Consulting HR Outsourcing Retirement Hot Topics in Retirement A Changing Horizon

Transcription

1 Consulting HR Outsourcing Retirement 2011 Hot Topics in Retirement A Changing Horizon

2 About This Survey This year s survey results show that employers are continuing to assess the most effective way to deliver retirement benefits to their employees and keep up with the evolving retirement landscape. The choices employers make in response to industry changes can have a significant impact on company financials, employee engagement and satisfaction, effective workforce management, employee retirement income security, the ability to attract and recruit new workers, and even workforce productivity. In November 2010, Aon Hewitt surveyed human resources professionals to learn what s likely to occur in We explored their focus and expected action regarding the design, management and delivery of their retirement programs. In this survey, we covered the topics of defined contribution (DC), defined benefit (DB) and retiree medical plans as they relate to active, salaried U.S. employees. Responses from more than 210 employers with plans that cover more than 6 million employees provided us a preview of the changes we can expect in the retirement landscape during Note: Percentages in this report are rounded to the nearest whole number; therefore, totals may not equal exactly 100%. While the focus of the survey instrument and survey samples has changed from year to year, there still are a number of areas where useful comparisons and trends over time can be examined. 2 Aon Hewitt

3 2011 Hot Topics in Retirement A Changing Horizon Contents 2. Survey Highlights 6. Survey Findings: Overview of Retirement Plans 10. Defined Contribution Plans 28. Defined Benefit Plans 35. Retiree Medical Plans 41. Participating Employer Information 2011 Hot Topics in Retirement A Changing Horizon 1

4 Survey Highlights In 2011, employers will continue to focus on their retirement plan Across Retirement Plans programs looking at their plan design and features as well as how employees are using the programs and the retirement outcomes they re likely to achieve. Plan sponsors identified high-priority items for 2011 for their retirement programs. Top among those priorities was employees taking accountability for their own future, which has been the top priority in the past few years, followed by employees retiring with sufficient retirement assets and the competitive position of the plan. These priorities continue to reflect the shift in the responsibility and risk of retirement income from the employer to the employee, and the fact that employees could use help. Employers strategies for helping employees meet their retirement needs come in a variety of forms, such as providing the employee with the right tool for retirement planning and distribution through retirement. The most commonly cited initiatives that employers have planned for 2011 for their overall retirement programs were to assess the appropriateness of the plan design and measure the competitive position of the program. Additionally, there s a continued focus among plan sponsors on actions meant to manage aspects of risk. Key Findings: Across Retirement Plans 39% report they are very likely to assess their current retirement plan design. 29% of respondents are very likely to measure the competitiveness of their retirement program. 51% of sponsors rank employees taking accountability for their own future as a high priority in 2011, followed by employees retiring with sufficient retirement assets at 43%. Defined Contribution Plans Defined contribution plans continue to take the spotlight with many plan sponsors reporting priorities and implementations related to automation, Roth 401(k), investment advisory services, retirement income solutions and fees. Automatic enrollment has become a standard feature in defined contribution plan trends, and its use will continue to rise 57% of plans currently have automatic enrollment and 13% of those not offering it today intend to add automatic enrollment in We expect employers with automatic enrollment will enhance the feature by adding new groups of employees or change the defaults. Two other automatic tools contribution escalation and automatic rebalancing are offered by about half of plans, and a significant number of sponsors intend to adopt during the coming year. 2 Aon Hewitt

5 Roth 401(k) has gained popularity in recent years and is expected to experience significant growth in Currently, 34% of plans offer the Roth feature up from 29% one year ago. Nearly 40% of plan sponsors not currently offering it report that they re very likely or somewhat likely to implement the Roth 401(k) feature in For those sponsors that have not yet added it, the primary barrier reported was the lack of evidence of significant employee usage. Employers will continue to look for effective ways to help employees make investment and saving decisions. They do this through an array of services and tools. Target-date funds, managed accounts, online guidance and other advisory services experienced significant growth in the past year. Eightythree percent of plans now offer target-date funds, up from 78% in the last survey. Most of these features are expected to gain significant momentum in 2011 with 47% of respondents (among those not currently offering) planning to adopt guidance and 36% adding advice. Finally, 30% noted that they were very or somewhat likely to offer managed accounts in Retirement income solutions are a significant topic of discussion among many plan sponsors, and some employers are likely to take action during this year. Nearly one in five plans already offer some types of in-plan retirement income solutions, such as managed payout funds, annuity or insurance products, or managed accounts with a drawdown feature. Of those employers that do not provide them today, 13% are very likely to add them in Of those plan sponsors that reduced or suspended the match, more than half (55%) already have reinstated it in some form (either partially or fully reinstated), 18% plan to reinstate or increase it in 2011, another 11% plan to do so in 2012 or later, and the remainder plan to leave them as they are for now. Employee communication is a high priority for Employers plan to help employees with their savings and diversification decision as well as highlight needs related to retirement income adequacy. Online postings and modeling tools, targeted mailings and messages will continue to be popular methods of communicating with employees in In regard to managing risks in 2011, plan sponsors are likely to benchmark plan administration and procedures, increase the amount of participant communication surrounding the investments and fund fees, and review plan governance structure. Other actions include performing a compliance review, increasing the frequency or intensity of reviewing total plan cost, and hiring a third party to review investment options. Furthermore, one-third of employers plan to communicate fees more clearly to participants. Continuing a trend that emerged two years ago, defined contribution plan sponsors are managing the risk in their plans with the same rigor and attention as pension plan sponsors Hot Topics in Retirement A Changing Horizon 3

