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2013 Hot Topics In Retirement
 

2013 Hot Topics In Retirement

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    2013 Hot Topics In Retirement 2013 Hot Topics In Retirement Document Transcript

    • Consulting/HR Outsourcing Retirement 2013 Hot Topics in Retirement Focusing on Financial Wellness
    • Focusing on Financial Wellness Aon Hewitt is pleased to provide you with this 2013 Hot Topics in Retirement survey report. This is the seventh year we have examined current and future retirement benefit strategy, from the employer’s perspective. The past year proved to be very busy for plan sponsors who were incorporating fee disclosures in defined contribution plans and reacting to new defined benefit funding legislation and large-scale de-risking opportunities for pension plans. We expect this pace to continue. Aon Hewitt’s 2013 Hot Topics in Retirement Survey In October 2012, Aon Hewitt surveyed human resource professionals throughout the United States to explore their focus and expected actions regarding the design, management and delivery of their retirement programs— including defined contribution (DC) and defined benefit (DB) plans. Responses from more than 400 employers are included, representing 11 million employees, a significant voice in the retirement industry. A Business Case for Financial Wellness The retirement landscape continues to evolve in a challenging economy with increased scrutiny. Plan sponsors are promoting financial wellness by providing effective measures, tools and messages that encourage employees to save for retirement. By focusing on financial well-being, mitigating risks in pension plans, seeking transparency in total plan costs and communicating using innovative technology, employers are making efforts to encourage employees to reduce the retirement income gap. Thank you for your interest in our research. Sincerely, Alison Borland Vice President Retirement Solutions and Strategies Byron Beebe US Retirement Market Leader Retirement Consulting
    • 2013 Hot Topics in Retirement Contents 2 Survey Highlights 5 Overview of Retirement Plans 9 Defined Benefit Plans 16 Defined Contribution Plans 25 Employer Priorities in 2013 27 Participating Employer Information
    • Survey Highlights The age of retirement accountability has arrived. As most individuals now use their employers’ defined contribution plan as their primary retirement vehicle,1 there is more personal responsibility to save for adequate retirement income. While plan sponsors typically provide incentives such as matching contributions to encourage employees to participate in their plans, savings rates remain low at an average before-tax saving rate of 7.2%.2 Equally troubling, employers’ confidence in their capability to effectively manage their employees’ ability to retire with sufficient assets is at an all-time low. Consequently, many plan sponsors are enhancing and refining their focus to better meet the retirement goals of both employers and employees. In the fall of 2012, Aon Hewitt surveyed 428 employers to examine current and future retirement benefit strategy. Four key trends emerge for retirement programs in 2013: 1. Employers are concentrating focus on financial wellness with a renewed effort to measure retirement income adequacy. 2. Defined benefit plan sponsors are continuing to find ways to manage risk in their plans. 3. Employers are seeking greater transparency regarding the total plan costs in their defined contribution plans. 4. Employers are adopting newer communication technologies (webinars, podcasts and text messages) to spread the word on retirement plan responsibilities and key milestones. 1 Aon Hewitt, 2011 Trends & Experience in Defined Contribution Plans 2 Aon Hewitt, 2012 Universe Benchmarks 2 Aon Hewitt
    • Focus on Financial Wellness Plan sponsors are embracing a more holistic perspective on their retirement programs by focusing on financial wellness and measuring projected retirement income adequacy, instead of merely concentrating on current participation and savings levels. Through this expanded view, employers can better assess the value of the plan design and communicate in a way that will resonate with employees. I I I 80% of employers are likely to focus on the financial well-being of employees through enhanced communication, resources, mobile apps and online tools. 61% of plan sponsors are likely to measure the expected retirement adequacy of their employee population in 2013. 86% plan to communicate concepts of retirement adequacy such as projected needs, required milestones and action plans to their employees in 2013. Mitigate Defined Benefit Plan Risks Last year was marked by sweeping pension de-risking actions. Employers confirm that minimizing the volatility of their defined benefit plan will continue to take center stage in 2013. Plan sponsors are not doing this by changing their plans (84% of respondents will not modify their pension formulas). Rather, respondents are focusing their de-risking efforts on the asset side of the equation. I I I 50% of employers are likely to perform asset-liability studies in 2013. 60% of plan sponsors intend to adjust the plan’s investments to better match its liabilities. 39% are likely to add or liberalize a lump-sum option to terminated, vested employees. In addition, the percentage of employers who plan to adopt a “glide path” asset allocation strategy to adjust the plan’s investment allocations in response to the plan’s funded status is expected to nearly double (from 18% to 31%). 2013 Hot Topics in Retirement 3
