Above and Beyond The Latest in Investment Menu Innovations Moderator: Jayson Davidson, Hyas Group Speakers: Steve Toole, State of North Carolina Brendan Curran, State Street Global Advisors Order of the Day. I. What about Choice II. The North Carolina Case II. Impact of Behavioral Finance on Plan Design III. Conclusion and Questions 2 1
3 Steve Toole Executive Director, NC Retirement Systems 4 2
North Carolina Retirement Systems Nine Defined Benefit Systems 1,400 Employers 930,000 Members/Retirees $93 billion in assets Three Defined Contribution Plans 457 435 Employers, $1,306,693,771 assets, 53,080 participants 401(k) 1,036 Employers, $9,175,785,702 assets, 247,114 participants 403(b) 51 Employers, $11,271,356 assets, 1,186 participants NC ABLE Program 5 Current Fund Line-Up Tier 1 Target Date Funds Tier II A Passive Core Options Tier II B Active Core Options Tier III Specialty Options Stable Value Fund Galliard Stable Value Fixed Income Fund BlackRock Debt Index Fixed Income Fund JP Morgan Core Bond Prudential Core Plus Inflation Responsive Fund PIMCO IRMAF GoalMaker Large Cap Equity BlackRock Equity Index Large Cap Equity Small/Mid Cap Equity BlackRock Russell 2500 Index Small/Mid Cap Equity Global Equity Fund Wellington Global Opportunities Arrowstreet Global Equity ACWI International Equity BlackRock ACWI ex US Index International Equity Fund Ballie Gifford ACWI ex US Growth Mondrian ACWI ex US Value 6 3
Moving to All White Label Options From Mutual Funds to Customized Line-up 7 Moving to All White Label Options Participants and Assets 8 4
Issues, Risks, and Challenges Limited control and ability to affect change, make recommendations Higher fees, less participant money for retirement Investment options not customized with specific needs of NC participants in mind Not maximizing talents of our investment managers Not leveraging powerful relationship between DB and DC for opportunities to lower fees, generate economies of scale and share talents 9 Personal Communications from the Treasurer 10 5
Coverage in multiple participant communications 11 What Did We Achieve? Nimbleness increased internal control and transparency for decision-makers and participants Strengthened ability to successfully carry out fiduciary duties. Internal staff and consultant now share responsibilities on performance review, recommendations and monitoring of investment managers. Lowered fees Streamlined line-up bringing less complexity for participants in support of Retirement Readiness Customized line-up, which helped participants better diversify/weather the markets Increased use of GoalMaker, which supports retirement readiness 12 6
What Else Did We Achieve? Highlighted Transfer Benefit Option 867 participants $80.1 million Enhanced relationship with participants Vision of Board now captured for members Strengthened partnership with DB/DC Data Analytics through exchange of data Targeted educational/marketing outreach 13 Our focus since this change Extend opportunity for supplemental savings to NC public K-12 and Community Colleges: Launched NC 403(b) in 2014 NC Total Retirement Plan Rebranding in 2015 Bringing the DB/DC under single, branded tent Unbundled in 2016 More transparency to support fiduciary oversight Went from asset-based fees to per-participant fees 14 7
Our focus since this change NC 457, 401(k), and 403(b) consolidated to one recordkeeper Further Simplification in 2017 Simplifying the Fund Line-Up with Plan Design Changes Changes coming September, 29, 2017 15 What s Next? Glidepath: Focus on creating opportunities for continued relationship with retirees Continue to leverage DB relationships to lower fees and increase value ABS continues to be expanded In 2015 includes all supplemental plans Total Benefits Statement coming in 2018, supporting document to ABS 16 8
Lessons Learned Remove complexity, increase value Always push on fees Advocate for auto features Know your fiduciary obligations Keep effective documentation memorialize this important work Minutes Plan documents Communications with employers and employees Keep focus on what s best for participants 17 Innovation in Automobiles and Retirement Investing Brendan Curran, CFA 18 9
19 The Evolution of DC Plans Streamlined Investment Menu Unlimited Choice Set it and forget it (Target Date, Reenroll) RETIREMENT 30 mi 20 10
The Impact of Innovation on Conventional Wisdom 1998 Don t get into strangers cars Don t meet people from the internet 2017 Summon strangers from the internet to get into their cars How can we utilize innovation to improve outcomes while testing the bounds of conventional wisdom? 21 Uber Adopt Technology to Improve Engagement Self Driving Automate the Journey Align Choice with Values Electric Car 22 11
Adopt Technology to Improve Employee Engagement Increasing efficiency and transparency Uber gained popularity by improving connectivity between driver and passenger. Technology Uber 6.5% in drunk-driving crashes per month 674,000 in miles driven (27 trips around the world) 2055 Fund Current Balance: $12,000 Years Until Retirement: Monthly Payments: 40 $50 Retirement 1 Uber.com, Helping Cities, 2015 23 DC-4132 Adopt Technology to Improve Employee Engagement Where We are Today and Where the Industry is Moving Today Participants are accumulating balances but are not sure how those balances will convert to a monthly income in retirement. Future It will be important for employers to consider online access to tools and 401k statements that convert balances to monthly income amounts. Researchers have found that narrowing the goal from trying to save one large figure over a lifetime into smaller, incremental savings targets can make saving for retirement seem more achievable 1 Source: 1 Knoll, Melissa A.Z. The Role of Behavioral Economics and Behavioral Decision Making in Americans Retirement Savings Decisions. Social Security Bulletin, 2010. Aon Hewitt and the Federal Retirement Thrift Investment Board, 20132 24 12
