength of a firm 20 to 30 years in the future, a prudent screening process should include a check of the ratings an insurer receives from independent rating agencies, among other factors. Lifetime income products can be offered either in-plan while the employee is working and in the savings stage or out-of-plan after the employee has retired. 8 Prepared for a lifetime

9 In-plan annuities: a closer look Allowing working employees to contribute to a fixed annuity during the accumulation phase enables your plan to function essentially as a pension plan within a defined contribution structure. Instead of focusing solely on tax-favored wealth accumulation by deferring current income, employees can make contributions that help ensure lifetime income during retirement. In terms of retirement readiness, employees who contribute to a lifetime income product during their working careers are better prepared and more likely to face a smooth transition to retirement. Investing in an annuity during accumulation avoids the psychological barriers to purchasing an annuity after retirement. In fact, evidence indicates that individuals are more than twice as likely to annuitize in retirement if they save through an annuity in a DC plan during their working years. 15 TIAA-CREF has been offering annuities in the investment menu for decades, and three out of four retirees receiving benefits from us have annuity income as part of their overall retirement distribution. Retirees who take systematic withdrawals equal to the payments they would receive from a life annuity, have a greater than 50% chance of running out of money. Some participants believe they can manage the distribution of their own money for better outcomes in retirement. But research concludes that if retirees elect systematic withdrawals that are equal to the income payments they would receive from a life annuity, there is a greater than 50% chance that they will run out of money. 16 As fiduciaries, plan sponsors can take comfort in the fact that offering a low-cost, lifetime income option like an annuity increases confidence that employees can afford to retire and live comfortably in retirement. Effective, low-cost retirement income options should play a major role in your investment lineup, through a menu that supports both accumulation and options to generate income including guaranteed options. Incorporating income projections in quarterly statements can keep the income issue top-of-mind with participants and help them track their progress. And putting a robust education and advice program in place will help employees take advantage of the full range of investment choices. Prepared for a lifetime 9

10 2. Deliver outcomes-based education and advice Effective plan design is critical to delivering positive participant results. But the way participants actually experience the plan is through the communication, education and advice they receive to understand the plan, engage with it and use it effectively. Unbiased advice is of paramount importance in helping people navigate their choices and figure out how to invest, how much to contribute, how to distribute assets, when to retire and much more. When they get all that right, they re on the road to achieving the only outcome that really matters: retirement readiness, leading to lifelong financial security and well-being. At TIAA-CREF, our experience is that individuals who received advice are five times more confident about their retirement than the average American worker. 17 And remember, the ultimate purpose of advice is to enable participants to take action that will improve their retirement readiness. Among people who seek financial advice, 52% act on that advice some of the time, and 32% act on advice all or most of the time. 18 It s also clear that when people are given actionable advice not merely guidance and a means to execute decisions quickly, they are more likely to take actions that lead to positive results. Know your audience. To ensure retirement readiness when the time comes, you and your provider must be able to target all participants with messages that encourage active engagement in the plan, and give them simple ways to take action. Studies have shown that engaging employees through targeted, relevant communications and education can increase participation, savings rates and net worth. 19 It s also true that the best advice is personalized advice that takes into account specific employee attributes and is able to adjust in response to variables such as age, current savings rates, specifics of plan investments and tolerance for risk. To be trustworthy, advice must be objective and unbiased. It should also be holistic, taking into account investments outside of the plan. Employers and providers have a distinct advantage when it comes to giving advice. A recent study of American households found that the sources of advice viewed with the highest level of trust are employers (66%) and financial institutions and providers (64%). What s more, of those who rely on a financial services provider, advisor or consultant, 67% are more likely to feel confident about having saved enough for retirement than those who rely on other sources. 20 The right advice tools can help employees design distribution strategies to generate income they won t outlive. Keep your eye on the goal. Like every element of your plan, advice must support both the accumulation stage and spend-down stage of the employee s life. Work with a provider that can help you develop easy-to-use approaches and tools that let employees see how their accounts are performing. They should be able to aggregate all their accounts to get a snapshot view of their total financial picture. Interactive tools can help employees chart, evaluate and experiment with various scenarios to help them set and attain the right goals to ensure retirement readiness. And when retirement nears, the right advice tools can help employees design distribution strategies to generate income they won t outlive. Embrace technology. Different people prefer to interact with the plan in different ways: in person, online, over the phone. At the same time, recognize that using new technologies is not an option; it s an imperative. And used properly, technology can increase participation and ease advice implementation. Research has shown that technology tools can boost savings behavior. Consider providing employees with the means to enroll on the spot through handheld devices such as ipads. If you get employees started online, you ll also be able to capture data about them that you and your provider can use to provide more targeted education and better service. Given current trends, online traffic will exceed paper-based traffic in the next two to three years. And, as the cost of data plans continues to drop, mobile apps will continue to 10 Prepared for a lifetime