6 Key Findings: Defined Contribution Plans 57% of respondents already offer automatic enrollment to new employees, with 13% of the remainder very likely to implement it this year. 34% of respondents already offer Roth 401(k) accounts, with 14% of the remaining very likely to add in % of respondents currently offer online investment guidance, while 36% offer managed accounts (up from 28%). Among plans that do not offer them currently, 30% plan to offer managed accounts this year. One in five plans offer some type of in-plan retirement income solutions currently, with 13% (of those not offering) very likely to add it in Defined Benefit Plans Pension plan sponsors continue to assess the appropriateness of their plan design, but a vast majority of plan sponsors plan to make no changes to plan design. Some respondents of ongoing plans are likely to close participation or freeze accruals in their pension plans during Plan sponsors are continuing to focus on ways to manage their plans financial and other risks more effectively. Actions most likely to be taken during 2011 to manage risk include performing funding and accounting projections, reviewing funding strategy, assessing the risks that the pension plan is running based on current strategies, and conducting an asset-liability study. Nearly three out of ten plan sponsors plan to change their pension plan investment policy in Other notable, but less prevalent, likely actions are adjusting equity exposure and/or overall asset allocation and adjusting plan investments to better match the characteristics of the plan s liabilities. These results reinforce the highest priority risk areas for plan sponsors: investment risk, interest rate risk, compliance risk, fiduciary risk and diversification risk. Key Findings: Defined Benefit Plans 75% of pension plan sponsors are very likely to continue their current plan with no changes in % of plan sponsors are very likely to freeze accruals, and 13% are very likely to close their plan to new entrants. 56% of respondents with a pension plan are very likely to perform funding and accounting projections, and 36% are very likely to review funding strategy. 72% of respondents rank managing investment risk as a high priority for Aon Hewitt

7 Retiree Medical Plans As we ve seen in the past several years, retiree medical benefits continue to decline. Seven out of ten respondents provide some type of postretirement medical coverage to their current or future retirees. Among those, the likelihood of a subsidy (or any coverage at all) declines significantly with three-quarters offering a company subsidy to current retirees, while 61% offer it to current active employees, and only 32% offering a subsidy to new hires. One-quarter of respondents with any retiree medical coverage offer their pre-65 retirees a Health Savings Account (HSA)-compatible High-Deductible Health Plan (HDHP). Sixty-five percent of respondents currently offer prescription drug coverage to their post-65 retirees and file for the Medicare Part D Retiree Drug Subsidy (RDS). However, only 53% of respondents are projected to have the same strategy in 2013 when the health care reform law eliminates the tax-free nature of the Medicare Part D subsidy. Key Findings: Retiree Medical Plans 73% of respondents who currently offer any retiree health care benefits are likely to increase retiree contributions to premiums. 59% of respondents are likely to increase retiree plan design cost-sharing requirements. A quarter of respondents offer an HSA-compatible HDHP to pre-65 retirees. Conclusions and Looking Ahead In 2011, employers are staying the course with regard to their retirement plans and focusing on providing tools to help employees with retirement planning, managing risk and communicating with their employees. Defined contribution plan automation will broaden, with planned enhancements aimed at achieving better outcomes for employees. Helping employees make better and more appropriate decisions through tools such as advice and managed accounts will also be an increasing priority. Providing employees with in-plan retirement income solutions also seems to be an emerging consideration in the coming year as sponsors assess the new products and developments in this arena. As in the past few years, employers are slowly moving away from pension plans toward defined contribution plans. Among sponsors who do not want to make significant changes to their pension plans, most are exploring ways to better manage the risks of their current plans. Risk is a continued priority across retirement programs as plan sponsors seek to address financial, compliance and litigation risk. Based on the results of this year s survey, employers are planning to spend more time and resources on retirement design and/or offerings with a goal of better retirement outcomes and financial security for employees and improved plan governance Hot Topics in Retirement A Changing Horizon 5

8 Survey Findings: Overview of Retirement Plans Retirement Plans Background Ninety-four percent of respondents participating in this survey provide their employees with a defined contribution plan. In addition, 28% provide an open defined benefit plan, meaning that new employees will be eligible to accrue benefits. About one in five (22%) respondents offer subsidized retiree medical plans to new hires. Types of Retirement Plans Offered to New Employees Defined Contribution Plans Yes 94% No 6% Defined Benefit Plans Yes 28% No 72% Retiree Medical Plans Yes 22% No 78% (n=212) 6 Aon Hewitt

