SEBC Spring Annual Educa1on 2014 Conference DEFINED CONTRIBUTION PLANS OF THE FUTURE 2016 SEBC Annual Educa1on Conference May 19 10:30-11:30
Introduc1ons Moderator Burke Lofland Vice President, Consultant RelaFons Fidelity InsFtuFonal Asset Management Chris Burkhard Vice President Charles Schwab Cynthia O. Zaleta Principal Buck Consultants, A Xerox Company
AGENDA Plan Benefit Rewards Time for a change? RoboAdvising The changing face of investment advice What s Next?
Plan benefit rewards Time for a change? Cynthia O. Zaleta Principal Buck Consultants LLC, a Xerox Company
Plan Benefit Rewards Plan Design and Student Loan Debt Student loan debt is now the largest form of non-mortgage consumer debt in the U.S. with approximately 43 million borrowers and an average balance of approximately $26,700 1 Recently, several large employers with an eye to appealing to millennials have announced a new benefit to help with student loan debt repayments While millennials are saving for refrement at an earlier age, their saving rates are low Without the safety net of a DB benefit and Social Security in jeopardy, will millennials ever save enough to refre? 5 Proprietary-This publicafon is for informafon only and does not consftute legal advice; consult with legal, tax and other advisors before applying this informafon to your specific situafon. 1 Student Loan Borrowing and Repayment Trends, 2015, Federal Reserve Bank of New York
Plan Benefit Rewards Plan Design and Student Loan Debt While student loan repayment programs may be appealing, saving for refrement must also be a priority Cash payments are taxable to the employee and the real value of the loan repayment is immediately diminished With this, many DC sponsors are reconsidering the use of matching contribufons as a preferred method for awarding employer benefits Reward dollars can be used for student loan repayments as well as other financial wellness acfons Abendance at financial seminars PreparaFon of will Credit card debt repayment Enrolling in certain plan features Consider what benefits might make the biggest impact Study the effect on nondiscrimina1on tes1ng 6 Proprietary-This publicafon is for informafon only and does not consftute legal advice; consult with legal, tax and other advisors before applying this informafon to your specific situafon.
The changing face of investment advice Chris Burkhard Vice President, Sales & Consultant Relations Schwab Retirement Plan Services, Inc.
There s a change sweeping all industries and all areas of our lives.
1.8 trillion www.statista.com/statistics/271450/monthly-unique-visitors-to-us-retail-websites as of August 2015
We make decisions differently now.
A personalized experience
Important trends are reshaping investment advice Changing investor demands Evolving technology Rapid Industry Growth
The emergence of robo-advisors
Exchange Traded Funds $2 trillion in exchangetraded funds* Exchange-traded fund flows have exceeded actively managed mutual fund flows in five of the past seven years 2008, 2011, 2012, 2013, and 2014.* Total assets in exchange-traded funds nearly equal assets in index mutual funds as of yearend 2014.* <icon> Exchange-traded fund flow in self-directed <text> brokerage accounts (42%) exceeded equity and mutual fund flows in Q4 of 2015.** *Data as of December 31, 2014. 2015 Investment Company Institute Fact Book, Investment Company Institute, 2014. **Net flow percentages are calculated by adding purchases and sales amounts within each respective asset class and dividing by the total net flow over the period. Figures are based on all PCRA participants with a minimum balance of $5,000 in their PCRA account (approximately 125,000 accounts). All data is for informational purposes only. Schwab does not guarantee the accuracy, timeliness, or completeness of the information. SDBA Indicator Q4 2015 Report. For the full report, visit schwab.com/retirementplanservices.
Digital advice is growing rapidly Projected US Robo Advisors AUM 2.5 CAGR: 68% 2 $ in trillions 1.5 1 0.5 0 1.1 0.7 0.5 1.1 0.8 0.4 0.2 0.4 0.1 0.1 2016 2017 2018 2019 2020 Sources:. The Coming Waves of Robo Adoption, AT Kearney, June 8, 2015, and KPMG Robo Advising, 2016 CAGR: Compound Annual Growth Rate From Non Invested Assets From Invested Assets 1
Underpinning the projected growth of digital advice is a broad appeal Consumer likelihood to use robo-advice 33% 31% 31% Not Likely Somewhat Likely Likely + 36% Sources: A.T.Kearney 2015 Robo-Advisory Services Study of 4000 banked consumers. Likely+ is Likely, Very Likely or Extremely Likely. 1
Most consumers will demand both digital and human advice http://www.economist.com/news/special-report/21650292-human-wealth-advisers-aregoing-out-fashion-ask-algorithm 75% Millennials interested in talking with a professional advisor when their financial situation gets more complicated Source: Schwab Man vs. Machine survey, May 2015.,
What does this mean for company sponsored retirement plans?
