Global Best Practices for DC Plans—A Global Perspective

Partner Conference 2014
Best Practice DC Plans -
A Global Perspective
Barry S. Kublin
President, BPAS

2
AGENDA
 Retirement Income Readiness: an Assessment of the US DC
Plan Effectiveness
 The Politics of Retirement Income Readiness Solutions
 A Global View of DC Plans
 Automatic Enrollment Plans in the U.S.
 Overcoming Employer Resistance to Auto Plans
 Differentiating Service Models for Auto Plans

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Retirement Income Readiness in the US
 "There are three kinds of lies:
— lies, damned lies, and statistics.”
 “There are three degrees of falsehood:
— the first is a fib, the second is a lie, and then comes statistics”
 Data Sources:
 National Institute on Retirement Security
 Center for Retirement Research at Boston College
 American Society of Pension Professionals and Actuaries (ASPPA)
 Vanguard

4
 38.3 mm working households (45%) do not own retirement
account assets
—53% of all households age 25-34 9.9 mm

5
 Including households without retirement savings, the
median retirement account accumulation is $3k and $12k
for near-retirement households.
 Median working-age household earnings:
—With retirement accounts $71,156
—Without retirement accounts $25,413

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 In 2011, 52% of private sector EEs age 25-64 had access to a
retirement plan on the job
— Among full-time employees, 44% (35.2 mm) had no access
— Small businesses account for 2/3 of workers that lack access to
a retirement plan
 Earnings levels are correlated to availability

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Amongst Private- Sector EEs 1979 1999 2011
EEs with access to workplace
retirement plan
57.8% 61.9% 52.0%
EEs w/o access 42.2% 38.1% 48.0%

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Retirement Savings Targets (multiple of current income to produce 85% replacement ratio)
Age Fidelity Aon Hewitt
25 0x
30 ,5x
35 1x
40 2x
45 3x
50 4x
55 5x
60 6x
65 7x 11x
67 8x

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 Account balances
—Age 55-64 account-owning households: $100,000
—Age 55-64 all households: $12,000
 Account balances as % of working household income (10x goal)
Age 0% >0 < 1 x 1 < 4 x 4 x +
45-54 34.9% 39.4% 22.6% 3.2%
55-64 31.8% 31.8% 28.1% 8.3%
All 40.1% 40.3% 16.7% 2.9%

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 Age-specific benchmarks:
— Share of working households below target
— Measured by retirement account balanced (RAB)
— Measured by net worth (retirement savings, DB benefit, other
savings, real estate less debt)
% below target for
their age Total PV shortfall $
Total retirement
assets
89.8% $11.6 T
Total net worth 65.1% $6.8 T

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 The bottom 40 % of the income distribution ends up almost
entirely dependent on Social Security
• The substantial pension gap between
higher-and lower-income individuals is
driven primarily by the lower-income
group’s lower employment rate and
the smaller probability of working for
an employer that offers pensions

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 When lower-income workers do have a pension plan at
work, their eligibility and opt-out rates are nearly equivalent
to higher-income workers
 Solutions for this group involve working for organizations
that offer retirement benefits, satisfying the eligibility
requirements (1,000 hours), and automatic enrollment
(prevalence amongst smaller ERs)

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A recent study from the Social Security Administration shows:
- 68% of private-sector workers have
access to a retirement plan at work
- 78% of full-time workers
- 80% of eligible private-sector workers
with access to a plan participate
- 84% participation rate for full-time
workers
W-2
Data
W-2
Data

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37% of part-time private-sector
workers have a retirement plan
available at work and 54% of those
participate
70% of workers earning from $30k to
$50k participate in ER plans when
available (EBRI)
A recent study from the Social Security Administration shows:
W-2
Data
W-2
Data

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“The current system is working very well for millions of working Americans.
Expanding availability of workplace savings is the key to improving the system.”
(ASPPA testimony, Senate Finance Committee, February, 2014)
49% of private-sector
EEs who work for ERs
with less than 100 EEs
have a plan available
at work, with a 69%
participation rate
68% of U.S.
households have an
IRA or ER- sponsored
retirement plan

