Prudential Retirement s Fifth Annual Workplace Report on Retirement Planning Quantitative research with America s youngest and oldest workers to test attitudes about the new auto-pilot retirement plans. October 2006
Table of Contents Page 1. Background and Objectives 3 2. Methodology 4 3. Executive Summary 5 4. Detailed Findings 7 4.1 Preliminary Issues 8 4.2 Auto-Feature Reaction 10 4.3 Recommendations 16 4.4 Gender Differences 17 Page 2
1. Research Background Background As a leading provider of retirement-plan administration, investments, and services, Prudential Retirement is keenly interested in monitoring trends/attitudes among U.S. workers about retirement-planning issues and workplace savings. - In fact, Prudential Retirement has sponsored a series of Workplace Report surveys to track and uncover trends and gain market insight into topics of contemporary interest. - This year s study is the fifth annual Workplace Report on Retirement Planning. We make special mention of the fact that new pension legislation, the Pension Protection Act (PPA), was signed into law in August by President Bush, an act that contains safe harbor provisions for two of the five auto-pilot features that we test with this survey. As a result, we believe this is the first quantitative research into the attitudes of American workers toward those, and other, so-call auto-pilot retirement-plan features, following passage of the PPA. Business Objective As interest grows in innovative ways to make workplace savings plans more effective, Prudential Retirement is interested in better understanding receptivity to so-called auto-pilot plan features and whether the receptivity might differ based on generational differences. The auto-pilot features are all related to defined contribution (DC) retirement plans like 401(k), 403b, 457, etc. The five components we tested were 1) automatic enrollment, 2) automatic contributions, 3) automatic contribution escalation over time, 4) automatic asset allocation, and 5) automatic default into a lifetime income annuity upon retirement. Research Objectives The objective of this research was to test five specific components of the new auto-pilot retirement plans through a market sample split by age. Some retirement confidence questions were also built in for interest and cross-check. An opportunity to provide open-ended comments was also included to allow our youngest and oldest worker cohorts to provide additional thoughts. Page 3
2. Research Methodology Methodology As with previous Workplace Reports, this study was designed as an online, quantitative test to gain broad reaction from a representative sample of workers. The survey criteria included: Age segments: Youngest = 21 to 30, oldest = 55 to 64. Include a gender mix sufficient for comparative purposes. Employer must offer a workplace savings plan option (401k, 403b, 457). Current plan participation is a preference, but not a requirement as the opinions of nonparticipants are of interest as well. An online panel study was designed and fielded in late August/early September with a target of 600 completions, split 300 to each age segment. The study was designed primarily as a quantitative poll to measure receptivity to autopilot programs among younger and older workers with an eye to differences which may exist between the segments. The study was fielded by an independent market research vendor, hired by Prudential Financial. The survey was designed in partnership between GMR, the client team and vendor. Page 4
3. Executive Summary of Key Findings In a surprising contrast to our experience with older workers (who have reluctantly accepted DC retirement plans), today s youngest workers appear eager to embrace a radical redesign of U.S. retirement plans. 66% of young workers said they would be grateful or optimistic if they were automatically enrolled in a new workplace retirement plan, compared with only 21% who said they would be apprehensive and 7% who said they would be resentful. When asked about a new plan that included all auto-pilot components, 57% of young workers said they would be feeling very good or no doubt about it, compared with 30% who said they would be feeling concerned and who said no way. Overall, regardless of which auto-pilot component we tested, more young workers than not preferred an auto-pilot approach rather than the more traditional do-it-yourself style of retirement plan. When we asked oldest workers whether they knowing what you know today would recommend auto-pilot retirement plans to young workers, they overwhelmingly said yes! Fully three-quarters (76%) of older workers recommend the entire auto-pilot package versus fewer than one-fifth (19%) who recommend the traditional do-it-yourself approach. Each of the five individual auto-pilot components is recommended over the traditional option by a minimum of 70% of older workers and an average of 75%, versus an average of just 19% recommending that young workers use a do-it-yourself approach. Page 5