    • Seek Transparency Regarding In the wake of required fee disclosure notices, defined contribution plan Total Plan Costs sponsors overwhelmingly are interested in the total cost of the plan. I I I 95% of all employers who have not calculated the total plan cost are likely to do so this year. 52% of these companies are planning to hire a third party to assist with benchmarking the plan and calculating the fund, recordkeeping and trustee fees in 2013. 31% of employers have recently changed their funds to reduce cost and 52% of the remaining plans may do so in 2013. Adopt New Technology to To communicate effectively to and with a digital workforce, plan sponsors Communicate Retirement Messages plan to use multiple levels of technology to communicate various aspects of the retirement plan to participants. I 83% of employers intend to host a webinar focusing on their plan. I 52% of employers are likely to create a podcast about their retirement plan. I 42% are likely to use text messages to convey important communications. Social media, such as Facebook and Twitter, is also gaining acceptance; the number of sponsors who are likely to use this vehicle to communicate with and educate plan participants in 2013 has tripled since last year (18% versus 6%). 4 Aon Hewitt
    • Overview of Retirement Plans Retirement Plan Basics Ninety-nine percent of respondents provide a defined contribution plan. Twenty-four percent provide an open defined benefit plan that allows new employees to accrue pension benefits. Larger employers (with more than 10,000 employees) are more likely to offer a defined benefit plan than employers with fewer than 1,000 employees. The continued shift from defined benefit plans to defined contribution plans places the responsibility for assuming greater accountability for their financial wellness on employees. Types of Retirement Plans Offered to New Employees Defined Contribution Plans Yes 99% No 1% (n=426) Defined Benefit Plans Yes 24% No 76% (n=428) 2013 Hot Topics in Retirement 5
    • Defined benefit plans are gradually becoming less prevalent. At the beginning of 2013, only 24% of employers offer defined benefit plans to new hires. Defined benefit plans can be categorized into one of three statuses: open, closed or frozen. Among open plans still accruing benefits, 55% provide benefits based on hybrid plan formulas, such as cash balance or pension equity formulas. The remainder (45%) use traditional formulas such as a final average pay plan or career average pay plan. Defined Benefit Plan Status— Among Sponsors Offering Hybrid DB Plans Traditional DB Plans Open Plan 55% 45% Closed Plan 15% 85% Frozen Plan 36% 64% (n ranges from 29 to 104) Retirement Plan Initiatives for 2013 6 Aon Hewitt When asked about retirement initiatives for 2013, employers are most likely to undertake the following tasks: packaging communication messages that focus on the financial well-being of employees, measuring the competitive position of the plan, assessing current plan design and implementing initiatives to address retirement savings gaps.
    • Eighty percent of employers are very or somewhat likely to concentrate on the financial well-being of employees, up from 74% last year. Nearly three out of four respondents (74%) plan to measure the competitive position of retirement programs and two-thirds of employers (66%) plan to assess the current plan design. These results indicate the continued focus and importance of retirement programs in 2013. Likely Initiatives for Retirement Plans in 2013 Initiative Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely Focus on financial well-being of employees (packaging, resources, communication, mobile apps, or online tools) 37% 43% 16% 4% Measure the competitive position of the retirement program 37% 37% 20% 6% Assess your current retirement program design 37% 29% 22% 12% Implement initiatives to address retirement saving gaps within your employee population 22% 42% 28% 8% Measure/project the expected retirement income adequacy of your employee population 19% 42% 30% 9% Analyze the influence of your current and emerging demographics on retirement designs, behaviors, policies, and practices 14% 34% 40% 12% Evaluate phased retirement alternatives 8% 28% 40% 24% Look at differences in retirement behaviors and outcomes based on race and ethnicity 8% 24% 44% 24% Collect data on employee preferences regarding the retirement program design and features 6% 23% 42% 29% (n ranges from 374 to 379) Employer Confidence in Effectively Managing Retirement Program Issues Most sponsors are confident that they are meeting compliance requirements and protecting fiduciaries from unnecessary risk. Sixty-one percent of respondents are very confident in managing compliance requirements and 48% are very confident in their ability to effectively protect fiduciaries from unnecessary risk. 2013 Hot Topics in Retirement 7
