Out of Crisis Comes Opportunity

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1THE ROCK CREEK GROUP
Kathleen Kennedy Townsend
Founder, Center for Retirement Initiatives
Managing Director, The Rock Creek Group

Out of Crisis Comes Opportunity
How States Are Stepping Into The Breach

Source: Reuters
• 77 percent worried more about outliving
their money in retirement than death itself,
(according to a survey by financial-services company Allianz of
people in their late 40s found)
• Those who are married with dependents
are even more terrified, with 82 percent
saying that running out of cash is a more
chilling prospect than death. (according to a
survey by financial-services company Allianz of people in their
late 40s found)
Is Outliving Your Savings a
Fate Worse than Death?

Fear and Loathing
• From 2001 to 2014, retirement has remained Americans’ top financial concern.
(Source: Gallup Poll)
• 86% of Americans believe that the United States faces a retirement crisis
(Source: National Institute on Retirement Security)

Do Not Go Gently into That Good Night
36%
have $0-$1,000
16% have
$1,000-$9,999
8% have
$10,000-$24,999
9%
have $25,000-
$49,999
9%
have $50,000-
$99,999
11%
have $100,000-
$249,999
11%
have $250,000
or more
Source: Employee Benefit Research Institute
52%
have less
than $10,000

• If you give Americans the opportunity to save they believe they could do it, if
employers made it easy
• 70% of Americans believe they could save $25 more per week by giving up:
• Eating out / ordering in (46%)
• Soft drinks or snacks (13%)
• Movies, videos, DVDs or streaming (12%)
• Coffee from specialty shops (11%)
• Lottery tickets (8%)
(Source: Retirement Confidence Survey, EBRI, Greenwald and Associates)
• But, half of all Americans can’t raise $2,000 in 30 Days … Because it’s not easy!
(Source: Time Magazine)
• $120,000 needed for a worker making $30,000 to reach 78% of pre retirement
income
Meager Savings

1. Americans are living
longer
2. Quantity and Quality of
Employer Based
Retirement
3. Individuals Don’t Invest
Well
Why Is There a Crisis?

• Americans are living longer
• Less Smoking
• More exercise
• Better healthcare
Why?

• Reduction of the Quantity of Employer Based Plans
• Half of working Americans were not offered a retirement
account by their employer —the result of a longer trend in
which, from 1999 to 2013, the percentage of workers being
offered such plans declined from 61% to 51%
• In 1978, 2/3 of dedicated retirement assets were held in
traditional pensions; by contrast, only 1/3 are today
(Source: The Hamilton Project, Brookings Institute)
Why?

• Reduction of the Quality of Employer Based Plans
• Workers with DB plans have a far greater chance of not being
in poverty
Why?
Source: Authors’ projections based on SIPP 2008 panel data; data from 2009. See chapter Appendix for income projection methodology. Universe is California residents age 25-64 who worked in the reference
period (the past four months), had positive earnings, were not unpaid family workers, and were and are not in the Armed Forces.

• Most American workers are not filling the retirement void created by their employers
• Among employees earning between $30,000-$50,000 a year, only 1 in 20 participate in
a non-employer based IRA
(Source: Unpublished estimates from the Employee Benefit Research Institute)
• When they do, they lose
• Only 1% of all active traders beat the market
• Why? Overconfident – overtrade, buy high/sell low, portfolios lack diversification,
pressure to chase ‘hot’ stocks.
• Investors’ equity fund returns lagged the S&P 500 index by 4.2 percentage points
annually over 20-year periods (Source: Dalbar).
The House Always Wins
(Source: Marketwatch, Howard Gold)

Who has Pensions?
• Unions: 82%
• Large Employers: 74%
• Government: 82%
Who Doesn’t?
• At employers with fewer than 10 workers, just 17 percent of workers have access to a
retirement plan
(Source: John Friedman, The Hamilton Project, June 2015)
Current Retirement Landscape: Employer Based Savings
Economies of
Scale
Adam Smith: The Wealth of Nations

Access Is Not Available For Employees In Small Firms
Source: The Hamilton Project
Employer Sponsored Retirement Plan by Firm Size
2007-09
25.1%
49.9%
63.5%
70.7%
76.6%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Less than 25 25 to 99 100 to 499 500 to 999 1000 or more
United States
FirmSize (numberof employees)
Shareofworkers