9 Defined benefit plan sponsorship has steadily declined during the recent past. While only 28% of companies offered defined benefit programs to new hires, 69% of employers carried a pension liability on their books. When these defined benefit plans are categorized into one of three statuses open, closed or frozen we learned the following: n 41% are open plans providing benefit accruals to new employees; this is slightly lower than in the 2010 survey (45%). n 32% have been closed to new entrants, allowing some segment of their employee population to accrue additional benefits but not new hires; this is a slight increase from last year when 31% reported closed plans. n 27% are frozen, where no participants are accruing additional benefits; this compares to 24% of plans that were frozen in the 2010 survey. Of all defined benefit plans open, closed or frozen most (71%) were based on traditional (final average plan or career average pay) formulas, while the remainder (29%) used hybrid plan formulas (cash balance or pension equity plans). Yet, when you consider open plans, the majority reported were the hybrid approach. Defined Benefit Plan Status Among Sponsors Offering All DB Plans Traditional DB Plans Hybrid DB Plans Open plan 41% 34% 58% Closed plan 32% 35% 22% Frozen plan 27% 31% 20% (n=142) Employer Confidence in Program Management and Prioritization As compared to 2010, employers in 2011 are more confident in the competitive position of their plan but slightly less confident in employees taking accountability for their own future. Forty percent of survey respondents are very confident in the competitive position of their plan (compared to 29% in 2010). Confidence in employees taking accountability for their future was down only 38% of employers reported being very confident in employees, down from 43% in In terms of employer prioritization for 2011, employees taking accountability for their own future continues to be the highest priority among employers, followed by employees retiring with sufficient retirement assets (43% of plans, up from 35% in 2010) Hot Topics in Retirement A Changing Horizon 7

10 Areas showing increased employer confidence are employees having sufficient assets in retirement and employees ability to make their retirement income last through their lifetime. This increase may be driven in part by the rebound in the economy. Low in priority and confidence are the ability to manage appropriate policies and procedures designed to influence the patterns of employee departures from the workforce and the impact of diversity and inclusion on retirement benefit effectiveness. Confidence Level of Employers Effectively Managing Retirement Program Issues and Priority of Each Issue in 2011 Confidence Level Priority Level Retirement Program Issues Employees taking accountability for their future Employees retiring with sufficient retirement assets Not Confident Very Confident 6 High Priority 3 Medium Priority 2 Low Priority 1 1% 2% 10% 22% 28% 38% 51% 44% 5% 1% 3% 13% 23% 30% 30% 43% 47% 10% Competitive position of the plan 2% 3% 7% 17% 31% 40% 42% 47% 11% The aging of the workforce and the impact retirements could have on your business in the next 5 to 10 years Employees ability to make their retirement income last for the rest of their lifetime Employees ability to prepare for and manage the transition into retirement Appropriate policies and procedures designed to influence the patterns of employee departures from the workforce (e.g., phased retirement) The influence of employee diversity and inclusion on retirement benefit effectiveness 2% 5% 20% 26% 27% 20% 29% 40% 31% 3% 5% 19% 20% 29% 24% 24% 55% 21% 1% 8% 16% 31% 24% 20% 15% 61% 24% 7% 16% 24% 25% 15% 13% 9% 44% 47% 6% 13% 25% 27% 17% 12% 8% 36% 56% (n ranges from 152 to 177) 8 Aon Hewitt

11 Retirement Plan Initiatives In terms of retirement initiatives employers are likely to undertake in 2011, nearly 70% of respondents state that they are very or somewhat likely to assess the current retirement program design and 65% are likely to measure the competitive position of their retirement programs. Just under one-half (48%) of plan sponsors are likely to analyze the influence of their current and emerging demographics on retirement designs, policies and practices while 44% intend to project employee retirement income adequacy. These results indicate the continued focus and importance of retirement programs in Likely Initiatives for Retirement Plans in 2011 Very Likely Likely Unlikely Very Unlikely Assess your current retirement program design Measure the competitive position of the retirement program Measure/project the expected retirement income adequacy of your employee population Analyze the influence of your current and emerging demographics on retirement designs, policies and practices 39% 30% 17% 14% 29% 36% 15% 20% 9% 35% 28% 28% 8% 40% 28% 24% Evaluate phased retirement alternatives 8% 24% 36% 32% Collect data on employee preferences regarding the retirement program Look at differences in retirement behaviors and outcomes based on race and ethnicity 7% 18% 41% 34% 6% 9% 35% 50% (n ranges from 132 to 185) 6% 2011 Hot Topics in Retirement A Changing Horizon 9

12 Defined Contribution Plans Automatic Enrollment As defined contribution plans become the primary vehicle through which plan sponsors help employees accumulate resources for retirement, they ve seen dramatic changes in plan features. This section looks at current defined contribution offerings and where we might expect additional changes in Automatic enrollment has been one of the hottest retirement trends in the past few years with the percentage of plans using the feature growing from 24% in 2006 to 57% in While the rate of increase in automatic enrollment is slowing, we continue to see interest in adding the feature among employers that do not currently employ automatic enrollment; 36% said they re somewhat or very likely to add automatic enrollment to new hires in The concept of also defaulting existing nonparticipants has garnered significant interest as more employers acknowledge the large impact the structure could have on employee savings. However, the popularity of backsweeping remains low with only 15% of plans (that used this approach) enrolling nonparticipants in addition to new hires, by defaulting either one time or periodically. Further, only 18% claimed to be somewhat or very likely to do so in Automatic Enrollment for New Hires Usage and Plans for 2011 Already have 57% Current State Don t have 43% Very likely 13% Future Direction Among Sponsors Not Offering likely 23% unlikely 28% Very unlikely 36% (n=180) 10 Aon Hewitt