    • Identical to last year’s results, 39% of employers continue to feel very confident in their ability to effectively manage the competitive position of their plans. Further, 25% feel very confident in their ability to effectively manage the influence of diversity and inclusion in their retirement benefit offerings. However, companies feel less and less confident in being able to effectively manage how well their employees understand the employer-sponsored resources available to them. Even though 59% ranked this as a high priority, only 7% feel very confident about employee understanding, down from 13% last year. Perhaps even more alarming, only 6% of employers feel very confident in being able to effectively manage their employees to take accountability for their own retirement success. Only 3% of employers are confident in their ability to effectively manage their employees’ income adequacy and achievement of lifetime income in retirement. Confidence and Priority Level of Employers Effectively Managing Retirement Program Issues in 2013 Priority Level Confidence Level Retirement Program Issues Very Confident 1 Not Confident at All 6 5 High Priority 1 Medium Priority 2 Low Priority 3 2 3 4 Meeting compliance requirements for the retirement plans your organization offers 61% 31% 5% 2% 1% 0% 72% 20% 8% Protecting fiduciaries from unnecessary risk 48% 41% 7% 3% 1% 0% 62% 30% 8% Competitive position of the plan 39% 39% 15% 5% 1% 1% 45% 42% 13% The influence of employee diversity and inclusion on retirement benefit effectiveness 25% 27% 30% 12% 5% 1% 25% 46% 29% The aging workforce and the impact retirements could have on your business in the next 5 to 10 years 9% 27% 36% 21% 6% 1% 30% 44% 26% Employees’ understanding and knowledge of the employer-sponsored resources they have available 7% 26% 40% 19% 7% 1% 59% 35% 6% Employees taking accountability for their own retirement success 6% 22% 42% 20% 9% 1% 51% 42% 7% Employees retiring with sufficient retirement assets 3% 16% 39% 27% 12% 3% 44% 46% 10% Employees’ ability to manage their retirement income to last for the rest of their lifetime 3% 8% 38% 29% 17% 5% 33% 52% 15% (n ranges from 370 to 382) 8 Aon Hewitt
    • Defined Benefit Plans Likely Changes in 2013 After years of watching their pension deficits swell due to falling interest rates and lagging equity returns, many plan sponsors unleashed a wide variety of bold measures to gain control over volatility in their plans in 2012. Large, high-profile organizations such as Ford, General Motors, and Verizon Communications announced actions that would significantly eliminate risk in their plans. Others took advantage of ultra-low borrowing costs to finance large pension contributions. Likely Changes to Defined Benefit Plans in 2013 Changes Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely Nothing; continue with current open plan as is 67% 17% 5% 11% Reduce benefits but continue to offer a defined benefit plan to current and future employees 8% 8% 17% 67% If your plan is open to new entrants: close participation and no longer allow new employees to enter your defined benefit plan 7% 10% 12% 71% If your plan has ongoing accruals: freeze benefit accruals for all or a portion of participants 3% 7% 17% 73% If you offer a traditional plan: change to a hybrid plan (cash balance or pension equity) 2% 2% 14% 82% Terminate the plan (remove all employer liability through lump-sum payout to participants or third-party annuity purchase) 0% 0% 8% 92% (n ranges from 88 to 106) 2013 Hot Topics in Retirement 9
    • Based on the responses to this survey, it appears these trends will continue throughout 2013. More than one-third of employers (34%) indicate they are planning to offer a lump-sum window for terminated vested participants and/or retirees. Only a minimal number of the pension plan sponsors who responded to this survey will close, freeze or otherwise alter the plan formula for benefits in 2013. Rather, respondents are focusing their de-risking efforts on the asset side of the equation. Sixty percent of sponsors are likely to adjust their plan investments to better match the plan’s liabilities. Half of all defined benefit plan sponsors are planning to perform an asset-liability study in 2013. Likely Actions Defined Benefit Plan Sponsors Will Take in 2013 Likely Actions in 2013 (Among Those Plans That Have Not Recently Completed) Completed Recently Actions Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 12% Adjust plan investments to better match the characteristics of the plan’s liabilities (e.g., liabilitydriven investing, or LDI) 21% 39% 21% 19% 12% Conduct an asset-liability study 14% 36% 23% 27% 11% Adjust equity exposure and/or overall asset allocation 21% 43% 22% 14% 10% Offer lump sums to terminated vested participants or retirees on an ongoing basis by permanently adding feature to the plan 10% 24% 30% 36% 7% Add or liberalize a lump-sum option focusing on terminated vested participants or retirees by adding a window approach 14% 25% 26% 35% 6% Monitor the funded status on a daily basis either by partnering with an outside organization or enhancing internal tools 5% 13% 24% 58% 3% Change to mark-to-market accounting 1% 8% 33% 58% 1% Purchase annuities for terminated vested participants or retirees 1% 6% 28% 65% 1% Use a buy-in offering (e.g., entering an agreement to transfer risk to a third party like an insurance provider) 0% 2% 22% 76% 1% Transfer the plan (both assets and liabilities) to an outside party to reduce risk exposure 0% 2% 11% 87% (n ranges from 134 to 185) 10 Aon Hewitt