Adopt Technology to Improve Engagement Self Driving Automate the Journey Align Choice with Values Electric Car 25 Automate the Journey Minimize the Opportunity for User Error Automation Self Driving Cars 90% in accidents 1 $190b in damages and health-costs annually 1 1 Wall Street Journal: Self Driving Cars Could Cut Down on Accidents, Study Says, 2015 2 ABC News Tampa, WAZE app to help ease Tampa area traffic congestion, 2016 Waze, a GPS phone app, is being used by the City of Tampa and Rio de Janeiro to decrease planning error when constructing new roadways 2 26 13
Automate the Journey Where We are Today and Where the Industry is Moving Today Participants are facing longer life expectancy and are left with the challenge of converting their DC savings to income through a self-managed drawdown. Future Participants will rely on their employers for a full life-cycle solution that addresses both savings and spending. 80% Express a guaranteed monthly payout benefit as a must have 67% Expect their employer to help them plan for retirement 53% Rank DC payments as a top 3 source of income in retirement Source: SSGA Biannual DC Investor Survey July 2013. Partnered with TRC Market Research, an independent marketing research firm located in suburban Philadelphia 20-minute online survey. Panel of 1,498 verified 401(k), 403(b), 457 and profit-sharing plan participants and retirees, age 40 to 70, who were actively engaged with their plans. 27 Automate the Journey Default Funds to Focus on Accumulation and Decumulation Key Principles Longevity risk is the key risk Simple for participants Seamless journey Cost must reflect value Begin journey to retirement by starting to save Prepare for retirement by introducing annuity component Retire and start spending your savings Enjoy the benefits of guaranteed income for life GUARANTEED INCOME The above is for illustrative purposes only. Source: State Street Global Advisors Defined Contribution 20 55 65* 80 Age 28 14
Uber Adopt Technology to Improve Engagement Self Driving Automate the Journey Electric Car Align Choice with Values Electric Car 29 Align Choice with Next Generation Values Value Electric Cars 45% 77% in carbon emissions by 2050 2 It costs $2 $4 to charge an electric car 2 Source: 1 Planned Giving Design Center, Why the $41 Trillion Wealth Transfer Estimate is Still Valid, 2011 2 NRDC.org, Study: Electric Vehicles Can Dramatically Reduce Carbon Pollution From Transportation, and Improve Air Quality, 2015 3 Morgan Stanley, Sustainable Signals: The Individual Investor Perspective, 2015 25% 20% 15% 10% 5% 0% Millennials are more likely to 3 22% 17% 12% Invest in companies targeting social/environmental goals Millennial investors Over the next 40 years, baby boomers will transfer $41 Trillion of assets to millennials 1 9% Invest in companies using high-quality ESG practices 15% 7% Exit an investment position due to objectionable activity Total individual investor population 30 15
Align Choice with Next Generation Values Where We are Today and Where the Industry is Moving Today Today s investments often overlook other factors important to the next generation like environment, social, and government impacts. Future Incorporate sustainability beliefs into the default by identifying factors that align with your participants ethos. Water Usage Carbon Footprint Gender Diversity Inclusion Source: State Street Global Advisors 31 Innovation Improves Outcomes Technology Automation Value After participants received monthly income estimates they 12% Increased contribution levels 1 29% Participation rates w/ Automatic enrollment: Participation rates w/ voluntary enrollment: 90% versus 63% Took action 1 77% of plan participants 53% agree that their employers should automatically enroll them 2 ESG is BIG. It accounts for over 25% of the world s professionally managed assets 4 think ESG factors are important for financial performance 3 of investment leaders 84% are satisfied with performance of their ESG investment strategy 3 Source: 1 Aon Hewitt and the Federal Retirement Thrift Investment Board, 2013. 2 Cerulli Reports, US Evolution of the Retirement Investor, 2017 3 This view is not a testimonial of satisfaction with our advisory services and should not be interpreted as a statement of experience or an endorsement by a client, but rather an opinion on ESG investing in general. Many of the survey respondents are not clients of SSGA. About this study: In December 2016 and January 2017, Longitude Research, in association with State Street Global Advisors (SSGA), surveyed senior executives with asset allocation responsibilities at 475 institutions. 4 GSIA, Global Sustainable Investment Review 2016. 16
Next Generation DC Checklist: How to stay on route. Adopt Technology to Improve Engagement Automate the Journey Provide online monthly income statements instead of standard account balance reporting Deliver online tools that allow participants to influence monthly income balance through choices like increased contribution, longer working years, or different investment options Reframe the opportunity from saving money to earning money (earning for your future self) Redesign default investment option to include income Make the transition from saving money to spending money automatic Align Choice with Values Consider evolving the investment menu to better align with your constituents ethos Explore opportunities to frame investment benefits and risk from an ESG perspective Source: State Street Global Advisors Takeaways: Removing complexity may increase value Consider auto features to promote participant behaviors Use technology to drive participant outcomes Innovate to improve CE Code: BLACK 34 17