13 Respondents with either a closed or frozen defined benefit plan continue to be significantly more likely to have defined contribution plans with automatic enrollment (62%) than respondents with an open pension plan or no pension plan (48%). Automation appears to be a tool used to help offset the impact of a decrease in defined benefit plan value. Among the employers that are unlikely to offer automatic enrollment in 2011, 73% of respondents cited the increased cost of the employer match as a primary barrier, up from 59% last year. The next most common reason (cited by 48% of respondents) was the concern about employee reaction to having deductions automatically taken from their paycheck. The vast majority of plans that currently offer automatic enrollment have no planned changes with respect to this feature in Where changes are expected, it s mainly to enhance how participants are defaulted, including: to add contribution escalation to the automatic enrollment default (9% of plans), increase the default contribution rate under automatic enrollment (5% of plans), and increase the target rate under contribution escalation (4% of plans). Changes Planned With Respect to Automatic Enrollment in 2011 Changes Planned Percentage of Plans No changes planned 79% Add contribution escalation as default 9% Apply automatic enrollment to existing nonparticipants (i.e., back sweep either one time or periodically) Apply automatic enrollment to additional classifications of employees (e.g., union employees or additional business units) 7% 6% Increase default contribution rate 5% If already utilizing contribution escalation, escalate participants to a higher rate 4% Change default investment fund 2% Eliminate automatic enrollment 0% (n=114; multiple responses) 2011 Hot Topics in Retirement A Changing Horizon 11

14 Contribution Escalation Getting individuals to save more can have a significant impact on employees ability to accumulate sufficient retirement assets. By offering contribution escalation, 47% of plans provide an easy way to gradually increase contributions over time (up from 17% of plans in 2006). Among employers that do not currently have contribution escalation as a plan feature, 26% said they re somewhat or very likely to adopt the feature in Contribution Escalation Usage and Plans for 2011 Already have 47% Current State Don t have 53% Very likely 9% likely 17% Future Direction Among Sponsors Not Offering unlikely 38% Very unlikely 36% (n=179) 12 Aon Hewitt

15 Among plans with automatic enrollment, 55% of these plans also embed contribution escalation within automatic enrollment, up from 48% in When an organization does not tie contribution escalation to automatic enrollment, a preference for active contribution rate change is cited as the top reason. Barriers to Embedding Contribution Escalation Into Automatic Enrollment Barriers Percentage of Plans Preference for active contribution rate change within the plan Default rate under automatic enrollment is already substantial 52% 36% Cost of employer match 24% Concern over fiduciary exposure 20% Other (e.g., concern over employee dissatisfaction) 16% (n=37; multiple responses) 2011 Hot Topics in Retirement A Changing Horizon 13

16 Automatic Rebalancing Half of employers (49%) reported that they currently offer automatic rebalancing to plan participants. Of the remainder, one-third are somewhat or very likely to offer automatic rebalancing in The need for automatic rebalancing has received greater focus amid participant behavior and significant market volatility experienced in the past several years. Automatic Rebalancing Usage and Plans in 2011 Already have 49% Current State Don t have 51% Very likely 8% likely 25% Future Direction Among Sponsors Not Offering unlikely 34% Very unlikely 33% (n=180) 14 Aon Hewitt

17 Roth Adding Roth 401(k) to retirement plans is another strong trend emerging for Today, nearly one-third of plans offer the Roth 401(k) feature, up five percentage points from last year. Of those plan sponsors that do not yet offer the Roth 401(k), interest is increasing over prior years with 38% stating they re somewhat or very likely to add the feature in 2011 (compared to only 25% of sponsors in 2010). Roth Usage and Plans for 2011 Already have 34% Current State Don t have 66% Very likely 14% likely 24% Future Direction Among Sponsors Not Offering unlikely 22% Very unlikely 40% (n=179) 2011 Hot Topics in Retirement A Changing Horizon 15

18 While the barriers to adding the Roth 401(k) are clearly decreasing, the types of barriers remain the same. Among the employers that are unlikely to add a Roth 401(k) provision, 47% said that it must be clear that general Roth 401(k) usage will be significant enough to justify adding it to the plan and one-third of employers cited administrative complexity and/or cost of offering a Roth 401(k) as barriers. Requirements Needed to Offer Roth 401(k) Requirements Percentage of Plans It must be clear that general Roth 401(k) usage will be significant enough to justify adding it to the plan Nothing not interested in offering a Roth 401(k) at this time The administrative complexity and/or cost of offering a Roth 401(k) must be reduced There must be access to better tools and resources to effectively manage the complexity of Roth 401(k) communication 47% 40% 34% 27% Employees must ask for it 17% Rollovers from traditional 401(k) accounts must be allowed into Roth 401(k) accounts for eligible distributions 4% Other 1% (n=120; multiple responses) Contribution Structure Employer matching contributions have gained attention with the economic downturn as some employers reported temporary suspensions or reductions in their matching contributions. Twenty-three percent of plans either suspended or reduced company matching contributions in the past two years. The good news for many employees is that these changes appear to be temporary. Of those employers that reduced or suspended the match, more than half (55%) have already reinstated it in some form (either partially or fully reinstated), 18% plan to reinstate or increase it in 2011, another 11% plan to do so in 2012 or later, and the remainder plan to leave them as they re for now. 16 Aon Hewitt

19 Have you made any changes to the company matching contribution in the past two years? Changes Made Company matching contribution has not changed 70% Percentage of Plans Company matching contribution was suspended but has been reinstated in some form (either partially or fully reinstated) Company matching contribution was suspended and continues to be suspended 9% 7% Add or increase company matching contribution 7% Company matching contribution was reduced and continues at that lower level Company matching contribution was reduced but has been reinstated to the prior or higher level 3% 3% Other 1% (n=140) Investment Advisory Solutions and Features Many plans have significantly expanded the investment advisory support tools available to participants during the past year. Fifty-six percent of respondents currently offer participants access to online investment guidance while 36% offer managed accounts (up from 28%). Phone access and in-person access to advisory services also show large growth in prevalence from last year. Additionally, the vast majority (83%) of plans now include target-date portfolios to simplify participants investment decision making. In 2011, these trends are expected to escalate significantly. Among plans that do not currently provide online investment guidance, 47% of respondents are very or somewhat likely to offer it, while 36% are likely to offer online advice in Additionally, 30% noted that they were very or somewhat likely to offer managed accounts. Target-date portfolios also continue to grow among plans not currently offering this option Hot Topics in Retirement A Changing Horizon 17