    • Defined benefit plan sponsors are cognizant of the need for robust communication if plan participants will be impacted by de-risking strategies. Eighty percent state they plan to provide written communication to participants in advance of the action date and half of all companies are planning to hire outside companies to assist them in some fashion with lump-sum windows (communication, calculation assistance, or a call center). Action Plan to Deal with Preparing for Lump Sums and/or Annuity Purchases Likely Actions in 2013 (Among Those Plans That Have Not Recently Completed) Completed Recently Actions Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 1% Provide written communication to retirees and/or terminated vested participants in advance of action date 56% 24% 12% 8% 2% Carefully review individual data inputs for pension calculations 50% 27% 15% 8% 2% Hire outside vendor to create communications, perform benefit calculations, and/or handle calls from impacted participants 24% 26% 14% 36% 1% Gather annuity purchase bids from insurance companies 8% 15% 23% 54% 1% Increase HR staff to prepare for additional calculations and questions from impacted individuals 1% 1% 16% 82% (n ranges from 72 to 79) 2013 Hot Topics in Retirement 11
    • Defined Benefit Plan Risk Confidence As in prior years, defined benefit plan sponsors place a high priority on compliance risk and more than half of respondents (52%) feel very confident in their ability to handle these risks. Conversely, relatively few respondents (34%) feel very confident in their ability to handle interest rate risk, even though it is a higher priority than compliance risk. Similarly, 74% indicate that investment risk is the highest priority; however, only 37% are very confident in their ability to manage it. Confidence and Priority Level of Risks in Defined Benefit Plans Priority Level Confidence Level Risk Management Topic Very Confident 1 2 3 4 Not Confident at All 5 6 High Priority 1 Medium Priority 2 Low Priority 3 Compliance risk 52% 32% 12% 3% 1% 0% 55% 32% 13% Fiduciary risk 46% 37% 13% 3% 1% 0% 54% 33% 13% Plan design risk (aspects of the plan design, such as lump sums or final average pay provisions) 41% 37% 16% 4% 2% 0% 31% 47% 22% Litigation risk 41% 36% 18% 3% 2% 0% 30% 42% 28% Diversification risk 38% 40% 17% 4% 1% 0% 45% 37% 18% Investment risk 37% 39% 18% 6% 0% 0% 74% 22% 4% Interest rate risk 34% 34% 22% 7% 3% 0% 65% 31% 4% Demographic risk (changes in participant demographics, such as retirement patterns) 29% 36% 25% 7% 3% 0% 20% 53% 27% Longevity risk 29% 33% 28% 7% 2% 1% 22% 46% 32% (n ranges from 186 to 188) 12 Aon Hewitt
    • From an investment perspective, defined benefit plan sponsors are overwhelmingly planning to adopt a so-called “glide path” strategy. This approach adjusts the plan’s investment allocations in relation to the funded status. While only 18% of sponsors currently have a glide path strategy in place, the percentage by the end of the year is expected to nearly double to more than 30%. This growth comes primarily at the expense of sponsors abandoning the traditional approach of investing 60% or more of plan assets in equities. Organization’s Current Investment Policy Primarily bonds 12% Duration matching 8% Preapproved glide path 18% Fully immunized 2% Alternative intensive 8% Primarily equity 52% (n=159) Organization’s Investment Policy at End of 2013 Duration matching 13% Primarily bonds 13% Primarily equity 31% Alternative intensive 8% Fully immunized 4% Preapproved glide path 31% (n=109) 2013 Hot Topics in Retirement 13
    • Managing an Increase in Retirement-Eligibles As the baby boomer generation continues to age, plan sponsors are taking steps to prepare for the anticipated increase in workforce retirements. The most common approach is to increase the level of automation and self-service available to plan participants; 52% of respondents are likely to offer these features in 2013. Sixty-five percent are also planning to increase their communication to near-retirees in 2013. Action Plan to Manage an Increase in Number of Participants Eligible for Retirement Likely to Offer in 2013 (Among Those Plans That Do Not Currently Offer) Completed Recently Actions Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 12% Increasing the level of automation, self-service, and/or web access to pension plan participants 25% 27% 20% 28% 11% Outsourcing additional services to an outside party 11% 9% 23% 57% 6% Nothing; we are well equipped to deal with the demographic changes 29% 32% 18% 21% 6% Nothing; we do not anticipate any demographic changes impacting our plan 25% 23% 22% 30% 5% Increasing communication about the retirement process 26% 39% 18% 17% (n ranges from 118 to 154) 14 Aon Hewitt