11 proliferate. To stay connected with participants and offer a seamless experience across many digital platforms, employers will need robust mobile technology and a thoughtful plan for the next two years. Whether it s online enrollment, interactive account management and planning calculators, or mobile connectivity, make sure your provider is on the technology curve with you. Provide real advice, not just guidance. Be aware that guidance only involves giving general direction about asset allocation. True advice includes specific fund recommendations. What s more, if the provider you choose for advice and education services is prepared to take fiduciary responsibility for the advice, that provider is legally obligated to act in the participants best interest, and is accountable for selecting an independent advisor who gives unbiased recommendations that are appropriate for each individual. Not so for providers giving mere guidance. Providing advice as a fiduciary can lead to better outcomes than basic guidance because participants can confidently take action on it without further consultation or decisions. That, in turn, helps plan sponsors better fulfill their responsibilities as stewards of the participants assets. In terms of contributions, a TIAA-CREF survey found that more than half of individuals who received advice increased their contributions. 21 Under the conditions we studied, over a 30-year period that could potentially result in $200,000 more in retirement savings 22 or $1,100 more per month for life. 23 Providing advice as a fiduciary can lead to better outcomes than basic guidance. Choosing advice over guidance can also have an impact on how participants manage their assets. In one TIAA-CREF study, participants who received specific, actionable investment recommendations ( Advice ) took action on their investments over 60% more often than participants who were only offered guidance. 24 Get real about retirement readiness Part of fiduciary responsibility requires assessing the effectiveness of the plan. Most providers can measure factors such as participation, savings rates and asset allocation. While those factors may serve as indicators of success, employers have not been able to shape that data into an overall picture of how effective the plan is on the most important measure of all: retirement readiness. TIAA-CREF has developed Plan Outcome Assessment, a retirement readiness measurement capability that gathers a broad set of data to calculate income replacement potential of plan participants. By using a forecasting engine that includes Monte Carlo analysis at the individual level, it is possible to examine each participant s plan assets, current savings rate and asset allocation to measure a participant s potential to replace income in retirement. The data can be rolled up to the plan level and evaluated by demographic categories including gender, age, years in the plan, and life-stage segment. We can also show specific steps plan sponsors, providers and consultants can take to improve plan design and effectiveness and what the effects of taking these steps would have on overall plan outcomes. Plan Outcome Assessment provides the ability to more directly measure, influence and report on the steps a sponsor is taking to adequately provide employees with the means to save for retirement. What s more, these results can provide benchmarks that allow sponsors to measure the effectiveness of their plan relative to other 403(b) plan sponsors. The benchmarks can also be used to establish plan outcome goals for the future and to design more targeted and effective communication, education and advice strategies to achieve plan outcome goals. This kind of measurement and benchmarking capability also supports the sponsor s fiduciary responsibilities. It provides the ability to more directly measure, influence and report on the steps a sponsor is taking to adequately provide employees with the means to save for retirement. Prepared for a lifetime 11

12 3. Maximize value for fees Current fee disclosure requirements for providers have increased fee transparency in retirement plans. Yet with this transparency comes increased responsibility for plan sponsors. Defining and maximizing value is about more than minimizing fees. The DOL itself has noted, fees are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. 25 A focus solely on efficiency or the lowest possible cost may sacrifice important employee outcomes and even overlook sources of value for your plan. A focus solely on efficiency or the lowest possible cost may sacrifice important employee outcomes and even overlook sources of value for your plan. Take a comprehensive view As a fiduciary, plan sponsors should ensure that the fees participants pay under the retirement plan are reasonable for the services received. The desire to pay a fair and competitive price must always be a guide. But the urgency to improve retirement outcomes also requires a more comprehensive understanding and assessment of value. The end game for your plan is to ensure participants are ready for retirement. Ultimately, if that isn t achieved, then all your efforts around plan management, costs, enrollment, communication and advice are undermined. Evaluate fees against outcomes Plan sponsors, their advisors and providers should have regular, open discussions to help make informed judgments about the value received in exchange for fees. Your provider should be able to demonstrate that plan fees for the services and strategies provided actually promote positive participant actions and plan outcomes. Consider an all-in fee for better comparison The TIAA-CREF paper Assessing Reasonableness of 403(b) Retirement Plan Fees, explores the concept of the all-in fee as a useful measure of reasonableness and benchmarking. 26 An all-in fee, as proposed by the Deloitte/ICI 2011 Defined Contribution Fee Study, includes all administrative, consulting and investment fees (i.e., the total expense ratio) whether assessed at the plan, employer or participant level. 27 Given the broad variation in fee practices, an all-in fee facilitates an apples-to-apples comparison by correcting for differences in allocating major expense categories (such as investment versus recordkeeping) among participants, the employer and the plan. After all, that s the bottom line for what plan participants pay. Again, the ultimate test of success is the ability of your employees to save enough so they can retire with a high probability of a secure retirement and lifetime income. So it makes sense that an appropriate portion of the fees paid under your plan should provide services that support that objective. 12 Prepared for a lifetime