20 Features to Help With Investment Selection Offerings Usage and Plans for 2011 Current State Likely to Offer in 2011 Among Those Plans That Do Not Currently Offer Investment Selection Offerings Already Offer Very Likely Likely Unlikely Very Unlikely Target-date/lifecycle funds (e.g., 2011, 2020) Online investment guidance (investment suggestions based on asset classes only) Target-risk/lifestyle funds (e.g., conservative) Online third-party investment advisory services 83% 16% 23% 23% 38% 56% 20% 27% 30% 23% 40% 2% 6% 21% 71% 36% 15% 21% 42% 22% Managed accounts 36% 17% 13% 26% 44% Phone access to third-party investment advisory services individual sessions with an advisor In-person third-party investment advisory services 35% 12% 22% 35% 31% 27% 6% 12% 36% 46% (n=181) 6% Where target-date portfolios are offered, three-quarters of the portfolios used off-the-shelf products, managed by a single manager, either using only proprietary fund vehicles (52%) or using multiple fund vehicles (proprietary and external fund managers). The number using off-the-shelf products is actually down from prior years. As plan sponsors seek out customization and flexibility, the number of plans that use custom investment mixes is on the rise 25% of plans offer a custom mix versus 14% last year. Digging deeper, we find that organizations are split when it comes to how they determine their glidepath. Nearly half of the funds in place employ a to retirement approach where the asset allocation is developed assuming the participant takes a distribution at retirement. The other half uses a through retirement approach where the asset allocation is developed assuming the participant continues to invest in the fund during retirement. 18 Aon Hewitt

21 Approach to Target-Date Investments Target-Date Investment Fund Structure Fund is managed by a single manager, using only proprietary fund vehicles (fund managed by the same manager) Target-date funds are customized for our plan (using core funds and/or customized glidepath structure) Fund is managed by a single manager, using multiple fund vehicles (proprietary and external fund managers) Investment Philosophy/Structure 52% 25% 23% Target-date funds are mainly actively managed 54% Target-date funds are mainly index/passively managed 45% Target-date funds include alternative investments (such as TIPS and REITs) 18% Glidepath Structure Glidepath employs a to retirement approach 53% Glidepath employs a through retirement approach 47% (n=165; multiple responses allowed for Investment Philosophy/Structure) Regarding the actions plan sponsors will take to target-date funds, 57% are very likely or somewhat likely to perform a comprehensive review of their fund manager and 51% will review the fund glidepath employed. Nearly 20% of sponsors are considering moving to customized solutions for their target-date funds, which is not surprising given how much these fund options have grown in importance and asset size. Likely Action to Target-Date Funds in 2011 Very Likely Likely Unlikely Very Unlikely Perform a comprehensive review of the fund manager Perform a comprehensive review of the fund glidepath Move to a customized solution for target-date funds (glidepath and/or underlying investments) 20% 37% 22% 21% 16% 35% 23% 26% 4% 14% 27% 55% (n ranges from 96 to 114) 6% 2011 Hot Topics in Retirement A Changing Horizon 19

22 Retirement Income Solutions/Annuities Retirement income solutions are a continued focus in the industry, as the needs of these services and tools are further highlighted while more institutional products and solutions come to market. Still most sponsors are assessing the landscape, but in 2011, some are planning to take action and begin implementing a solution rather than just taking a wait and see approach. More than a quarter (27%) of respondents already provide or promote some form of retirement income solutions, either inside or outside their plan. Facilitation of annuities outside the plan is offered by 13% of plans, while nearly one in five (19%) plans offer an in-plan solution today. Among those who do not offer any in-plan or out-of-plan retirement income solutions, 13% of employers reported that they re very likely to add at least one of these in-plan solutions during 2011, which is a significant increase over the 2010 responses. Whether or not organizations offer a retirement income solution option, they re trying to help employees understand what they can spend each year in retirement. Sixty-one percent of plans provide online modeling tools for that purpose, and of those that do not provide modeling tools today, 66% are very or somewhat likely to offer them this year. 20 Aon Hewitt

23 Retirement Income Solutions/ Annuities Usage and Plans for 2011 Current State Likely to Offer in 2011 Among Those Plans That Do Not Currently Offer Retirement Income Solution Already Offer Very Likely Likely Unlikely Very Unlikely Online modeling tools to help participants determine how much they can spend each year in retirement Facilitation of annuities outside the plan as options for plan distributions Within the plan; managed payout funds (funds with an allocation targeted at a specific payout percentage each year with no guarantees) Within the plan; annuity or insurance products (e.g., variable annuity features, guaranteed minimum withdrawal benefits, preservation of principal, minimum annuity payout, other) Within the plan; managed accounts with drawdown feature (managed account provider allocates participant assets as well as manages the amount paid each year from plan) 61% 29% 37% 18% 16% 13% 4% 16% 35% 45% 11% 3% 15% 47% 35% 10% 3% 13% 36% 48% 8% 8% 17% 43% 32% (n ranges from 175 to 178) 6% 2011 Hot Topics in Retirement A Changing Horizon 21