    • Pension Calculation Administration Only one out of five plan sponsors will perform the administration of the defined benefit plan by themselves in 2013. The majority of respondents (55%) use an outside party for all plan administration. The remaining plan sponsors (25%) use a combined in-house or co-sourced approach. By 2015, we expect few companies (15%) to continue in-house administration. Approach to Defined Benefit Administration Current Approach In-sourced 20% Co-sourced 25% Out-sourced 55% (n=183) Likely Approach in Two Years In-sourced 15% Co-sourced 27% Out-sourced 58% (n=137) 2013 Hot Topics in Retirement 15
    • Defined Contribution Plans Management and Priority of Participant Behavior As defined contribution plans become the primary retirement vehicle, plan sponsors will place greater emphasis on providing employees with tools and information to use the plan efficiently and effectively. This year, employers are focused on effectively managing participant behaviors when it comes to participation, diversification and leakage in defined contribution plans. Throughout this survey, employers consistently indicate low confidence in their ability to effectively manage employees’ retirement savings behaviors. As in the past, when it comes to participant behavior, 70% of plan sponsors are confident in their abilities to effectively manage participation rates in defined contribution plans. Additionally, 91% of employers place a high or medium priority on diversification, savings rates (93%) and retirement readiness (91%). However, confidence levels in the ability to manage these behaviors are low. One out of four employers is very or somewhat confident they are effectively managing leakage from the plan. However, only 14% of employers consider leakage due to employees taking loans or withdrawals from the employersponsored plan a high priority in 2013. Confidence and Priority Level of Employers in Effectively Managing Retirement Program Participant Behaviors in 2013 Priority Level Confidence Level Retirement Program Behaviors Very Confident 1 2 3 4 Not Confident at All 5 6 High Priority 1 Medium Priority 2 Low Priority 3 Participation rates: Eligible employees saving in the plan 37% 33% 22% 4% 3% 1% 61% 29% 10% Diversification: Participants adequately diversifying and taking “appropriate” risk 12% 32% 38% 14% 3% 1% 41% 50% 9% Leakage: Employees avoiding taking loans and withdrawals from the plan 9% 16% 30% 24% 16% 5% 14% 46% 40% Savings rates: Participants contributing enough to meet their future retirement needs 8% 22% 43% 16% 10% 1% 54% 39% 7% Retirement readiness: Participants are focused on saving milestones or have a plan to reach their retirement savings goals 7% 20% 39% 23% 10% 1% 40% 51% 9% Distributions: Terminated employees making smart choices about what to do with their defined contribution balances 5% 16% 37% 24% 13% 5% 10% 32% 58% (n ranges from 374 to 377) 16 Aon Hewitt
    • Investment Advisory Solutions and Features Employers continue to offer several features to help employees with their investment selections. More than three-quarters of respondents (76%) currently offer target-date funds to provide employees with a turn-key investment approach. By the end of 2013, this number is expected to grow to more than 85% of plans. Additionally, nearly 60% of companies currently offer online investment guidance. Among those who do not currently offer it, nearly 50% are likely to add it this year. Managed accounts (39%) and online third-party investment advisory services (39%) remain common and are expected to become more prevalent in the coming year. Features to Help With Investment Selection Offerings— Usage and Plans for 2013 How Likely to Offer in 2013 (Among Those Plans That Do Not Currently Offer) Already Offer Investment Selection Offerings Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 76% Target-date/lifecycle funds (e.g., 2015, 2020) 22% 13% 24% 41% 57% Online investment guidance (investment suggestions based on asset classes only) 13% 34% 29% 24% 39% Online third-party investment advisory services (personalized advice on specific plan investments) 10% 24% 36% 30% 39% Managed accounts 9% 18% 37% 36% 33% Phone access to third-party investment advisory services (individual sessions with advisor) 7% 20% 38% 35% 32% Target-risk/lifestyle funds (e.g., conservative) 1% 8% 32% 59% 25% In-person third-party investment advisory services (individual sessions to provide personalized advice on specific plan investments) 3% 17% 36% 44% (n ranges from 46 to 260) 2013 Hot Topics in Retirement 17