13 Control costs through improved efficiency Don t overlook the role of operational efficiency in improving the cost-effectiveness of your provider relationship and the value of your plan. More efficient operations are a win-win for everyone providing faster and more accurate day-to-day transactions, helping to contain or even reduce administrative costs, and enhancing financial and regulatory reporting. Plus, more efficient operations can result in an improved employee experience. The following efficiency measures are just a few examples. Interact with your provider electronically whenever possible. Online enrollment, electronic remittances, and automated disability contributions all improve speed and accuracy while easing the administrative burden. Place limits on certain transactions that are expensive and may not be in the best interest of the plan and its participants long-term goals. Limiting outstanding loans, for example, simplifies reporting and administration and reinforces the goal of preserving retirement assets for use during the retirement years. Provide census data to your provider. Including census data in the remittance file, for example, can speed transactions and supply your provider with information that can improve the overall efficiency of your plan. Also, providing termination date information eliminates the need for phone calls or paper forms to confirm dates allowing faster, more accurate transaction turnaround. Eliminate paper as much as possible. Sending plan enhancement notifications via , and sending transaction confirmations, prospectuses and statements electronically, can reduce costs and streamline data storage. It is also more environmentally responsible. Prepared for a lifetime 13

14 Conclusion: Ready or not? The challenging decisions you face about plan design, participant advice, and reasonableness of fees are not getting any easier to make. Amid all the details and decisions, though, one fact is clear: The primary objective of all your efforts is retirement readiness preparing every participant for a safe, secure retirement. Retirement readiness should underlie all your decisions about how you structure and manage your plan and how you partner with a provider to help you meet the lifelong needs of your participants. From enrollment, investment and accumulation, to retirement and beyond, plan sponsors should take a long-term, all-inclusive view of the retirement plan. Plan sponsors must also consider asset accumulation and lifetime income hand-in-hand, as twin imperatives that are critical to retirement readiness and successful outcomes. In this paper we ve provided guidance that will help you make prudent fiduciary decisions with the best interests of your participants in mind. Working with trusted partners and focused on the importance of plan design, advice and overall value, you can renew your commitment to making a positive difference in the lives of plan participants both to and through retirement. About TIAA-CREF TIAA-CREF ( is a national financial services organization with $520 billion in assets under management (as of 3/31/2013) and is the leading provider of retirement services in the academic, research, medical and cultural fields. 14 Prepared for a lifetime

15 Driving positive outcomes A plan sponsor checklist 1. Build a strong foundation Implement proven plan design features such as strategic default services auto enrollment and auto increase to drive participation, contributions and improved outcomes. Offer a carefully built, simplified investment menu making sure to include lifetime income options that strengthen retirement readiness. Consider an annuitization plan provision to ensure that some portion of the participant s assets will be used to provide lifetime income. Consider appropriate plan consolidation and moving toward a sole recordkeeping model for lowest cost and highest value. Follow fiduciary best practices to manage your plan in the best interest of your participants, and seek the support of a trusted provider and/or consultant to guide and evaluate your efforts. 2. Deliver outcomes-based education and advice Provide targeted, action-oriented communications to increase engagement. Focus advice on both accumulation and income generation objectives. Use technology to enhance the employee experience and participation. Work with a provider that will take on the fiduciary responsibility for advice, rather than provide simple guidance, and that is committed to achieving retirement readiness. 3. Maximize value for fees Assess the reasonableness of your plan fees relative to the value, to provide positive outcomes and retirement readiness. Benchmark an all-in fee for the plan for more informed decision making and comparison. Seek cost control through improved operational efficiency in partnership with your provider. Prepared for a lifetime 15

