State of the retirement industry

spring 2013
New York Life Retirement Plan Services
State of the
retirement industry
This report is the first publication of our “State of Retirement”, an annual report that takes stock of how current trends
are impacting American’s ability to retire, and the short term and long term implications of those trends. We look beyond
conventional wisdom to understand the real influences of corporate and individual behavior while understanding how
changes in the market have long reaching implications.
Conventional wisdom isn’t always wise
Many of the “known truths” of retirement industry are simply myths.
The retirement plan industry is at the cusp of a major evolution.
Participant demographics, political scrutiny, product innovation,
and employer demands are escalating change and redefinition
– but in order to know where we are going, we must have a clear
definition of where we are.
This annual report takes a close look at plan features, participant behavior, and investment trends to dispel the retirement
plan myths that lead to poor plan decision making.
auto features
Did you know...24% of auto-enrolled participants
1
proactively increase contribution rates within 12 months, and 23%
change investment allocations?
Myth 1: A good portion of the American workforce
will not save for retirement.
False. We know how to get the vast majority of people to
save and we shouldn’t accept the notion that we can’t reach
everyone. Auto-enrollment works, period. 92.96% of people
auto-enrolled remain enrolled, compared to the 37.49%
of people that choose to enroll within the first 12 months
of eligibility.
More than 67% of our clients auto-enroll new participants
– which is good – but we can do better. We encourage our
sponsors to auto-enroll ALL participants, not just new hires.
We also advocate periodic “sweeps” of non-saving employees,
re-enrolling workers that have stopped saving in the past.
Participants should have to make the choice NOT to save, not
the other way around.
Auto enrollment: Client adoption trends
Myth 2: We can’t “burden” the average worker with
too high of a savings rate. They can’t afford it and will
end up opting out of the plan.
False. Participants are more likely to stay in the plan the higher
the default contribution rate. The average contribution rate
of an individual making less than $75,000 is 5.6%2 . No valid
reason exists for artificially lowering contribution rates, and our
clients recognize this. The number of our sponsors that autoenroll with a contribution rate higher than 3% has increase
200% over the last 6 years.
Myth 3: Auto-enrollment results in small orphaned
accounts that drive up the costs of running the plan.
Auto-cash out or rollover features have largely solved for this
issue. In fact, a plan with auto-enrollment grows its asset base
11% faster annually than a plan without auto-enrollment,
80
allowing
for a more advantageous fee/cost environment.
70
70%–
Myth
4: Participants will disengage from their
60
retirement plan with automation.
60%–
50 it and forget it” is market phrase, not a reality. Auto“Set
features
are about making things easier, not irrelevant. A
40
quarter of participants adjust their asset allocation in the
30 year of participation, and another 23% change their
first
contribution
rate. What engages participants in retirement is
20
accumulating assets, not the act of enrollment.
50%–
40%–
30%–
20%–
10
10%–
12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12
Myth
5: Auto-increase can be good, but there is
0
a possibility participants might save too much.
100they won’t. It would be a wonderful problem to have but we
No
need to acknowledge participants are not saving enough. A
3
good
80 rule of thumb is a person should save 15% of their annual
salary to adequately save for retirement. Auto-increase features
slowly increase an individual’s contributions over time, and
60
should,
at a minimum, help participants reach the 15% savings
threshold. Auto-increase features are slowly gaining acceptance
with
40 employers, and are moving the needle.
Average participation rate
80%–
60%–
40%–
20
20%–
0
12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12
Plans with auto enrollment
Plans without auto enrollment
All statistics quoted within this report represent New York Life Retirement Plan Services’ 401(k) plan participants as of 12/31/2012 unless otherwise noted.
New York Life Retirement Plan Services 401(k)plan participants, 12/31/2011.
3
Forbes, 2012.
1
2
PARTICIPANT BEHAVIOR
Did you know...52% of participants don’t take
full advantage of the match?
Myth 1: A match is free money, everyone
understands free money.
An employer‘s and employee’s perception of match is very
different. To a sponsor – it is free money given to an employee
to supplement their retirement savings. But it isn’t free money,
a participant has to engage in very specific behavior to earn that
match – namely contribute to retirement personally. Match is an
incentive, not a gift, and it needs to be explained more clearly if
we are to incent proper behavior.
But sponsors also need to help participants take full advantage
of the match. A key step is ensuring the auto-enrollment
default contribution rate is at least as high as the match. For
example, if a plan’s match formula is 3%, but is structured to
pay .5% for the first 6%of contributions – participants should
be auto-enrolled at least at 6%! More than 70% of New York
Life sponsors have a default contribution rate that is not high
enough for participants to automatically take full advantage
of the match.
Myth 2: Access is critical, if you want people to
participate in their plan you need to ensure they have
access to their money.