    • Due to the popularity of target-date funds, employers are planning to scrutinize the fund manager and the glide path. In 2013, more than half of all plan sponsors with target-date funds are very or somewhat likely to perform a comprehensive review of the fund manager and a nearly equal number of respondents plan on a comprehensive review of the fund glide path. Nearly 20% of employers have completed a move from a primarily active to a primarily passive target-date fund approach, but very few plan to do so in 2013. Plan sponsors also have a small appetite for changing the fund manager (7% very likely) or moving to a customized target-date fund (2% very likely). Likely Current and Future Actions to Be Taken on Target-Date Portfolios Likelihood of Action in 2013 (Among Plans That Have Not Completed Recently) Completed Recently Actions Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 25% Perform a comprehensive review of the fund manager 20% 38% 22% 20% 23% Perform a comprehensive review of the fund glide path 22% 34% 27% 17% 18% Move from a primarily active to a primarily passive target-date fund approach 3% 6% 34% 57% 15% Change fund managers or seek replacement options 7% 16% 29% 48% 12% Move to a customized solution for target-date funds (glide path and/or underlying investments) 2% 5% 29% 64% (n ranges from 203 to 255) Retirement Income Solutions/Annuities Retirement income solutions continue to gain ground as employers shift from defined benefit plans to defined contribution plans. As these solutions mature, the number of products that are available to employers in the market continues to grow. Employers are more willing and more likely to consider retirement income solutions in their plans, though barriers still remain. More than 60% of sponsors already offer online modeling tools or mobile apps to help participants determine how much they can save each year for retirement. In addition, 58% of the remainder are very or somewhat likely to offer these types of tools in 2013. 18 Aon Hewitt
    • The number of employers who offer professional management (managed accounts) with a drawdown feature has doubled since last year. In addition, 26% of plans that do not currently offer this type of solution are likely to add professional management solutions in 2013. Very few plan sponsors are keen on adding annuity products as part of their fund lineup. Currently, 10% of sponsors have an in-plan annuity product and only 2% of those without an annuity product are very likely to add one in the coming year. Retirement Income Solutions/ Annuities—Usage and Plans for 2013 Likelihood to Offer in 2013 (Among Those Plans That Do Not Currently Offer) Already Offer Retirement Income Solution Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 61% Online modeling tools or mobile apps to help participants determine how much they can spend each year in retirement 14% 44% 31% 11% 37% Distributions from plan/automatic payment (participant elects an automatic payment from the plan over an extended period of time) 6% 18% 41% 35% 19% Within the plan: professional management (managed accounts) with drawdown feature (managed account provider allocates participant assets for income and manages the annual amount paid from the plan) 6% 20% 45% 29% 13% Facilitation of annuities outside the plan as options for plan distributions 1% 14% 40% 45% 12% Within the plan: managed payout funds (those with a specific annual target payout percentage with no guarantees) 3% 16% 49% 32% 10% Within the plan: annuity or insurance products as part of fund lineup (e.g., minimum annuity payout, fixed annuities, other) 2% 12% 41% 45% 3% Ability to transfer assets to a defined benefit plan in order to receive an annuity 1% 5% 29% 65% (n ranges from 110 to 313) 2013 Hot Topics in Retirement 19
    • As these types of retirement income solutions become more common features in defined contribution plans, employers not interested in offering income solutions at all has dropped from 57% to 27% over the past year. Among employers who do not currently offer retirement income solutions, the barriers cited most often were operational or administrative concerns (54%) as the primary reason, followed by fiduciary concerns (51%), and waiting to see the market further evolve (50%). Barriers to Adding Retirement Income Solutions/Annuities Barriers Percentage of Employers Operational or administrative concerns 54% Fiduciary concerns 51% Waiting to see the market evolve more 50% Participant utilization concerns 44% Difficulty with participant communication 34% Not interested in offering income solutions within the plan at this time 27% Portability concerns 23% Cost barriers 23% Preference for participants to leave the plan at termination 11% (n=306; multiple responses) 20 Aon Hewitt
    • Investment Fund Offerings As a result of the U.S. Department of Labor fee disclosure regulations, 35% of sponsors have recently completed a review of defined contribution fund operations, including fund expenses and revenue sharing. Among plans that did not perform a defined contribution fund operation review, 87% of sponsors are very or somewhat likely to do so in 2013. Cost-cutting is top of mind for many sponsors. Nearly one-third of employers have recently changed their funds to reduce cost and 52% of the remaining plans may do so in 2013. Likely Actions to be Taken on Investment Fund Offerings in 2013 Likely to Offer in 2013 (Among Those Plans That Do Not Currently Offer) Completed Recently Actions Related to Funds Very Likely Somewhat Likely 35% Review defined contribution fund operations, including fund expenses and revenue sharing 62% 25% 8% 5% 35% Perform a comprehensive review of fund offerings 58% 22% 12% 8% 35% Update investment policy statement 28% 36% 22% 14% 31% Change/alter fund options to reduce costs of funds 22% 30% 26% 22% 27% Implement a self-directed brokerage window 2% 7% 14% 77% 21% Add funds designed for inflation protection 4% 14% 41% 41% 20% Change some or all funds from actively managed to index funds 7% 20% 31% 42% 17% Add a tier of index options 3% 14% 34% 49% Somewhat Unlikely Very Unlikely (n ranges from 205 to 277) 2013 Hot Topics in Retirement 21