Employees expect technology to help
Intelligent use of readily available individual data * Target-date fund Multi-data point advice Age Account balance Salary Savings rate Estimated Social Security benefits Employer contribution formulas Related retirement plans State of residence Marital status Gender *Related plan information included if the plan is record-kept by Schwab Retirement Plan Services, Inc.
Personalization for portfolio construction 100 90 Equity allocation (%) 80 70 60 50 40 30 25 30 35 40 45 50 55 60 65 Age Average target-date mutual fund Participant average Participant managed accounts allocations Morningstar Associates LLC, Better Expected Outcomes with Managed Accounts, David Blanchett, January 13, 2013.
87% Increased contribution rates * Better diversification * Staying the course * Source: Blanchett, David. August 2014. The Impact of Expert Guidance on Participant Savings and Investment Behaviors, Working Paper.
Up to 40% more income in retirement * Source: Blanchett, David. August 2014. The Impact of Expert Guidance on Participant Savings and Investment Behaviors, Working Paper.
What s Next? Questions?
Sources and disclosures Slide 7: * You refers to the conference attendees (plan sponsors and consultants) in this instance. Slide 8: * Our and us refer to the collective body of the presenter and conference attendees (plan sponsors and consultants) in this instance. Slide 9: http://www.statista.com/statistics/271450/monthly-unique-visitors-to-us-retail-websites as of August 2015. Amazon is not affiliated with Schwab Retirement Plan Services, Inc. Slide 10: * We refers to the collective body of the presenter and conference attendees (plan sponsors and consultants) in this instance. Slide 11: * We and our refer to the collective body of the presenter and conference attendees (plan sponsors and consultants) in this instance. Slide 12: * Our and us refer to the collective body of the presenter and conference attendees (plan sponsors and consultants) in this instance. Slide 14: * You and your refer to the collective body of the presenter and conference attendees (plan sponsors and consultants) in this instance. ** They and their refers to the retailers discussed on this slide. *** We refers to Schwab Retirement Plan Services, Inc. in this instance. Slide 15: 2015 Investment Company Institute Fact Book. Data as of December 31, 2014. Schwab Personal Choice Retirement Account (PCRA) is offered through Charles Schwab & Co., Inc. (Member SIPC), a registered broker-dealer, as part of the Plan, with Plan recordkeeping services provided by Schwab Retirement Plan Services, Inc. Slide 16: The Coming Waves of Robo Adoption, AT Kearney, June 8, 2015, and KPMG Robo Advising, 2016 Slide 17: Sources: A.T.Kearney 2015 Robo-Advisory Services Study of 4000 banked consumers. Likely+ is Likely, Very Likely or Extremely Likely. Slide 18: Source: Schwab Man vs. Machine survey. The survey was conducted by Charles Schwab, one of the largest full-service investment services firms in the country with $2.53 trillion in total client assets, and Koski Research. The online survey was fielded between February 18 and 26 among 1,808 consumers. The margin of error for the total survey sample is 2.3 percentage points. Slide 19: http://www.economist.com/news/special-report/21650292-human-wealth-advisers-are-going-out-fashion-ask-algorithm, The Economist, May 9, 2015. Source: Schwab Man vs. Machine survey. The survey was conducted by Charles Schwab, one of the largest full-service investment services firms in the country with $2.53 trillion in total client assets, and Koski Research. The online survey was fielded between February 18 and 26 among 1,808 consumers. The margin of error for the total survey sample is 2.3 percentage points. Slide 20-22: * We refers to Schwab Retirement Plan Services, Inc. in this instance Side 23: Source: Morningstar Associates LLC, Better Expected Outcomes with Managed Accounts, David Blanchett, January 13, 2013.