Executive Summary (Continued) Preference for auto-pilot retirement plans versus the traditional do-it-yourself approach was consistent among both our oldest and our youngest workers. As one might expect, older workers who are generally facing shortfalls in their retirement savings seem more receptive to all five auto-pilot components than their younger counterparts, with an average Top 2 box score of 70%. Somewhat unexpectedly however, younger workers are generally quite receptive to the autopilot features over traditional do-it-yourself options. In all five cases, younger workers gave a Top 2 box majority (favorable response) to the auto-pilot option when it was compared to the traditional do-it-yourself approach. On a somewhat wistful note, America s oldest workers now say for each auto-pilot feature tested they wish they d had it when they started working 30 years ago, by large majorities. - 75% say they would be optimistic / grateful if they d had automatic enrollment. - 76% say they would be optimistic / grateful if their contributions had been set at enrollment.. - 6 say they would be optimistic / grateful if their plan contributions had been automatically increased over time. - 60% say they would be optimistic / grateful if their plan investments had been automatically rebalanced for them, based on age and risk-tolerance. - 70% say they would be optimistic / grateful if they had been automatically enrolled in a plan that provided guaranteed, lifelong monthly income upon retirement. - 70% say they would be optimistic / grateful if they d had a retirement plan with all five autopilot components. Page 6
Executive Summary (continued) Plan participants are more confident about retirement than non-participants. They are 2 ½ times as likely to say they are ahead or right on schedule in their retirement savings than non-participants (40% vs. 14%). They are twice as likely to say they expect to have enough savings to quit work at the age they hoped rather than having to work longer to better afford retirement than non-participants (31% vs. 14%). However, the majority of participants and non-participants alike score on the negative side of these confidence questions, a result confirming numerous other retirement surveys. The study looked for meaningful differences in the data pattern by a number of variables, and an interesting gender difference is present. Women are more receptive to auto-pilot features than their male counterparts regardless of age. Women are more likely than men to pick the auto-pilot approach over the traditional approach as the one likely to provide the greatest savings at retirement. Women have greater apprehension over their ability to retire when they want with a comfortable lifestyle than men do. Older workers advice to younger workers on retirement savings includes these themes: Start: Just do it. Pay yourself first. That is the advice my dad gave me, and he was right. Workplace plans: As soon as a retirement plan is offered to you start to invest. Don t wait. Payroll deduction: Any direct deposit savings is a must even if small. Be smart: Get into a 401k plan and stay there get professional help Embrace auto-pilot features if offered: Try the auto pilot retirement plan because you can always opt out. Interestingly, 283 out of 300 older survey respondent took the time to offer an optional comment for younger workers about saving for retirement, fully 93%! Page 7
Executive Summary (continued) When given the opportunity to offer one suggestion to retirement-plan sponsors, younger workers responses reveal a deep-seated need for help and therefore not surprisingly a willingness to consider auto-pilot plans: Help me: Better explain the process, how it works, why it s important, and how I will benefit. Offer a plan: Offer good 401k plans and financial advisors Make it easy: Take a mandatory retirement amount from every check and add it to a 401k Match me: Matching is probably the best way to help employees retire successfully AND motivate them to help themselves retire successfully. Auto-pilot: The auto-pilot plan would be great. In a finding that is not necessarily a surprise but troubling nonetheless, oldest workers at a ratio of greater than 2 to 1 now say that they will not have enough savings to quit work at the age I had hoped and will have to work longer than planned. Survey Results In a Nutshell America s oldest workers wish they d been forced to save for retirement when they started working 30 years ago, especially since two-thirds now say they will not be able to retire when planned. These oldest workers also strongly recommend automatic retirementsavings plans for today s youngest workers, who appear ready to embrace this radical redesign of defined contribution retirement programs. This suggests strong popular support for the new Pension Protection Act, signed by President Bush in August, which contained provisions to permit employers to add auto-pilot features to their plans. Important note: While still not widespread, today s DC retirement plans can be designed to include two of the five autopilot components that we tested: automatic enrollment and an automatic minimum contribution amount. In such plans and in future plans that would contain the other autopilot components the participant always has the ability to either opt out of the automatic action or to change it. For example, an employee might be automatically enrolled in his/her workplace retirement plan, but he/she is permitted to refuse to participate. Similarly, if a plan automatically set the minimum contribution level at 3% of compensation, the worker could raise or lower it, as he/she sees fit. In this survey, we explained that this opt out feature would be a part of each component, so the respondents were well aware that they could change or refuse any automatic component. Page 8
