DC Best Practices - Nebraska. DC Plan Design.pdfThe survey was conducted in collaboration with...
Transcript of DC Best Practices - Nebraska. DC Plan Design.pdfThe survey was conducted in collaboration with...
DC Best Practices
Brendan Curran, CFA
Mary K. Guy
July 27, 2017
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This material is solely for the private use of Nebraska Investment Council and is not intended for public dissemination.
Participants May Not be Optimally Allocated
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8.4%8.5%have a 0% equity allocationhave a 100% equity allocation
Source: SSGA Defined Contribution Team based on plan sponsor data set (as of December 31, 2016).Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20 30 40 50 60 70 80
Equity Rate
AgeAge Based Individual participants
2%
7%
25%
3%
10%
29%
0%
5%
10%
15%
20%
25%
30%
35%
After 4 months After 1 year After 2 years
Future return on stock purchased Future return on stock sold
Behavioral Impediments to Retirement Readiness
Low Financial Literacy Inertia
Frequent Traders Chase Returns Plan Design Impacts Investment Decision Making
• It takes an average of 371 days for the average participant who is already investing in a DC plan to allocate to newly introduced investments in the plan1
• Only 9% of plan participants made a trade in 20152
Center for Applied Research Preliminary Research Findings, May 2014*
Source: ‘Do Investors Trade Too Much?’ Odean (1999)
1 Delayed Adjustment to New Funds, David Laibson, Andrew Metrick and James Choi (2002).2 How America Saves, Vanguard (2016).
Source: Benartzi and Thaler (2001)
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* A series of questions was posed to 2,880 investors in Q1 2014 in 16 countries globally. The questions focused on basic financial and investment related concepts to gauge respondents’ financial literacy.
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Equity Distribution by Age
Participants asset allocations are widely distributed as few derisk near retirement
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Source: SSGA Defined Contribution Team based on plan sponsor data set (as of December 31, 2016).Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
Equity Allocation by Age
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0%
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30%
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50%
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80%
90%
100%
25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69 70 to 74 All
Equity Allo
catio
n
Age
Middle 90% Middle 50% Median
Majority of Participants Using Core Investment Choices
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Limited derisking reflects the power of inertia for core menu investorsParticipant Usage of Investment Options (Amongst Participants Invested)
Source: SSGA Defined Contribution Team based on plan sponsor data set (as of December 31, 2016).Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
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0
1,000
2,000
3,000
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6,000
0%
10%
20%
30%
40%
50%
60% Num
ber of Participants with Any Allocation to FundFa
ction of Partic
ipan
t with
Any
Allo
catio
n to Fun
d
Mean Median Fully Invested Participant Count
Participants Identifying as ‘Do-it-Myself’
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Over 70% of plan participants are not taking advantage of pre-mixed portfolios• Inertia likely driving investment decision‐making
Source: SSGA Defined Contribution Team based on plan sponsor data set (as of December 31, 2016).Allocations are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
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0%
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100%
25 – 29 30 – 34 35 – 39 40 – 44 45 – 49 50 – 54 55 – 59 60 – 64 65 – 69 70 – 74 All
% of P
articipan
ts
Age
Do‐it‐for‐me Help‐me‐do‐it Preserve‐it Do‐it‐myself
‘Do‐it‐for‐me’ = 75% or more of savings in Age Based Funds‘Help‐me‐do‐it’ = 75% or more of savings in Risk Based Funds‘Preserve‐it’ 75% or more of savings in Stable Value‘Do‐it‐myself’ = All others
Participants Use of Plan Options
The Action Gap: Understanding versus Knowing
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Source: SSGA April 2012 DC Investor Survey. The survey was conducted in collaboration with Boston Research Group, a leader in retirement plan research. The data were collected in April 2012 through a 10‐minute Internet survey using a panel of verified 401(k), 403(b), profitsharing and stock purchase plan participants who were actively contributing to their plans. The sample of 1,034 observations has a maximum sampling error of +/‐ 3 percentage points at a 95% confidence level.
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Think it’s important
Feel knowledgeable
about it
How to select a diverse mix of investments 65% 33%
How to adjust my asset allocation depending on my investment timeline 67% 30%
How to determine how much I will need to save to have a secure retirement
78% 33%
How to make my retirement savingslast a lifetime 82% 28%
Asset Allocation (Target Retirement Funds)
Income Fund
2015 Fund
2020 Fund
2025 Fund
2030 Fund
2035 Fund
2040 Fund
2045 Fund
2050 Fund
2055 Fund
2060 Fund
Core Funds
Self‐Directed Brokerage
Tiered Plan Menu: Helping Improve Participant Outcomes
Tiered investment menu aligns plan design with participant behavior• Seeks to offer a strong default and communicate it’s benefits• Simplify and streamline core menu by consolidating fund options or employing white labeling• Seeks to provide added diversification within default or core options fund of funds
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1 Callan DC Trends (2017)Diversification does not ensure a profit or guarantee against loss.