Access is not critical, but leakage is a crisis. A comparison of
401(k) plan’s on our defined contribution platform show a
difference of less than 10% in participation for plans that have
loans compared to those that don’t. Rare is the participant that
takes an in-depth look at the plan features when making decision
to participate (or to opt out of participating) in the 401(k) plan.
Loans have far reaching implications, the average contribution
rate for a participant with a loan is 5.63% compared to 7.23% for
those participants without a loan. Additionally, more than twothirds of participants with an outstanding loan balance who leave
their employment end up taking a distribution rather than pay
the loan back.
So this begs the question, why do we offer them? The answer
of course is because the person is often in dire straits and needs
financial help. Yet 401(k) loans only ease a symptom rather than
address the problem and there needs to be better scrutiny in
how employers help participants solve these financial problems.
Are you playing favorites?
The IBM Indicator
This is a question we pose to our clients
regularly. Why would an employer only
enroll their new employees into their
401(k) plan. For example, let’s look
at a typical manufacturing company.
Chances are they have enabled automatic
enrollment in their plan, as have 67% of
the peers in their industry.
IBM is taking the concept of match
as an incentive – not as free money
– quite seriously. At the end of 2012
they announced that match will only
be paid once a year, and only to those
employees still employed at IBM on
the day of payment.
But the average tenure for a
manufacturing employee is 8 years.
Meaning it will take that long for the
employee population to effectively
turnover and for the broad population
to experience auto-enrollment. And the
“lifers” who never proactively enrolled will
never reap the benefits.
This is contrary to industry practices,
which is to pay match payments simultaneously with participant contributions.
While there certainly was initial uproar
in the media, this is an important trend
to watch, as IBM has led the way in
retirement trends for more than three
decades. Match is designed to incent
participation, encourage higher saving
rates, and to be part of competitive
benefits package. If a delayed match
does not materially impact participation
rates – it is quite likely annual match
contributions will be more common.
Your average American worker in a New York Life 401(k) plan is...
• 43 years old and earns a salary of $68,700 annually
• Contributes 6.25% of her salary into her 401(k) plan
• Her account balance is $55,270, and there is a 1 in 5 chance she has
a loan balance of $7000
A look at asset allocation along all participants
shows 18% of assets are in a principal preservation
product, and target date funds are becoming
increasingly common.
New York Life Asset Allocation
Asset allocation/ TDFs
Equity funds
Bond funds
Principle preservation
But in reality, there is no average worker. For example,
if we look at workers based on the industry in which
they work, we see:
The average financial and professional employee:
• Is 42 years old and earns $105,000 annually.
• Contributes 7.2% to the plan annually, with an average account
balance of $77,000
• Has a 16% probability of having outstanding loan balance.
• Has a 65% probability of investing in a target date fund, making
exposure to this asset class 20% more likely than the general
population despite being the least likely worker to be autoenrolled into a target-date fund.
The average manufacturing employee:
• Is 41 years old and earns $44,700 annually.
• Contributes 6.4% to the plan annually, with an average account
balance of $55,000
• Has more than a 30% chance of having a loan, and is more likely
to have multiple loans compared with the broader workforce.
The average technology
and communication employee:
• Is 43 years old and earns $104,500 annually.
• Contributes 6.4% to the plan annually, with an average account
balance of $77,500
• Is the most likely to have exposure to stable value funds,
showing a strong conservative streak not as prevalent in the
average worker.
• Is most likely to have a loan that is a full 10% of his entire
account balance, at $7700 if a loan is present.
ENVIRONMENTAL FACTORS
Did you know...The General Accounting office has
stated that the 401(k) system represents $429 billion of forgone tax
revenue for 2013-20174?
Myth: The 401(k) is a failed experiment.
It is an imperfect system, one that is still rapidly evolving and
improving, but it is not a failure. It is, however, in jeopardy. As
the nation looks for additional ways to raise revenue, the past
failings of the 401(k) are under a glaring and critical light. The
Government Accountability Office has concluded that tax
benefits favor higher wage earners rather than the average
Americans, and there is some consideration in Washington to
reduce the tax benefits associated with 401(k) plans.
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The Government Accountability Office, 2012
But the major reforms created by the Pension Protection
Act of 2006 are just beginning to take hold, participation and
contribution rates are increasing, we are reaching younger
(and lower wage earners) more uniformly….we are making
real progress in improving the 401(k) system . We need to
continue our progress – not take a step backwards.
Creating a viable path to retirement is one way New York Life
keeps good going every day. We seek to understand how we
can better outcomes for our sponsors and participants alike.
Please contact us for more information.
New York Life Retirement Plan Services is a division of New York Life Investment Management LLC.
New York Life Retirement Plan Services
690 Canton Street
Westwood, MA 02090
newyorkliferetirementplans.com
NYLIM-29493 05/2013