4. Detailed Findings 4.1 Preliminary Issues Retirement confidence issues: plan participants vs. non-participants Workplace savings plan importance in paying for retirement: older vs. younger workers 4.2 Auto-Feature Reaction oldest vs. youngest workers Enrollment feature Minimum contribution feature Contribution escalation feature Asset allocation feature Retirement income feature Total package 4.3 Recommendations Oldest workers recommendation of auto-pilot features versus do-it-yourself approach to younger workers 4.4 Gender Differences Auto-pilot feature preference by gender Retirement comfort & auto-pilot confidence by gender Page 9
4.1 Preliminary Issues Retirement confidence issues: plan participants vs. non-participants 100% 75% How would you assess your retirement savings progress so far? (All workers) 0% 7% 14% 33% 22% Will you have enough savings to quit work at the age hoped, OR will you need to work longer to better afford retirement? (Older workers) 100% 14% 31% 75% 50% 25% 3 27% 37% 50% 25% 69% 86% 15% 0% Plan participants (N=482) Non-participants (N=118) Ahead of schedule Right on schedule Don't know Somewhat behind schedule Quite far behind schedule 0% Plan participants Non-participants (N=256) (N=44) Quit work when planned Have to work longer Plan participants (among all workers) are more likely to be on schedule with their retirement savings and (asked only of older workers) more confident they can quit work when planned than non-participants by large margins (26% & 17%). Page 10
4.1 Preliminary Issues Workplace savings plan importance in paying for retirement: older vs. younger workers Older Workers (N=300) Younger Workers (N=300) Social Security 85% Savings from a workplace plan 94% Savings from a workplace plan 86% Personal savings 91% Personal savings 75% Pension from an employer 55% Pension from an employer 64% Social Security 44% 0% 25% 50% 75% 100% % "Very/somewhat important" 0% 25% 50% 75% 100% % "Very/somewhat important" Younger workers expect their workplace savings plan to be very important in paying for their retirement - #1 over even personal savings. Note the older workers apparent reliance on Social Security. Page 11
4.2 Auto Feature Reaction Older vs. younger worker reaction to automatic enrollment into a retirement-savings plan Resentful Apprehensive Don't know Optimistic Grateful Older workers - "Given your experience, how would you feel today if - over the last 30 years - the organizations you had worked for had automatically enrolled you in your workplace retirement program, rather than leaving it up to you?" 6% 11% 35% Top 2 box total = 75% 40% Younger workers - "If you changed jobs today and your new workplace retirement savings plan automatically enrolled you, how would you feel about it over the more traditional do-it-yourself approach?" 7% 21% 6% 41% Top 2 box total = 66% 25% 0% 25% 50% 75% 100% Automatic enrollment is well viewed by older and younger workers alike. Older workers are 4+:1 more likely to feel grateful/optimistic vs. apprehensive/resentful looking retrospectively. Younger workers are 2:1 looking prospectively. Page 12
4.2 Auto Feature Reaction Older vs. younger worker reaction to an automatic minimum contribution amount Resentful Apprehensive Don't know Optimistic Grateful Older workers - "Knowing what you know now, how would you feel today if - over the last 30 years - the organizations you'd worked for had used the auto pilot approach to set a minimum contribution level, rather than leaving it up to you?" 7% 10% 7% 42% Top 2 box total = 76% 34% Younger workers - "If you changed jobs today and your new workplace retirement savings plan automatically set a minimum contribution level for you, how would you feel about it over the more traditional do-it-yourself approach?" 13% 27% 6% Top 2 box total = 54% 39% 15% 0% 25% 50% 75% 100% An automatic minimum contribution is also well viewed by older workers earning a 4+:1 ratio of grateful/optimistic vs. apprehensive/resentful. Younger workers are more hesitant with a 5:4 ratio looking prospectively. Page 13
4.2 Auto Feature Reaction Older vs. younger worker reaction to automatic increases in contribution amounts Resentful Apprehensive Don't know Optimistic Grateful Older workers - "Given your experience, how would you feel today if - over the last 30 years - the organizations you'd worked for had used the auto pilot approach to gradually increase your contribution level, rather than leaving it up to you?" 9% 15% 36% Top 2 box total = 6 32% Younger workers - "If you changed jobs today and your new workplace retirement savings plan automatically increased your contribution level on a gradual basis, how would you feel about it over the more traditional do-ityourself approach?" 15% 26% Top 2 box total = 51% 34% 17% 0% 25% 50% 75% 100% Majorities of both older and younger workers give the contribution escalation feature grateful/optimistic scores with older workers doing so by nearly a 3:1 margin and younger at 5:4. Page 14