81% - 84%
Participation if
offered!!
All
Access
Take-up
Participation
Firm Size
Firm Size <25
Access
Take-up
Participation
Firm Size 25-99
Access
Take-up
Participation
Firm Size 100-499
Access
Take-up
Participation
Firm Size 500-999
Access
Take-up
Participation
Firm Size 1,000+
Access
Take-up
Participation
*Each three-year span represents appended data for those three years; figures reported are three year averages.
Source: Authors'analysis ofMarch CPS, 1988-90,1998-2000, and 2008-10. Data are from 1987-89, 1997-99, and 2007-09, respectively.
Figures are three-year averagers.
71.2% 65.5%
83.7% 76.6%
85.1% 85.4%
84.0% 84.9%
65.7% 60.0%
57.3% 52.8%
78.2% 70.7%
69.9% 63.5%
82.3% 83.1%
80.0% 81.8%
43.4% 40.8%
21.7% 20.8%
54.2% 49.9%
27.3% 25.1%
79.6% 82.8%
53.9% 49.0%
64.5% 58.1%
83.5% 84.4%
1997-99* 2007-09*
Participation Rate Does Not Depend On Firm Size
Employer Sponsored Retirement Plan Coverage, United States
United States United States

• Employees who work in primarily small firms that don’t offer a retirement plan
• Employees in middle income brackets who have the money to save if it was easy
• Employees who frequently change jobs
• Self-employed
• Financially not sophisticated
• Social security will not be sufficient to support them in retirement years
• If employees don’t save taxpayers will pick up the tab
• Increasing net worth among the bottom one-third of retirees by just 10 percent over the
worker’s career would decrease government outlays by more than $194 million over the
next 15 years
(Source: AARP)
Who Needs Help?

• Reasonable monthly retirement benefits
• Automatic payroll deduction
• Affordable
• Portable
• Professionally managed
• Low fees
• Pooled risk
• Choice: ability to make changes
What Should Be Features of Savings Plan

Savings in Individual Retirement Accounts are Inadequate

• Multi generational risk allocation
• Multi generational pooling means that individual does not have to
decrease risk close to retirement. The younger generations in the pool can
absorb the risk and the older individual can enjoy the higher returns
associated with greater risk
• Professionally Managed
• More easily resists the buy high, sell low phenomena
• Access to More Asset Classes
• More balanced portfolio because asset classes that don’t require “daily
liquidity” can be included
• Fees
• Lower fees because spread over thousands of people
The Benefits Of Pooled Investments

With Individual Accounts, Retirement Income Fluctuates Depending on When
People Retire. That makes them less secure, not more
Pooling Assets will enhance investment returns and increase the probability of individuals
meeting their retirement targets.
Source: RCG
Only 17% of cohorts will meet retirement
income target of 78% with a 60% equity,
40% fixed income portfolio (blue)
Only 7% of cohorts will meet retirement income
target with a 100% Fixed Income Strategy (green)
The percentage of cohorts meeting the retirement
income of 78% replacement rate doubles to 33% with
a pooled investment strategy (orange)

20
Individual Characteristics
Retirement Age:
Age:
Salary:
Annual Contribution Rate:
25
65
$30,000
3%
Post-Retirement Income
from Personal Savings:
$677 Monthly
(27% of salary) Total Post Retirement
Income:
$1950 Monthly
(78% of salary, ie.,
replacement ratio*)Post-Retirement Income
from Social Security:
$1273 Monthly
(51% of salary)
Market Assumptions
Inflation: 2.5%
Fixed Income Returns: 5.5%
Equity Returns: 9.5%
60% Equity, 40% Fixed
Income Return (nominal): 7.9% * According to Aon consulting a total
replacement ratio target of 77%-78% is
required to maintain a person’s pre-
retirement standard of living
Life Expectancy: 85*
* Life expectancy of a person reaching 65 is 84.5 for men and 86.6 year for women