Sources and disclosures Slide 24: 1. David Blanchett. 2014. The Impact of Expert Guidance on Participant Savings and Investment Behaviors, Working Paper (August). The percentage of participants who increased their savings deferral rates is determined by comparing each participant s savings deferral rate prior to and after using the Morningstar Retirement Manager service. Participants who increased their savings deferral rate after using Morningstar Retirement Manager are included in this data point. 2. David Blanchett. 2014. The Impact of Expert Guidance on Participant Savings and Investment Behaviors, Working Paper (August). For purposes of this study, do-it-yourself participants (those mentioned as not previously using Morningstar s advice and managed account service) are defined as those who have an allocation of 20% or less to an investment classified as an allocation (such as a target-date) fund by Morningstar, Inc. prior to using Morningstar Retirement Manager. The portfolio asset allocations held by participants prior to using Morningstar Retirement Manager were classified by investment type, and those meeting the definition of a do-it-yourself investor s portfolio were analyzed to determine number of funds held in the portfolio. 3. David Blanchett. 2014. The Impact of Expert Guidance on Participant Savings and Investment Behaviors, Working Paper (August). Average equity allocations of participants prior to using Morningstar Retirement Manager were analyzed from May 2007 to February 2014 and compared to the value of the S&P 500 Index. Slide 19: This figure represents the potential wealth increase an average 25-year-old could have at retirement when using a managed accounts service versus an average 25-year-old that did not use a managed accounts service. The analysis is based on 58,444 participants who used the Morningstar Retirement Manager SM service between the dates of January 2006 and February 2014. Participants are grouped by the age when they first implemented or received advice from Morningstar Retirement Manager and are assumed to have an initial retirement account value of $0 and a retirement age of 65. The results show that the average participant who first uses Morningstar Retirement Manager as a 25-year-old with a 0.4% annual fee could have 38.9% more retirement income at retirement than an average 25-year-old participant who did not use Morningstar Retirement Manager. Similarly, the average 45- year-old using Morningstar Retirement Manager with a 0.4% annual fee could have 23.3% more and the average 55-year-old could have 13.8% more retirement income at retirement. The amount of additional retirement income attributed to the use of Morningstar Retirement Manager at retirement varies by age, and tends to decrease with the age the participant first uses the Morningstar Retirement Manager service. Additionally, the potential amount of additional retirement income increases as the management fee decreases; conversely, decreases as the management fee increases. The average difference in the saving rate before and after using Morningstar Retirement Manager is calculated for each age group. The savings rate was applied to an assumed median income value for each age group. In a similar manner, the average difference in portfolio investment return before and after using Morningstar Retirement Manager was calculated for each age group. Six different annual fee levels (0.0%, 0.2%, 0.4%, 0.6%, 0.8%, and 1.0%) for the Morningstar Retirement Manager advice service were analyzed and the fee was applied to the average portfolio balance for each age group on an annual basis. The final account value for each age group at retirement age was then compared for each annual fee level. This analysis does not account for all portfolio costs such as fees, taxes, or expenses other than the annual account fee. If included, they would lower the potential amount of additional retirement income at retirement shown in this analysis. In no way should the results of this analysis be considered indicative or a guarantee of the future performance of an actual client using Morningstar Retirement Manager or considered indicative of the actual performance achieved by actual participants that have used Morningstar Retirement Manager. Actual results of participants that use Morningstar Retirement Manager may differ substantially from the results shown here and may include an individual participant incurring a loss. Morningstar Associates, LLC does not guarantee that the results of their advice, recommendations, or the objectives of Morningstar Retirement Manager will be achieved. The Morningstar name and logo are registered marks of Morningstar, Inc. Slide 25: * We refers to Schwab Retirement Plan Services, Inc. in this instance Disclosures Schwab Retirement Plan Services, Inc. created this communication for retirement plan sponsors and retirement plan consultants, advisors and other retirement plan service providers and fiduciaries only. Schwab Retirement Plan Services, Inc. is not a fiduciary to retirement plans or participants and only provides recordkeeping and related services. The material contained herein is proprietary to Schwab Retirement Plan Services, Inc. (SRPS) and is for informational purposes only. None of the information constitutes a recommendation by SRPS. The information is not intended to provide tax, legal, or investment advice. SRPS does not guarantee the suitability or potential value of any particular investment or information source. Certain information presented herein may be subject to change. Neither the presentation nor any information or material contained in it may be copied, assigned, transferred, disclosed, or utilized without the express written approval of SRPS. 2016 Schwab Retirement Plan Services, Inc. All rights reserved. (0516-FJPY)
Contact Informa1on Chris Burkhard Vice President Sales & Consultant RelaFons Central Region Manager Schwab ReFrement Services AusFn, TX Email: christopher.burkhard@schwab.com Phone: 877.783.4372 Cynthia O. Zaleta Principal, Wealth Buck Consultants, A Xerox Company Atlanta GA Email: cynthia.zaleta@xerox.com Phone: 770.857.4046