16 Retirement Confidence Survey, EBRI. 2. Retirement Confidence on Campus: The 2011 Higher Education Retirement Confidence Survey, Paul J. Yakoboski, TIAA-CREF Institute, June Interview with Dr. Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management, Harvard University, December 21, Impact of Automatic Enrollment on Defined Contribution Plans, Lessons From the Private Sector, Pamela Hess, Aon Hewitt, Nudge, Improving Decisions About Health, Wealth and Happiness, Richard H. Thaler and Cass R. Sunstein, Save More Tomorrow, Practical Behavioral Finance Solutions to Improve 401(k) Plans, Shlomo Benartzi, For ERISA-covered DC plans, the PPA created the Qualified Automatic Contribution Arrangement (QACA) which, for plans designed to meet its requirements, limits automatic increases to no more than 10%. 8. Impact of Automatic Enrollment on Defined Contribution Plans, Lessons From the Private Sector, Pamela Hess, Aon Hewitt, The Plan Participation Puzzle: Comparison of Not-for-Profit Employees and For-Profit Employees, LIMRA, December Retirement Plans, Policies and Practices in Higher Education, Paul J. Yakoboski, TIAA-CREF Institute, Valerie Martin Conley, Ohio University, March, Retirement Research Inc./Brightwork Partners, How Much Choice is Too Much: Contributions to 401(k) Retirement Plans, Pension Research Council Working Paper, Sheena S. Iyengar, Wei Jian, Gur Huberman, Rethinking Defined Contribution Plan Design: A Survey of Experts, Paul J. Yakoboski, TIAA-CREF Institute, August Lifetime Income in Defined Contribution Plans: A Fiduciary Approach, Fred Reish, Bruce Ashton, Joseph Faucher, Drinker, Biddle & Reath LLP, Retirees, Annuitization and Defined Contribution Plans, Paul J. Yakoboski, TIAA-CREF Institute, April, The Role of Guaranteed Income in Improving Retirement Security. David P. Richardson, TIAA-CREF Institute Working Paper, Based on survey of 2,376 individuals that received TIAA-CREF advice via phone or in person from April through September National Consumer Survey on Financial Advice and Education, KRC Research, August Financial Counseling, Financial Literacy, and Household Decision Making, Pension Research Council, October National Consumer Survey on Financial Advice and Education, KRC Research, August Based on survey of 2,376 individuals that received TIAA-CREF advice via phone or in person from April through September Based on TIAA-CREF proprietary research, In 2010, the average annual contribution of premium-paying participants who took advantage of our Advice offering was $11,900 prior to the session and $13,700 after the session, representing an increase of 15%. Hypothetically, over a 30-year period, the additional accumulation at retirement will be $204,388. This assumes end-of-month contributions, 6% annual rate of return and 3% annual premium increase rate. 23. The payout annuity in all cases assumes a 65-year-old retiree, single life annuity with 10 years guaranteed, 4% rate of return, and the mortality assumptions used in computing current total income under TIAA pension payout annuities. The experience of each investor depends on a number of factors and individual experience will vary. These calculations are purely hypothetical and do not illustrate past or projected performance. Past performance is not indicative of future returns. Account balances depend on employee and employer contribution rates as well as performance of the investments selected. 24. TIAA-CREF Advice & Planning analysis of 2011 Advice & Guidance sessions. 49% of employees with actionable fund-level advice did a full or partial implementation compared to 30% of employees with asset class guidance who made some reallocation change. Therefore, participants who received advice took action 63% more often than those who received guidance Assessing the reasonableness of 403(b) retirement plan fees: Best practices for determining who, what, how and why, TIAA-CREF, January Inside the Structure of Defined Contribution/401(k) Plan Fees: A Study Assessing the Mechanics of the All-In Fee, Deloitte/ ICI 2011 Defined Contribution/401(k) Fee Study, Deloitte Consulting LLP, November C9957 TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details. Please note guaranteed lifetime income is subject to the claims-paying ability of the issuing insurance company. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Rebalancing does not protect against losses or guarantee that an investor s goal will be met. Please note for Lifecycle Funds, the target date is the approximate date when investors plan to start withdrawing their money. The principal value of the fund(s) is not guaranteed at any time, including at the target date. You should consider the investment objectives, risks, charges and expenses carefully before investing. Please call , or go to tiaa-cref.org for a current prospectus that contains this and other information. Please read the prospectus carefully before investing. TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), New York, NY Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, 730 Third Avenue, NY _ A13731 (4/13)