25 States Have Considered or Enacted
Private Sector Retirement Initiatives

Bill Element California SB 1234 Illinois SB 2758 Oregon 8B 2960
Type of retirement plan Automatic traditional IRA Automatic ROTH IRA Defined Contribution
Required participation Employers with 5 or more
employees with no retirement
plan
Employers with 25 or more
employees with no retirement
plan.
Size of business not yet
determined; there is also auto
escalation and auto enrollment
Exceptions None 2 year delay for new businesses
or businesses with retirement
plans within last 2 years
Investment Management Pooled fund with professional
management – no individual
choice
Pooled and professionally
managed
Pooled and professionally
managed
Insurance Board to procure private
insurance to provide guaranteed
return
Board has option to create a
“secure return” principal
preservation option with private
insurance
Insurance is an option
Fees No more than 1% No more than .75%
Payout Stated interest in providing
lifetime retirement income, but
no specific requirement
Stated interest in providing
lifetime retirement income, but
no specific requirement
Implementation The board must conduct market
analysis and feasibility study
before returning to legislature
for authorization vote before
opening plan to enrollment.
The board shall open the plan to
enrollment within 1 year of
effective date of bill.
The board has enormous power
and it does not have to go back
to the legislature
Secure Choice Plans

Massachusetts Retirement Plan for
Non-Profits
Washington Small Business
Retirement Marketplace
Implement if ERISA Applies Yes Yes
Administrative Entity Treasurer’s Office Agency
Employers Affected Nonprofits of 20 or fewer employees 100 or fewer employees
Employer Participation Voluntary Voluntary
Automatic Enrollment Yes
6%
Business owners may auto enroll as IRS
rules allow – no state requirement
Investment of Assets 17 options:
13 custom target-date funds
4 objective funds
• 1Growth
• 1 Income
• 1 Capital Preservation
• 1Inflation Protected
Depends on Type of Plan
Fees 22-86 bps custom date funds
Growth: 60 bps
Income: 40 bps
Capital Preservation: 40 bps
Inflation Protected: 86 bps
No more than 1%

• It would create a pooled and professionally managed trust
• The multi-employer retirement plan allows for employer contributions
• It would create a lifetime annuity
Massachusetts Legislation

• President Directed DOL to Issue Rules to "Provide a Clear
Path for States to Create Retirement Savings Programs” on July
31st, 2015.
• DOL to issue proposed policy changes by end of 2015 with goal
to finalize by end of 2016.
• Rulemaking will address 2 approaches:
• ERISA exempt - Mandatory, auto-enroll IRAs
 Will provide updated guidance on safe harbors that avoid ERISA
preemption.
• ERISA covered – 401(k) defined contribution plans
 Will look at the use of the Multiple Employer Plan (MEP) arrangement by
the state to facilitate plan formation and take burden off of employers, but
maintain ERISA protections.
DOL ERISA RULEMAKING

To foster state innovation by serving as a trusted public policy center that offers rigorous research,
technical assistance, and effective advocacy for state-based retirement solutions by:
• Connecting state policymakers, scholars and industry experts
• Sharing research, best practices and success stories with state policymakers
• Analyzing legislative and regulatory developments and assisting with program design
• Serving as a resource to all states and stakeholders in addressing the challenge of achieving
retirement security for more Americans and promoting policies that will strengthen the
economy
Center For Retirement Initiative's ROLE
RESOURCE FOR STATES

John Chiang (D-CA)
Janet Cowell (D-NC)
Ron Crane (R-ID)
Tom P. DiNapoli (D-NY)
Ron Estes (R-KS)
Mike Frerichs (D-IL)
Mark Gordon (R-WY)
Nancy Kopp (D-MD)
Ken Miller (R-OK)
Kelly Mitchell (R-IN)
Beth Pearce (D-VT)
Kelly Schmidt (R-ND)
Scott Stringer (D-NYC)
Ted Wheeler (D-OR)
Clint Zweifel (D-MO)
Council of State Treasurers (15)

• Launched in February 2015 with 13 states and NYC as
members
• Host monthly meetings for states to discuss their legislative
initiatives, share experiences, lessons learned, best practices,
etc.
• CRI’s opportunity to build deep relationships with the state
staff and identify areas of research and advocacy where
we can support states’ efforts
• Participating states currently include WA, OR, CA, IL, MD, ND,
KS, KY, NY, NYC, VA, VT, CT, UT with others to be added.
• Host and/or facilitate meetings with federal policymakers to
discuss issues of concern to states
CRI Leads State Legislative Working Group

• Crisis: People are Scared
• Three words: Retirement, elderly, planning
• Hope and Opportunity
• States are laboratories of Democracy
• Involvement
• Pooled and professional management
Conclusion
States Are Stepping Into The Breach

30
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