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 Which “Statistics?”
 Political Environment
 Problem definition
 Global best practices
 Opportunities for
improvement

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The Politics of Retirement Income
Readiness Issues in the US
What America Worries About Most (Gallop,PersonalFinancialSurvey(April,2013)
Financial Concerns 18-29 30-49 50-64 65+
Not enough money for retirement 52% 68% 72% 42%
Not paying serious illness medical bills 52% 63% 63% 50%
Not maintaining standard of living 46% 51% 61% 42%
Not paying normal monthly bills 40% 42% 44% 31%
Not paying for children’s college 42% 59% 29% 7%
Not paying rent or mortgage 38% 39% 39% 19%
Not paying credit card bills 16% 21% 22% 14%

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Storms
State-based Initiatives to:
 increase retirement savings
coverage and rates
 “reduce fees”
 “Obama care II”
 Federal Budget Pressures
 CBO cost of retirement savings
“expensive benefit for the rich”
Down the Road

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State Initiatives to Address
Retirement Income Readiness
Concerns:
www.pensionrights.org/issues/
legislation/state-based-
retirement-plans-private-sector

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California
 Secure Choice Retirement Savings Trust Act, signed
Sept. 2012, to address 6.3 mm workers w/o access to
workplace retirement plans
 Mandatory payroll deduction plans for ERs w/5+ EEs
who do not sponsor retirement plan
 Auto-enroll at 3% w/opt-out
 Investment Board currently conducting market
research to develop final regulations/infrastructure
 Implementation requires subsequent legislation

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Connecticut
 Act Promoting Retirement Savings, submitted to Governor
May, 2014
 Establishes CT Retirement Security Board to study and
create public retirement program
 ERs w/5+ EEs who do not sponsor retirement plan
 Auto-enroll (min TBD w/ER option to increase)
 Form of benefit – lifetime annuity w/lump sum option

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AARP Connecticut released the following statement from State
Director Nora Duncan regarding passage of the CT SFY 2014 Budget
and Implementer Bill:
“We’re thrilled that our elected officials understood that when it
came to retirement security, Connecticut had to act. If older adults
do not have enough money for a secure retirement, they will rely
more heavily on public assistance. By investing up front in the design
of a state retirement savings plan, Connecticut will allow more of its
citizens the opportunity to save for their future, and the state will
ultimately save money. -

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Massachusetts
 In March 2012, Massachusetts passed an Act Providing
Retirement Options for Nonprofit Organizations
 State Treasurer to sponsor a plan for EEs at small non-profit
organizations
 Tax-qualified, participant directed, ER and EE contributions
 Plan is pending before IRS for final authorization
 For non-profit ERs with <21 EEs

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 A number of insurance industry groups opposed the bill.
Adam Sachs, government relations chair for the
National Association of Insurance and Financial Advisors
of MA, said, “This bill puts the Commonwealth in direct
competition with MA companies that are already
providing retirement plans to employers of all sizes in
MA … This is not filling a void, or correcting a market
failure—it is simply an effort to take business away from
MA taxpayers.”

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Illinois
• IL Secure Choice Savings
Program
• Senate passage April
2014, awaiting House
action
• 3% auto-enroll, opt-out
• Participant directed,
target date default
• Assets managed by IL
Treasurer/Board
Maryland
• MD Secure Choice
Retirement Program
& Trust, Introduced
Jan 2014
• 5+ EEs, would require
IRS tax-qualification
and ERISA exemption
Other Initiatives
• MN, OR, WA, WI
• Obama myRA
• $5,500/year, $15k
cap, Roth, govt.
bonds, payroll
deduction plan
• Targeted at ERs who
do not sponsor
retirement plans

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Federal Budget Considerations
 “… if this Congress want to help, work with me to fix an upside-
down tax code that gives big tax breaks to help the wealthy
save, but does little or nothing for middle-class Americans.”
(President Obama, 2014 State of the Union Address)