    • Communication Initiatives Many employers are planning to communicate to their employees to describe the plan and influence participant behaviors. Sponsors are primarily interested in campaigns that highlight the availability of resources to help with retirement planning, improve diversification or evaluate retirement income adequacy. Likely Defined Contribution Communication Initiatives in 2013 Very Unlikely Initiatives Very Likely Somewhat Likely Somewhat Unlikely Availability of online advice/resources to help with retirement savings/planning 54% 34% 8% 4% Improving diversification (including through the use of target-date investments) 51% 35% 10% 4% Evaluating retirement income adequacy, including understanding projected needs, required milestones, and deliberate plans 50% 36% 12% 2% Rolling over of balances instead of cashing out of the retirement plan 18% 37% 34% 11% Ways to minimize fund fees at retirement in order to maximize income stream 12% 33% 40% 15% (n ranges from 364 to 368) Communication channels continue to evolve as technology advances. In 2013, one-quarter of all sponsors are planning to use webinars extensively to interact with their participants—a percentage that has doubled since 2012. Further, employers are planning to use podcasts (52%) and text messages (42%) in 2013, up from 12% and 3% in 2012, respectively. Social media applications such as Facebook and Twitter are gaining acceptance. The percentage of plan sponsors who are planning to use these applications has tripled since last year from 6% in 2012 to 18% in 2013. Communication and Education Channels Webinar 25% Online forums 16% Podcasts Mobile apps Twitter Facebook 37% 9% Text messages 58% 56% 38% 2% 15% 83% 17% 81% 20% Use Extensively Aon Hewitt 48% 35% 6% 0% 22 47% 43% 7% 2% 17% 58% (n ranges from 57 to 318) 40% Use Selectively 60% Rarely Use 80% 100%
    • Managing Risk and Plan Expenses Plan sponsors are focusing on total plan costs in 2013. Ninety-five percent of plan sponsors who have not recently reviewed the total plan cost (fund, recordkeeping, and trustee fees) are likely to do so. Additionally, one-third of employers have recently hired a third party to assist them in benchmarking and evaluating costs; another 52% plan to do so this year. The number of employers who have been supplementing the required fee disclosures with additional communication has doubled since last year. Only 3% of employers are very likely to increase participants’ share of plan expenses. Likely Action With Respect to Plan Expenses in 2013 Likely to Do in 2013 (Among Those Plans That Have Not Recently Completed) Completed Recently Actions Related to Expenses 37% Review the plan’s total plan cost (including fund fees, recordkeeping fees, trustee fees, etc.) Very Likely Somewhat Likely Somewhat Unlikely Very Unlikely 70% 25% 3% 2% 33% Lower costs by changing some or all funds from mutual funds to institutional funds 10% 20% 26% 44% 32% Hire a third party to benchmark or evaluate costs 28% 24% 21% 27% 22% Restructure to allow administrative fees to be assessed to participants in a more equitable manner (e.g., consistent asset-based/revenue sharing, a per-head charge to participants) 7% 19% 25% 49% 15% Supplement required fee disclosure with additional communication details 15% 32% 24% 29% 11% Have participants share more plan expenses 3% 8% 25% 64% (n ranges from 198 to 307) 2013 Hot Topics in Retirement 23
    • Retaining Employees’ Balances in the Plan Sixty-two percent of plan sponsors have no preference if terminated employees leave money in their plan(s). Among the remaining group, 20% of respondents want the participants to leave the money in the plan and an additional 17% would like the participants to roll it to an IRA outside the plan. Twenty-one percent of sponsors are concerned about retail IRAs capturing the terminated participants’ balances. The discussion around defined contribution plans continues to evolve from purely asset accumulation to including the payout phase in retirement. Employers have begun to focus on controlling plan expenses in order to help increase participants’ ability to eventually retire. Currently, some employers are beginning to show interest in retaining assets in the plan, as it increases the company’s purchasing power and provides a more cost-effective vehicle for current and retired employees than those available in the IRA marketplace. Employer Preference: Terminated Employees Leaving Money in Plan Leave plan 17% Remain in plan 20% Other 1% No preference 62% (n=362) Level of Concern in Capturing Retail IRAs When Participants Terminate Employment Somewhat unconcerned 40% Somewhat concerned 17% Very concerned 4% Very unconcerned 39% (n=357) 24 Aon Hewitt