24 Employers that are unlikely to offer retirement income solutions/annuities in 2011 cited fiduciary, operational or administrative, or participant utilization and communication concerns as the top barriers to adding retirement income solutions. While many plans sponsors (35%) are waiting to see how the industry evolves, this response is down significantly from last year by ten percentage points. Barriers to Adding Retirement Solutions Barriers Percentage of Plans Not interested in offering insurance products at this time 66% Fiduciary concerns 47% Operational or administrative concerns 45% Participant utilization or communication concerns 43% Waiting to see the market evolve more 35% Portability concerns 27% Cost barriers 19% Preference for participants leaving the plan at termination 12% Other 4% (n=221; multiple responses) 22 Aon Hewitt

25 Investment Fund Offerings The majority of respondents expect to review defined contribution fund operations, including fund expenses and revenue sharing. Furthermore, about one-quarter of employers plan to change/alter their fund options to reduce overall fund costs, many noting a move to institutional vehicles (non-mutual funds). Half of employers intend to perform a comprehensive review of fund offerings. In general, respondents that offer only a defined contribution plan (no closed or open defined benefit option) are more likely to be taking action with respect to fund offerings than sponsors that also have a pension plan. Likely Action to Investment Fund Offerings in 2011 (n ranges from 103 to 139) Actions Related to Funds Review DC fund operations, including fund expenses and revenue sharing Perform a comprehensive review of fund offerings Update investment policy statement Change/alter fund options to reduce costs of funds Analyze fund options securities lending procedures Remove/replace funds that practice securities lending Change some or all funds from actively managed to index funds Implement a selfdirected brokerage window Add a money market fund Remove stable value fund Very Likely Likely Unlikely Very Unlikely 54% 31% 10% 5% 50% 27% 15% 8% 36% 32% 16% 16% 26% 27% 29% 18% 16% 24% 33% 27% 11% 20% 36% 33% 10% 20% 33% 37% 5% 7% 13% 75% 4% 6% 26% 64% 1% 6% 24% 69% 2011 Hot Topics in Retirement A Changing Horizon 23

26 Communication Initiatives in 2011 Many employers continue to use communication as an important tool to reach employees and influence their behavior. Communication initiatives on many topics are likely in 2011, including topics such as understanding and appreciation of the plan, plan participation, diversification, contribution levels and retirement income adequacy. Likely Defined Contribution Communication Initiatives in 2011 Initiatives General understanding and appreciation of plan Very Likely Likely Unlikely Very Unlikely 62% 25% 11% 2% Plan participation 46% 31% 15% 8% Diversification/ fund usage Participant contribution levels Retirement income adequacy Plan and/or fund expenses 401(k) decision making within a broader financial or total benefits context Retirement considerations and retirement process Broader financial education Rolling over versus cashing out of plan Loan-taking or in-service withdrawals 45% 39% 12% 4% 43% 34% 17% 6% 41% 39% 15% 5% 39% 36% 20% 5% 32% 38% 25% 5% 30% 36% 22% 12% 27% 31% 29% 13% 19% 25% 39% 17% 15% 24% 42% 19% (n ranges from 168 to 171) 24 Aon Hewitt

27 In terms of how plan sponsors are delivering these messages, electronic media are popular and effective ways to reach employees. Nearly 80% of respondents are using their intranet site, 67% are using online modeling tools and 64% are using blasts. In addition to online vehicles, popular communication approaches include targeted mailings (73%), featured articles in internal newsletters (47%) and in-person financial seminars (46%). Likely Communication and Education Vehicles to Be Used in 2011 Communication/Education Vehicles Percentage of Plans Articles posted to an intranet or benefits site 79% Targeted mailings (based on employee behaviors or situations) 73% Online modeling tools 67% correspondence 64% Features articles in internal newsletters 47% In-person financial seminars 46% Webinars 39% Financial planning sessions with independent thirdparty advisors 23% Podcasts 5% Other 3% (n=135) 2011 Hot Topics in Retirement A Changing Horizon 25

28 Managing Risk and Plan Expenses Respondents were asked about their likely actions related to managing the risk in their defined contribution plans. This has been a greater priority in recent years compared to historical levels. Nearly seven out of ten employers are very or somewhat likely to increase the amount of participant communication surrounding the investments and overall fund fees in their defined contribution plans. Six out of ten respondents are likely to benchmark plan administration and procedures to best practices, or review their plan governance structure. Nearly half are likely to conduct a compliance review or increase the frequency and/or intensity of the review of total plan cost. Additionally, about a quarter of employers are likely to hire a third party to monitor or review investment options, and a similar number report to increase the frequency and/or intensity of fund option monitoring. Likely Actions in 2011 to Manage Risk in Defined Contribution Plan (n ranges from 86 to 148) Actions Related to Risk Benchmark plan administration and procedures to best practices Increase the amount of participant communication surrounding the investments and plan and fund fees Review plan governance structure Perform a compliance review Increase the frequency and/or intensity of the review of total plan cost Hire a third party to monitor or review fund options Increase the frequency or intensity of fund monitoring Outsource fiduciary responsibility to a third party Very Likely Likely Unlikely Very Unlikely 22% 37% 26% 15% 21% 48% 19% 12% 16% 42% 22% 20% 16% 35% 26% 23% 12% 36% 27% 25% 11% 16% 15% 58% 9% 14% 35% 42% 1% 7% 24% 68% 26 Aon Hewitt