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 Dave Camp, Chairman, House Ways and Means Committee,
REPUBLICAN, MI
 Tax Reform Act (2014 draft)
 401k limit to be comprised of 50% pre-tax, 50% Roth
—For 2014, $8,750 pre, $8.750 Roth plus 50/50 on catch-up
—Generates $143 billion over 10 years

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 Inflation adjustments to DB benefit limits, DC
contribution limits to be frozen for 10 years
 Generates $63 billion over 10 years (inflation rate?)
 TRA 2014 (cont.)Camp
 25% deductibility limit on ER/EE contributions to DC plans
vs. 35% top marginal rate (10% tax on $52,000)

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 The American Society of Pension Professionals & Actuaries
(ASPPA) and the ERISA Industry Committee (ERIC) expressed
concern with Camp’s tax reform proposal. Should this proposal
become law, ASPPA said, it would subject individuals in the new
35% tax bracket to a 10% surtax on all contributions made to a
qualified retirement plan – that is, both employer and employee
contributions. In effect, this proposal would tax contributions to
qualified retirement plans twice, ASPAA noted: individuals would
pay the 10% surtax when contributions are made to the plan, and
then pay tax again at the full ordinary income tax rate when the
money is distributed from the plan during retirement.

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Summary
 Policy makers at the State and Federal level concerned about
the rate of retirement plan participation and savings
 Politicians often react to polls
 Absent progress from private-sector service providers
relative to participation and savings rates and cost
effectiveness, there is an emerging willingness amongst
elected officials to provide for public-sector-based
“solutions.”

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Summary
 Substantially all proposals being discussed at the state
level include a mandate for automatic enrollment for EEs
in organizations that do not offer retirement plans
—A mandate for non-401k/403(b)/457 plans
—An optional feature for qualified plans?

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A Global View of DC Plans
Country Overall Index Country Overall Index
Denmark 80.2 USA 58.2
Netherlands 78.3 Poland 57.9
Australia 77.8 France 53.5
Switzerland 73.9 Brazil 52.8
Sweden 72.6 Mexico 50.1
Canada 67.9 China 47.1
Singapore 66.5 Japan 44.4
Chile 66.4 S Korea 43.8
UK 65.4 India 43.3
Germany 58.5 Indonesia 42.0

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Total Adequacy Sustainability Integrity
USA
2012 59.0 58.3 58.4 61.1
2013 58.2 56.6 57.8 61.2
Average
2012 61.0 62.2 52.1 71.5
2013 61.6 63.5 52.8 70.8

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Chile DC System
 Pioneered Social Security in Latin America, establishing a
PAYGO system in 1924
 Country of 17 mm
 In late 1960s, 500k retirees receiving benefits
 In late 1970s, 1 mm retirees receiving benefits
 System was greatly underfunded, deemed a fiscal burden,
 Too many schemes for different sectors, ineffective
regulatory environment for investments

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Chile DC System
 Reformed in 1981
 Mandatory DC program
 All workers establish individual accounts with private firm
 Mandatory contribution rate: 10% of pay; optional voluntary
contributions
 6 investment options, five target portfolios plus government
bond fund
 Up to 60% of assets may be invested in non-Chilean securities

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Chile DC System
 Largest investment firms in the system
— iShares: 11.2%
— Vanguard: 10.8%
— Franklin-Templeton: 9.1%
 Upon retirement
— Age 60 for women
— Age 65 for men
— Accumulated fund balance my be paid out as a programmed
withdrawal option (RMD recalculated every year) OR value of
purchased annuity

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Chile DC System
 Age 65 male contributing for 80% of working life projected
to receive benefit amounting to 60% of pre-retirement
income, in the form of a J&S
 DC benefit supplemented by non-contributory public system
that is means-tested and funded by general tax revenue

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UK DC System
 UK Pension Act of 2008/2011 mandates ERs to automatically enroll
workers into ER sponsored plans starting in 2012 (phase-in by size of
ER)
 Intent increase private pension coverage from 33% to 75%
 Prior system of DC plans (Stakeholder Pension Act of 2001) failed;
utilized opt-in strategies
 New system allows EEs to opt-out, but ERs must sweep every 3 years
— Age 22 earning 15,800 (US) mandatory
— All workers earning 9,500 can opt-in and receive match