4.2 Auto Feature Reaction Older vs. younger worker reaction to automatic asset re-allocation feature Over my dead body Hold on there Don't know Give it a shot Go for it Older workers - "Given your experience, how would you feel today if-over the last 30 years-the organizations you'd worked for had used the auto pilot approach to periodically adjust your asset allocation for risk/return, rather than leaving it up to you?" 9% 25% 6% 35% Top 2 box total = 60% 25% Younger workers - "If you changed jobs today and your new workplace retirement savings plan included an automatic asset allocation feature, how would you feel about it over the more traditional do-it-yourself approach?" 35% Top 2 box total = 49% 37% 12% 0% 25% 50% 75% 100% The asset allocation feature scores the weakest of the five feature set for both age groups. However, the ratios are still positive at 2+:1 for older workers and 49%/43% for younger. This feature seems to be the most threatening to respondents perhaps because of the wording vs. a softer sounding automatic rebalancing. Page 15
4.2 Auto Feature Reaction Older vs. younger worker reaction to default into a retirement income program upon retirement Resentful Apprehensive Don't know Optimistic Grateful Older workers - "Knowing what you know now, how would you feel today if...so that when you retire your workplace savings accounts would automatically provide guaranteed, lifelong, monthly income for you versus having to establish that option yourself...?" 15% 7% 3 Top 2 box total = 70% 32% Younger workers - "If you changed jobs today and your new workplace retirement savings plan automatically provided you a guaranteed monthly income at retirement, how would you feel about it over the more traditional do-it-yourself approach?" 7% 20% Top 2 box total = 65% 47% 1 0% 25% 50% 75% 100% In perhaps the biggest surprise of the survey, automatically defaulting into a guaranteed lifetime income product upon retirement was viewed quite positively by older and younger workers alike, with 3:1 and 2.5:1 ratios respectively. Page 16
4.2 Auto Feature Reaction Older vs. younger worker reaction to entire package of autopilot components No way Feeling concerned Don't know Feeling very good No doubt about it Older workers - "Given your experience, how would you feel today if - over the last 30 years - the organizations you'd worked for had used the entire package of autp-pilot features to guide your retirement savings in the plans you've participated in?" 7% 19% 5% 39% Top 2 box total = 70% 31% Younger workers - "If you changed jobs today and your new workplace retirement savings plan used the entire package of autopilot featues instead of the traditional do-it-yourself option, how would you feel?" 30% 6% Top 2 box total = 57% 50% 7% 0% 25% 50% 75% 100% Response to the total package of auto pilot features over the traditional do-it-yourself approach is strong, but lags the levels of the most attractive features such as auto enrollment and auto contribution. The likely rationale is that asset allocation feature dampened enthusiasm for the overall package by some meaningful margin. Page 17
4.3 Recommendations Older workers recommendation to younger workers: autopilot features versus do-it it-yourself approach Strongly/somewhat recommend do-it-yourself approach Don't know Strongly/somewhat recommend auto approach "Automatic enrollment" 15% 5% 80% "Minimum contribution" 14% 6% 80% "Contribution escalation" 19% 6% 75% "Asset allocation" 24% 6% 70% "Retirement income" 21% 7% 72% "Total package of auto pilot features" 19% 5% 76% 0% 25% 50% 75% 100% Older workers recommend auto pilot features over the traditional do-it-yourself approach by very wide margins. (N=300) Page 18
4.4 Gender Differences Preference for autopilot feature, by gender top box score (most favorable) female vs. male Older Worker Score Comparison Female (N=128) Male (N=172) 60% 4 40% 20% 35% 37% 34% 33% 29% 30% 32% 32% 33% 22% 29% 0% Auto enroll Contribution Escalation Asset allocation Income stream Total package 60% Younger Worker Score Comparison Female (N= 157) Male (N=143) 40% 20% 29% 20% 15% 19% 15% 15% 15% 9% 20% 15% 6% 0% Auto enroll Contribution Escalation Asset allocation Income stream Total package Women more strongly favor auto pilot options in 9 of 12 comparisons. Page 19
4.4 Gender Differences Level of retirement comfort & auto-pilot confidence, by gender Confidence you can retire when you want with a comfortable lifestyle? (Younger workers) 100% 15% 29% Which approach will provide the most savings at retirement? (Younger workers) 100% 7% 16% 75% 75% 41% 51% 43% 50% 47% 50% 14% 1 25% 6% 13% 21% 25% 29% 20% 0% 6% 6% 0% 10% 3% Males Females Males Females Very confident Somewhat confident Don't know Not too confident Not at all confident Auto far superior Auto somewhat superior Don't know Do-it-yourself somewhat superior Do-it-yourself far superior Women are less confident about their ability to retire to a comfortable lifestyle than men and express greater confidence in the auto pilot approach to provide retirement savings over doing it themselves. Page 20