29 Plan expenses are an area where signification attention is likely to be focused in Nearly all employers are very or somewhat likely to review the plan s total plan cost (including fund fees, record keeping fees, trustee fees, etc.). Nearly 80% are also likely to communicate fees more clearly to participants, and nearly half are likely to hire a third party to benchmark or evaluate costs. In addition, sponsors are seeking lower-cost fund alternatives; 36% stated they re likely to lower costs by changing some or all funds from mutual funds to institutional funds. Likely Action With Respect to Plan Expenses in 2011 (n ranges from 108 to 153) Actions Related to Expenses Review the plan s total plan cost Communicate fees more clearly to participants Hire a third party to benchmark or evaluate costs Lower costs by changing some or all funds from mutual funds to institutional funds Look for ways to allow administrative fees to be assessed to participants in a more equitable manner Have participants share more plan expenses Very Likely Likely Unlikely Very Unlikely 55% 39% 3% 3% 33% 46% 13% 8% 18% 28% 19% 35% 15% 21% 30% 34% 8% 24% 21% 47% 5% 8% 30% 57% 2011 Hot Topics in Retirement A Changing Horizon 27

30 Defined Benefit Plans This section of the survey shows findings from respondents that provide any form of defined benefit plan (open, closed or frozen). Depending on the questions, results may be shown for a subset of these respondents, as indicated. Likely Changes in 2011 Defined benefit plan sponsors are likely to take one of two approaches with respect to their plans during They plan to either continue with their plans as is or stop future accruals in the plan by either freezing their plan or closing it to new entrants. Very few are planning to change their defined benefit formulas from one form to another. Three-quarters of employers participating in the survey that provide a defined benefit plan are very likely to stay the course in This result is consistent with 2010 and 2009 surveys. However, more employers are planning to close or freeze their defined benefit plans in the coming year versus Among the plans that have ongoing accruals for some or all employees, 16% say they re very likely to freeze accruals during In addition, among plans that are open to new hires, 13% are very likely to close participation to new employees. Likely Changes to Defined Benefit Plans in 2011 Likely Changes Nothing, continue with current plan as is If your plan has ongoing accruals: freeze accruals and cease benefit accruals for all/portion of participants If your plan is open to new entrants: close participation and no longer allow new employees to enter your defined benefit plan Change other aspects of the plan design, but continue to offer a defined benefit plan to current and future employees Terminate the plan and fully fund and remove all company liability through lump sum payout to participants or third party annuity purchase Very Likely Likely Unlikely Very Unlikely 75% 7% 8% 10% 16% 4% 25% 55% 13% 8% 21% 58% 5% 12% 10% 73% 2% 3% 6% 89% 28 Aon Hewitt

31 Likely Changes to Defined Benefit Plans in 2011 continued (n ranges from 48 to 105) Likely Changes Change to other plan design ( Fair Value, Stable Value, Retirement Shares, or other pension design) If you offer a traditional plan: change to a hybrid plan (cash balance or pension equity) Extend participation to new hires (if plan is closed) and/or restart benefit accruals (if plan is frozen) Very Likely Likely Unlikely Very Unlikely 2% 1% 9% 88% 0% 4% 9% 87% 0% 2% 1% 97% Among those planning to close participation, freeze accruals or terminate their defined benefit plans, two responses ranked equally high as the main reason for closing: freezing or terminating their plans. Two in five respondents equally ranked the funding cost and the volatility of funding as the main reason for wanting to close, freeze or terminate their pension plans during Among respondents that are unlikely to make changes to their ongoing defined benefit plans in 2011, the primary reason, reported by 15%, is the belief that their plans fit the needs and/or preferences of their workforce. Nearly 30% of respondents may evaluate the plan at a later date but have other priorities for Hot Topics in Retirement A Changing Horizon 29

32 Primary Reason Defined Benefit Employers Are Not Making Changes in 2011 Reason Changes Not Planned We may evaluate the plan at a later date but have other priorities for 2011 Percentage of Plans 29% Fits workforce needs and/or preferences 15% Plan is already frozen; no need to change 15% Plan is an efficient vehicle for delivering retirement benefits 11% Plan is necessary to remain competitive 8% We already made changes in recent years 8% Plan is over-funded and costs little to nothing; no reason to change PPA and recent court ruling validate hybrid plan designs 5% 0% Other 8% (n=84) Likely Actions Planned in 2011 RIsk Management The most likely actions anticipated for defined benefit plan sponsors during 2011 include managing risk, reanalyzing their investment policy, changing administration processes and dealing with an expected increase in retirement-eligible employees. Similar to the defined contribution responses, pension plan sponsors are focusing on risk-management strategies. Respondents are likely to perform funding and accounting projections, review funding strategy, and assess pension risks based on current strategies in These results are consistent with last year s survey. In addition, one-quarter of respondents are very likely to conduct an asset-liability study. Plan sponsors are less likely to adjust the equity exposure of the plan s investments and/or the overall asset allocation or adjust the plan s investments to better match the characteristics of the plan s liabilities. 30 Aon Hewitt