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UK DC System
 UK Pension Act requires 4% EE contribution and 3% ER
contribution (matching formula), 1% GOVT contribution;
plan may provide for additional ER and EE contributions
 McDonalds UK
 37k EEs in UK, 35k are hourly
 Enrolled 1,150 salaried and 11,500 hourly employees to
date w/ 3.48% and 2.15% opt-out rates respectively

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UK DC System
 National Employment Savings Trust competes against private
firms for ER plans
—75 bp cap on default funds
 No distributions upon change of employment, no loans, no
hardships, benefits available at age 55
 One time 25% lump sum distribution, balance annuitized

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Common Challenges/Solution Requirements
 Increase retirement age to reflect increasing life expectancy
 Encourage/require higher levels of private savings to reduce
future dependence on the public pension
 Increase coverage for EEs in the private system
 Reduce leakage from the system prior to retirement

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Automatic Enrollment in the US
 Automatic enrollment is arguably one of the most powerful
tools employers have to bolster employee retirement
readiness.
 The problem isn’t education, access, or as some claim, a
“broken” system, it’s … inertia. (Sapers % Wallack, 2013)
 “Education is very important, but auto features produce real
results.” (Credit Suisse)
 9% auto-enroll, 1% auto-increase up to 15%

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 Organ donor participation rate in Denmark (opt-in): 4.25%
 Organ donor participation rate in Sweden (opt-out): 86%
 47.2% of 401k plans have auto-enroll feature
 61.5% of plans with >5k participants
 13.6% of plans with <50 participants
 89.8% of Plans with auto-enrollment (AE) sweep new hires
only

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• 69%Manufacturing
• 52%Insurance
• 54%Health Care
• 44%Retail
• 39%Financial
Industry adoption of
AE plans

45
 23% of AE also provide for auto-increases (AI)
 Contribution Caps on AI plans
 Annual rate of increase
—97% report 1 - 1.99%
—3% report 2 - 2.99%
<6% 6% 7-9% 10% >10%
7.8% 44.4% 8.5% 28.2% 11.1%

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 Default contribution rate with AI
 Participants in AE plans without AI contribute 1% LESS
than participants in non-AE plans (participant rate is
higher, average deferral is lower)
—Default rate for AE plans is the major contributing
factor to this phenomenon
< 3% 3-3.99% 4-4.99% 5-5.99% 6% +
14% 44% 14% 15% 13%

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Other Factors Affecting
Retirement Income Readiness
Annuity/In
stallment
payout
option in
plans
12%
Loans
payments
post
termination
of
employment
3%

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Bold Auto Plan Design
 6%-8% automatic enrollment rate
within 45 days of date of hire,
depending upon average comp and top
heavy considerations
—Impact of raising default rate from
3% to 6%
—25% increase in GAP success rate for
lowest income quartile

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 Include part-time employees
—These persons will become members of
the retirement community, they may
convert to full-time status with current or
subsequent ER, and they also need to
start early and save regularly
 Eligibility for ER contributions may based
upon longer length, hours of service and
vesting schedule

50
 Increase auto-enrollment rate by 2% until
total EE/ER contribution rate reaches 15% of
pay
—Subject to AI above 10% is not a safe
harbor design
 Auto sweep non-participating EEs every year
 Auto increase EEs every year

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 Sweep into QDIA every year; EEs can opt-out
of AE, AI and QDIA, every year.
—Annual sweep will restore contributions for
hardship suspended, if not otherwise
provided
—70% of those who swept in after opting out
stay in (NY Life)

52
 Stretch the match, subject to safe harbor
considerations
—100% first 3%,
—50% next 2%
—25% next 4%
—5% total on 9% deferral vs. 100% on the
first 5% (5% total on 5% deferral)

