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1st Quarter 2009 Executive
Summaries
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The combination of dramatic changes taking place in retirement plans and demographic forces have brought new risks and responsibilities for individuals, with many at risk of falling short in their retirement income needs. This article describes those changes, shows how many employees have not met the challenges they now face, and discusses how employers have responded through their retirement plan designs. The basic challenges of employee responsibility remain, but new tools, resources and approaches emerge to address barriers to retirement readiness.
Defined Contribution Plan Design in a Post-PPA Environment
by Rita Holder, Towers Perrin
The Pension Protection Act (PPA) opened the door to new features that enable employers and employees to manage their retirement savings risks. This article gives an overview of the defined contribution plan design changes that PPA has brought, including automatic enrollment, automatic contribution increases and default investments. The author provides plan sponsors with information about potential fiduciary liabilities and suggests best practices for ensuring fiduciary compliance in the current post-PPA environment.
Taking Aim at Benchmarking and Evaluating Target Date Funds
by Ivan Cliff and Lori Lucas, Callan Associates
Since the 2006 Pension Protection Act paved the way for target date funds to be a safe harbor default investment option within defined contribution (DC) plans, adoption of such funds has exploded. Unfortunately, there have been no widely accepted objective benchmarks or analytical methods for comparing and analyzing differing target date solutions. This article explores key tools necessary for performing a complete target date fund analysis, including the creation of a consensus glide path index. The authors find that all target date funds involve a series of trade-offs, and that it is not enough just to look at any one performance variable to make a determination about the appropriateness of a target date series for a given DC plan.
The Spend-Down Challenge: Succeeding in Uncharted Territory
by Bill McClain, Mercer
Organizations have made important strides in helping employees accumulate money for retirement. But the looming challenge for a vast nation of retirees will be to effectively manage the spend down of those funds—and it is vital that the retirement community play a strategic role in helping them succeed. This article describes the challenges facing retirees and recommends an action plan to address retirees' longevity risk and their spend-down challenge.
A Plan Sponsor's Guide to Postemployment Investment Issues
by Susan Alford, CEBS, Aon Consulting
A new generation of products designed to address retirement plan participants' postemployment investment issues and offer them a stream of income for life are on the market. If plan sponsors decide to offer participants such products, a well documented process is necessary for meeting fiduciary responsibility and mitigating potential liability. This article explains how analyzing program goals, reviewing options in the marketplace, evaluating and monitoring the plan, and helping participants make the right choices can aid plan sponsors in mitigating fiduciary risk in this rapidly evolving marketplace.
Everything Old Is New Again: Applying Defined Benefit Solutions to Defined Contribution Programs
by Peter A. Gold and Alan Vorchheimer, Buck Consultants
Plan sponsors and financial institutions, buttressed in some cases by legislation, have developed features and services to help employees manage the impact caused by the shift from defined benefit (DB) plans to defined contribution (DC) plans. Seen as a whole, these efforts have been referred to as the “DB-ification” of the DC plan. This article describes common design techniques used to help bring DB plan features to DC plans, including ways to ensure benefits adequacy; mitigate investment, longevity, disability and lifestyle risks; and lower investment costs. Together, these techniques should help employees better manage the challenge of securing adequate retirement income in the years ahead.
Helping Retirees Maximize Sustainable Income With Institutionally Priced Annuities
by Chris Mayer, Principal Financial Group
In light of increasing life expectancies and shrinking sources of guaranteed lifetime income, using income annuities as a tool for providing secure retirement income is an idea whose time has come. This article dispels common myths about income annuities and discusses why employers should play a leading role in providing retirement income security by offering income annuities as a source of guaranteed lifetime income. Employers can bring annuities to their company-sponsored pension plans without adding burdensome costs or administrative headaches.
Who Is Likely to Opt Out of an Automatic Enrollment Plan? Who Is Likely to Stay in? A Study of 401(k) Participation Choices
by Leslie A. Muller, Economist, Kenneth R. Elliott, U.S. Bureau of Labor Statistics and James H. Moore Jr., New Jersey Department of Labor and Workforce Development
Automatic enrollment (AE) 401(k) plans are an increasingly common plan choice for employers. This article reviews regulatory and legislative actions related to AE, as well as the literature relating to traditional 401(k) plan participation, AE and financially vulnerable workers. Using 2001 SIPP data, the authors examine the reasons why 401(k)-eligible workers decline to participate and lay out their econometric model and its subsequent estimates of who is most likely to stay in, and to opt out of, an AE plan. They find that workers under the age of 30 are the most likely group to stay enrolled in an AE plan, with older individuals, those with annual earnings under $30,000 and blacks more likely to opt out. The authors discuss policy considerations raised by these findings.
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