33 Likely Actions Sponsors Will Take in 2011 For All Defined Benefit Plans Actions Related to Risk Perform funding and accounting projections Very Likely Likely Unlikely Very Unlikely 56% 29% 3% 12% Review funding strategy 36% 36% 12% 16% Assess the risks (financial and nonfinancial) that the pension plan is running based on current strategies Conduct an asset-liability study Adjust equity exposure and/or overall asset allocation Adjust plan investments to better match the characteristics of the plan s liabilities (e.g., Liability- Driven Investing, or LDI) Purchase annuities for retirees Allow in-service distributions as early as age 62 as permitted by the PPA Add or liberalize a lump-sum option Transfer the plan (both assets and liabilities) to an outside party to reduce risk exposure Transfer excess pension assets into a health benefits account under Code section % 37% 9% 21% 26% 31% 17% 26% 21% 34% 19% 26% 17% 35% 22% 26% 2% 4% 12% 82% 1% 7% 18% 74% 0% 7% 13% 80% 0% 2% 12% 86% 0% 1% 8% 91% (n ranges from 88 to 109) 2011 Hot Topics in Retirement A Changing Horizon 31

34 Risks on which respondents place a high priority tend to be the risks respondents are most confident they re managing effectively. Those high-priority items are investment risk, interest rate risk, compliance risk and fiduciary risk. Respondents assign a low priority and are least confident in their ability to manage longevity risk and demographic risk. Confidence Level of Employers Effectively Managing Risks in Defined Benefit Plans and Priorities Confidence Level Priority Level Risk Management Topic Not Confident Very Confident 6 High Priority 3 Medium Priority 2 Investment risk 1% 0% 2% 8% 27% 62% 72% 23% 5% Interest rate risk 0% 0% 3% 13% 34% 50% 52% 40% 8% Compliance risk 1% 0% 4% 9% 36% 50% 45% 38% 17% Fiduciary risk 0% 1% 3% 10% 36% 50% 44% 45% 11% Diversification risk 0% 0% 5% 7% 29% 59% 40% 47% 13% Litigation risk 0% 0% 10% 13% 36% 41% 25% 37% 38% Low Priority 1 Plan design risk (aspects of the plan design, such as lump sums or final average pay provisions) 1% 2% 3% 14% 30% 50% 16% 42% 42% Longevity risk 2% 2% 7% 28% 29% 32% 8% 54% 38% Demographic risk (changes in participant demographics, such as retirement patterns) 1% 3% 11% 21% 33% 31% 7% 50% 43% (n ranges from 102 to 106) 32 Aon Hewitt

35 Investment Policy Twenty-seven percent of employers plan to change their pension plan investment policy in 2011 to reduce potential volatility in the future, down from 30% in the last survey. Plans to Change Pension Plan Investment Policy in 2011 Yes 27% No 73% (n=113) Dealing with Increase in Retirement-Eligibles Many defined benefit plan sponsors (28%) indicate they re well equipped to deal with expected demographic changes or that they do not anticipate any demographic changes to impact their plans (27%). However, one in four defined benefit plan sponsors are very likely to increase communication with plan participants as they approach retirement, especially regarding the retirement process. One in five also intend to increase the level of automation, self-service and/or Web access to pension plan participants Hot Topics in Retirement A Changing Horizon 33

36 Action plan to deal with increase in retirement-eligible participants in 2011 (n ranges from 89 to 100) Actions Nothing; we are well equipped to deal with the demographic changes Nothing; we do not anticipate any demographic changes impacting our plan Increasing communication about the retirement process Increasing the level of automation, self-service and/or Web access to pension plan participants Outsourcing additional services to an outside party Very Likely Likely Unlikely Very Unlikely 28% 30% 13% 28% 27% 29% 16% 28% 26% 36% 20% 18% 22% 26% 18% 34% 8% 14% 15% 63% Pension Calculation Administration Nearly 60% of plans have their calculations fully outsourced, another 28% use a co-sourced solution and 14% are performed in-house. Pension Plan Calculations Fully Outsourced, Co-Sourced, or Performed In-House In-House 14% Co-Sourced 28% Out-Sourced 58% 34 Aon Hewitt

37 Retiree Medical Plans This section examines employers likely changes to retiree medical plans in Types of Plans As noted earlier, 69% of organizations indicated they had some form of retiree medical benefits. Yet these employers have various types of benefits some access to medical coverage, some offering a retiree medical subsidy, some offering both. Plus, the coverage levels can vary depending on retirement date or hire date with current retirees being far more likely to have subsidized coverage (or any coverage at all) than new hires. Among those employers that offer any retiree medical coverage, we find that access to coverage is much more common than a subsidy for retiree medical. For current retirees, 94% offer access to retiree medical while only 78% of organizations provide a subsidy for retiree medical. These numbers decrease substantially when you look at new hires, with only 70% of employers providing access to coverage and only 32% offering a retiree medical subsidy. Type of Retiree Medical Coverage Offered in 2011 Among Those Providing Postretirement Coverage Type of Coverage Subsidized and uncapped through a company-sponsored group program Subsidized and capped through a company-sponsored group program Subsidized to some extent but without access to company-sponsored program Access-only through a companysponsored group program No retiree medical subsidy or access Offer subsidy for retiree medical coverage Offer access to retiree medical coverage Current Retirees Current Actives New Hires 26% 21% 17% 46% 38% 15% 6% 2% 0% 22% 28% 38% 0% 10% 30% 78% 61% 32% 94% 87% 70% (n=110) (n=107) (n=94) 2011 Hot Topics in Retirement A Changing Horizon 35