The Benefits of Automatic Enrollment Presented By: Terry Smith CPC, QPA, QKA Assistant Vice President, Account Manager Amanda Wielk CEBS Assistant Vice President, Account Manager
The information contained in this presentation is provided for informational purposes only. Neither USI nor its affiliates and/or employees/agents/registered representatives offer legal or tax advice. For more information or if you have questions, please contact your USI representative. 2of 25
Today s Agenda What is Automatic Enrollment? Types of Automatic Enrollment Arrangements Qualified Default Investment Alternatives (QDIA) Behavioral Finance Concepts 3of 25
What is Automatic Enrollment? Feature available in 401(k), 403(b) or governmental 457(b) plans Opt out, rather than opt in Pension Protection Act of 2006 (PPA) set the framework in place Final Regulations issued in 2009 4of 25
Current trends 401(k) Plans 47.2% of all plans in 2013* Up from 38.4% in 2009* 403(b) Plans 16% of plans in 2013* Up from 11.5% in 2009* Governmental 457(b) Utilization limited *Profit Sharing Council of America Annual Surveys 2009, 2013. 5of 25
Types of Automatic Enrollment Arrangements 6of 25
Automatic Contribution Arrangement (ACA) Provision to increase employee participation Set deferral percentage applies to newly eligible employees Opt-out period Notice requirement Reasonable period prior to eligibility bl and each plan year Default investment Qualified Default Investment Alternative (QDIA) recommended 7of 25
Eligible Automatic Contribution Arrangement (EACA) Similar to ACA Set deferral percentage Default investment (QDIA recommended) Notice requirement Extension of time to distribute excess amounts from non-discrimination test failures Typically applies to all eligible employees Must be in effect for the full Plan Year 8of 25
Qualified Automatic Contribution Arrangement (QACA) Automatic enrollment starts at not less than 3% Scheduled deferral percentage increases Increases to at least 6%, but not more than 10% Deferral can start at 6% to avoid auto-escalation Default investment (QDIA recommended) Safe harbor plan design ADP and Top-Heavy test exemption Required employer contribution Must be in effect for the full Plan Year Notice requirement 9of 25
QACA Safe Harbor Requirements Employer Contribution Contribution Type Non Elective Basic Match Enhanced Match 3% of pay 100% of the first 1% of pay plus 50% of the next 4% of pay Must be at least as generous as Basic formula Vesting 100% after 2 years 100% after 2 years 100% after 2 years Allocation Requirement* Employees eligible to participate Participants who actually defer Participants who actually defer Withdrawal Availability Not available for hardship or inservice withdrawals before age 59 1/2 Not available for hardship or in service withdrawals before age 59 1/2 before age 59 1/2 age 59 1/2 age 59 1/2 Not available for hardship or in service withdrawals before age 59 1/2 *Option to exclude those who have not attained age 21 and completed 1 year of service. 10 of 25
Why Offer Automatic Enrollment? Increase participation rates Help employees save for retirement Improve non-discrimination test results Eliminate certain non-discrimination tests (QACA) Extend correction period for ADP/ACP tests (EACA) 11 of 25
Qualified Default Investment Alternatives (QDIA) 12 of 25
Qualified Default Investment Alternatives (QDIA) Default investment for participants who do not make an affirmative investment election Provides fiduciary protection for plan sponsors Capable of meeting a worker s long-term retirement savings needs 13 of 25
Common Types of QDIA Product with a mix of investments t taking into account characteristics of the group of employees as a whole, rather than each individual Example: a balanced fund Product with a mix of investments that takes into account the individual s age or retirement date Example: a target date retirement fund Investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual s d age or retirement date Example: a professionally managed account, such as Managed by Morningstar SM* *Morningstar Retirement Manager is an investment advisory service offered by Morningstar Associates, a registered investment advisor. Morningstar Associates is not affiliated with USI Consulting Group or any of its affiliates. Morningstar Associates does not provide any form of compensation to any affiliate of USI Consulting Group in relation to this service. 14 of 25
Key Requirements for QDIA Participants and beneficiaries must be given opportunity to provide investment direction Initial and annual participant i t notices Investment prospectuses provided Plan must offer a broad range of investment alternatives as defined under ERISA 404(c) 15 of 25
Behavioral Finance and Automatic Enrollment 16 of 25
Defined Contribution Plan Challenges Employees are not saving enough and they aren t investing wisely Plan sponsors struggle to get employees to participate even with a matching contribution and investment education meetings Experts estimate that the additional cost to employers is between $10,000 and $50,000 per year, per employee, for every year that participants delay their retirement* * Impact of Employee Financial Stress on Health Care Costs, Financial Finesse Reports, 2011. 17 of 25
Behavioral Biases Revealed Most common behavioral biases in retirement plans: Status quo bias* the tendency to like things to stay relatively the same Present bias** asserts most individuals place a greater value on a benefit received in the present than the same benefit received at some point in the future Loss aversion*** the tendency to strongly prefer avoiding losses over acquiring gains Auto enrollment and QDIA are solutions that target these biases * William Samuelson and Richard Zeckhauser, Status Quo Bias in Decision Making, Journal of Risk and Uncertainty, vol 1, pp 7 59(1988). ** Shlomo Benartzi and Roger Lewin. 2012. Save More Tomorrow, Practical Behavioral Finance solutions to improve 401(k) plans, pp 104 105. New York: Penguin. ***Daniel Kahneman and Amos Tversky, Prospect Theory: An Analysis of Decisions Under Risk, Econometrica, vol 47, no. 2, pp 263 291 (1979). 18 of 25
Opt-in or Opt-out? The graph below shows the percentage of people in a country who are organ donors. Can you guess which countries operate opt-in policies for organ donation and which operate opt-out policies? Source: Johnson, Eric J. and Daniel Goldstein. 2003. Do Defaults Save Lives? Science 302: 1338 1339. 19 of 25
Opt-in or Opt-out? (continued) The graph below colors countries with an opt-in policy red and countries with an opt-out policy green. Source: Johnson, Eric J. and Daniel Goldstein. 2003. Do Defaults Save Lives? Science 302: 1338 1339. 20 of 25
Similar Behaviors for Plan Participants Employees view company management as financially sophisticated More likely to accept the default deferral percentage Accepting the default option is easier Status quo is used to the employee benefit Helping prepare them for their financial future 21 of 25
Automatic Enrollment and Retirement Readiness Studies show contribution rates should be 12-15%* Many participants unlikely to actively change their deferral rate (present and status quo biases) Consider the outcome when selecting a default rate Plans with a 6% default deferral rate have a 93% participation i rate** Higher default rates do not increase opt-out rates*** * Prudential, Overcoming ParticipantInertia Inertia, 2013 ** PlanSponsor Defined Contribution survey, 2012 *** Choi, James J., David Laibson, Brigitte C. Madrian, and Andrew Metrick. Saving for Retirement on the Path of Least Resistance, July 19, 2004. 22 of 25
Summary Next Steps Identify which plan design features would benefit you and your employees Speak with your USICG Account Manager or Representative for more information Develop an appropriate timeframe for implementation 23 of 25
Questions? If you have any additional questions, please direct them to your USI Consulting Group Account Manager or representative or by email to Information@usicg.com. com Speaker s notes used during the webcast are not included with this handout. 24 of 25
Next Benefits in Focus Webcast: Fiduciary i Basics for Retirement Plan Fiduciaries i i Wednesday, August 20, 2014 2 p.m. ET 25 of 25