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 LEAKAGE
 Loans
—Limit loans to 50% of vested account
balance up to$10,000 vs. 72p limit of
$50,000
—Provide for loan continuation (and
origination) after termination of
employment

54
 Annuitize benefit payments
— Provide for installment payment option for
retirees vs. lump distribution requirement (DB
feature)
— Installment payments vs. lifetime income
products
Neither are solutions to the issue of under-
accumulation
— Longevity Insurance
Pooled insurance for benefits after age 85

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Resistance to Auto Plans
Administrative burdens
 Tracking default enrollment dates
 Issuing notices to participants in advance of the default
enrollment date
 Processing contribution rate changes for auto participants
 Tracking auto increase dates and amounts
 Processing contribution rate changes for auto increases

56
Resistance to Auto Plans
Administrative burdens
 Liability of not administering auto feature correctly
—Employer makes contribution on behalf of employee equal to 50%
of default amount plus match plus earnings
 Increase cost of match associated with increase
participation and savings
 Perception among financial advisors that participant
enrollment is a key element of value proposition; it’s
what they get paid for
 Perception that retirement savings is an EE choice; not
the ER’s responsibility to mandate the EE to do so

57
Overcoming Resistance to Auto Plans
 BPAS Administration Services
 BPAS determines auto enrollment dates
 Sends notices to participants
 Creates payroll change file
 With 360 payroll integration, payroll changes are transmitted directly from BPAS to Paylocity
 BPAS determines auto increase amounts and dates
 Creates payroll change file as above
 Auto increase notices included on quarterly statements
 Participants may opt-out using BPAS VRU/Web systems
 3rd party administration of Auto Plans requires daily administration, which is more than daily valuation
recordkeeping
 Requires that ERs remit full census date every contribution cycle and that recordkeepers make continuous eligibility
determinations
 Bifurcated service model of TPA/recordkeeper has limited the adoption of Auto plans in <100 life market

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 Increased costs
 Recognize that ACA, minimum wage (pressure on wages above
$10.10) and slow growth economy are impediments to higher
retirement plan expenses
 Nominal increase in matching expenses (25% match on 4%
increase in average savings rate) can be mitigated by future
salary increases (as have increases in health insurance cost
over the years)

59
Advisor Perceptions
 97% of plan sponsors that embraced automatic
enrollment, automatic escalation and QDIAs together say
the advantages outweigh any perceived disadvantages,
indicating the value of the bundled approach compared
to a single-feature approach.
(Lincoln Retirement Power Automatic Features Study,
2012)

60
Advisor Perceptions
 Ultimately, Advisor/Administrator services will be
evaluated in context of retirement income readiness
among plan participants –the ultimately metric for plan
success
 Auto plan provisions allow Advisors to focus on holistic
financial planning, less on transaction of enrollment

61
The ER’s Cost of an Ineffective Retirement Readiness Plan
 The productivity cost of employee meetings for the
purpose of opt-in transactions
 The productivity and human costs of financial stress
associated with inadequate retirement planning
 By preparing workers to retire on time, ERs have the
ability to make room for new employees with different
skills at potentially lower salaries

62
The ER’s Cost of an Ineffective Retirement Readiness System
 The productivity costs of workers who are their only
because they can’t afford not to be
 Absent a private sector solution to the retirement savings
crisis, businesses will be faced with a government
mandate

63
The ER’s Cost of an Ineffective Retirement Readiness System
 Our consumer-based economy will be challenged by the
absence of retirees who have little discretionary
purchasing capacity
 The lack of retirement income from private sources will
place pressure on government safety net systems
(entitlement programs), which will result in increased
personal and business tax assessments

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Conclusion
 We as industry professionals must accept retirement income
readiness for ALL employees as our core deliverable.
 Our unwillingness/inability to sell effective plan design
threatens our industry.
 We have the tax benefits and technology to deliver results.
 Increasing active employment savings will have limited benefits
to the extent we do not address leakage; we need to re-
examine the concept of “distributable events” and promote
lifetime benefits.

Questions?
65

Contact
Barry Kublin
President
BPAS
bkublin@bpas.com
66

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