    • Employer Priorities in 2013 In 2013, plan sponsors are promoting financial wellness by providing effective measures, tools and messages that encourage employees to save for retirement. This study shows employers’ four key priorities for the year ahead. Focus on Financial Wellness I I I Promoting financial wellness and the use of investment advisory tools— Employers are focusing on the financial well-being of employees through enhanced communication, resources, mobile apps, and online tools. Employers are offering investment advisory tools through an array of alternatives to meet employee needs. Measuring retirement income adequacy—Employers are projecting retirement needs and required milestones for employees to reach their savings goals. Assessing plan design—Employers are assessing the impact their plan designs may have on participant behavior. Mitigate Risk in Pension Plans I I I Minimizing volatility—Employers are performing asset-liability studies and adjusting their plans’ investments to better match the liabilities. Adopting glide path asset allocation—Employers are adopting a glide path asset allocation strategy that will adjust their plans’ investment allocations. Transferring longevity risk—Plan sponsors are adding lump sum features to their pension plan for terminated vested participants or current active employees who leave the workforce in the future. Seek Transparency Regarding Total Plan Costs I I Reviewing fund offerings—In light of fee disclosure regulations, employers are reviewing fees associated with fund offerings in their defined contribution plans. Benchmarking total plan costs—Employers are evaluating and benchmarking the total plan costs (fund, recordkeeping, and trustee fees). 2013 Hot Topics in Retirement 25
    • Adopt New Technology I I Increasing the use of communication technology—Employers are using innovative technology channels to reach employees, such as text messaging and social media vehicles to communicate various aspects of their retirement plans to participants. Hosting webinars and podcasts—Employers are hosting webinars and podcasts to reach their employees about the importance of retirement savings and features of their plans. The retirement landscape continues to evolve in a challenging economy with increased scrutiny, while employee inertia regarding saving for retirement still exists. Employers are focusing their attention on promoting financial wellness by effectively managing their retirement programs and trying to reach as many employees as possible. The results of this study show the four key priorities that employers will address in 2013. By focusing on financial well-being, mitigating risks in pension plans, seeking transparency in total plan costs, and communicating with innovative technology, employers are making efforts to encourage employees to reduce the retirement income gap. 26 Aon Hewitt
    • Participating Employer Information Four hundred twenty-eight employers representing 11 million employees participated in this survey. Forty-five percent of the survey respondents have 10,000 or more employees. The average number of U.S. employees is 25,761, and the median is 8,350. Over half of respondents (55%) have publicly traded stock. Respondents by Size of Employee Base Range of Employees Percentage of Employers Under 1,000 7% 1,000–4,999 28% 5,000–9,999 20% 10,000–24,999 24% 25,000 or more 21% (n=428) Respondents by Industry Industry Percentage of Employers Industry Percentage of Employers Aerospace and Defense 2% Associations, Foundations and Charitable Organizations 2% Automobiles and Components 2% Health Care Equipment, Services and Pharmaceuticals Banks and Diversified Financials 7% Information Technology Building Products, Construction and Machinery 6% Chemicals 3% Commercial and Professional Services 6% Consumer Durables and Apparel 2% Consumer Services and Products 4% Education 5% Energy 5% Food, Beverage and Tobacco 6% Government 3% Insurance 11% 6% 10% Media 2% Metals, Mining and Paper Products 4% Retail 7% Telecommunications Services 2% Transportation 2% Utilities 3% (n=428) 2013 Hot Topics in Retirement 27
    • www.aonhewitt.com 28 Aon Hewitt
    • About Aon Hewitt As the global leader in human resource solutions, Aon Hewitt partners with organizations to solve their most complex challenges in health, retirement and talent. Aon Hewitt designs, implements, communicates and administers a wide range of leading solutions. With more than 29,000 professionals in 90 countries, Aon Hewitt guides clients to achieve better business outcomes while improving the well-being and security of their people. Contact Information Patti Balthazor Björk Director of Retirement Research Aon Hewitt +1.847.295.5000 patti.balthazor.bjork@aonhewitt.com Amy Atchison Research Consultant Aon Hewitt +1.847.295.5000 amy.atchison@aonhewitt.com Rob Austin, FSA, EA Senior Retirement Consultant Aon Hewitt +1.704.343.4100 rob.austin@aonhewitt.com For questions or comments, please contact Patti Balthazor Björk or Amy Atchison, by telephone at +1.847.295.5000 or via email at: patti.balthazor.bjork@aonhewitt.com or amy.atchison@aonhewitt.com. © 2013 Aon plc