Capitalize on automatic features and drive flows
to diversified automated solutions
Provide simplified choice across broad
risk spectrum
US Large Cap Equity
US Small/Mid Cap Equity
Global ex‐US Equity
Diversified Inflation
Management
Cash/ST FixedIncome
Core US Fixed Income
Globally Diversified
Fixed Income
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The Benefits of Target Retirement Funds
1 Callan 2017 DC SurveySource: SSGA
Target Retirement Funds offer retirement savers an easy and effective means of managing their retirement savings over time• Over 90% of DC plans offer Target Retirement Funds1
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DiversificationBroadly diversified across an
array of asset classes
Automatic DeriskingAutomatically derisk based on an
expected retirement date
Professional OversightOngoing management ensures the funds prudently evolve
Breadth of Diversification Strategic Enhancements over Time
A Case for Reenrollment
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1 EBRI Issue Brief, December 2013 no. 394, data as of December 31, 2012. 2 J.P. Morgan Retirement Plan Services. Analysis measurement period is December 31, 2008, through December 31, 2013. The above data represents a sampling of participant data. It does not represent the returns of any individual product or portfolio. 3 SSGA Defined Contribution. Simulations use SSGA Long‐Term Asset Class forecasts and compare median outcomes of 10,000 wealth accumulation simulations holding contribution rates and wage growth assumptions constant.
1 2 3
More than 40% of newly hired employees allocate almost exclusively to target date funds, while less than 10% of those with more than 20 years tenure do so
Participants in target date funds have realized higher average returns with less dispersion in best case and worst case outcomes
Legacy stable value investors are exposed to the risk of not generating sufficient wealth accumulation to last throughout retirement
Annualized Five‐Year Returns: Highs, Lowsand Averages by Investment StrategyDecember 2008 – December 20132
0%5%10%15%20%25%30%35%40%45%
0–2 >2–5 >5–10 >10–20 >20–30 >30
Tenure (Years)
Percentage of participants with more than 90% invested in Target‐Date Funds1
$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000$800,000
20 30 40 50Age of First Contribution
Forecasted Wealth Accumulation for participants based on age of first contribution3
Stable Value Target Date Funds
Stable Value investors exposed to insufficient returns
Investing in the Default can prevent extreme outcomes
More tenured employees are less likely to use Default
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The fraction of assets invested in equities is positively related to the fraction of equity funds offered by the
401(k) plan3
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Best Practices in the Core Menu
Source: SSGA1 Iyengar, Huberman and Jiang (2004). 2 Elton, Blake, and Gruber (2013)3 Benartzi and Thaler (2001).4 Dvorak (2009)
SimplifyLimit the number of available options to increase participant engagement
DiversifyImbue options with meaningful internal diversification; reducing risk of ‘extreme outcomes’ for concentrated investors
BalanceStrike a balance in the number of fund options offered with opposing objectives (growth versus preservation)
Each additional 10 funds in the investment menu is
associated with participation rate that is 2% lower1
Participants contributions and transfers magnify the change in asset allocation caused by
returns by 57%2
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92% of participants do not understand ‘Growth’ and
‘Value’ styles, 40% believed that Growth generally outperforms Value4
Did you know….
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Conclusion: Participants Want and Need your Help Investing for Retirement!
Source: SSGA
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Power of the Default: Evaluate Target Retirement Funds as a simple and effective means for participants to ‘set it and forget it’
Take Advantage of Inertia: Consider tools, like a plan reenrollment, to leverage recognized behaviors to the benefit of plan participants
Make Bad Decisions Hard: Revisit the core investment menu and affirm alignment with established best practices
Appendix A: Additional Information
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Precedence for Re-enrollments
Many large plan sponsors have undergone re-enrollments in recent years with meaningful success in moving participants towards age-appropriate investments
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Impact on Asset Allocation
DHL Retirement Savings Plan
Illinois State Board of Investment
Hanesbrands, Inc.
23% 21%12%5% 10%
62%
0%
20%
40%
60%
80%
Small Cap Growth Stable Value Target Date
Pre‐reenrollment Post‐reenrollment
1 'Disrupting DC plan status quo', Pension and Investments, July 13, 2015.2 SSGA “The Participant”, Winter/Spring 2015.3 Pensions & Investments, “Auto Re‐enrollment adoption gains slowly”, January 2015Target Date asset allocation sourced from Brightscope.
Reason for Re‐enrollment/Key Takeaways
27% 30%
89% 85%
0%20%40%60%80%100%
2012 2013 2014 2015
% of Plan Assets in TDFs
29% 24%8%
66%
0%
20%
40%
60%
80%
Stable Value Target Date
Pre‐reenrollment Post‐reenrollment
Reason: Participants were misallocated1
“We're trying to get the plan consistent with best practices because we have an outsized allocation (23.3% of total fund assets) to small‐cap growth,” —William Atwood, ISBI
Reason: New Plan Investment Option (TDFs)
“The old default option was cash, and we found that there were just too many people who had all their savings in cash,” — Robert Whitaker, DHL Treasurer2
Reason: New Recordkeeper/Misallocated Participants
“Mapping doesn't correct misallocation and it doesn't allow participants access to new asset classes” — Kendall Frederick, Hanesbrands3
Participant Reaction to a Re-enrollment
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Communication is key while participant reaction tends to be muted
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1 “Harnessing Inertia, Improving participant outcomes through re‐enrollments” SSGA (2015) 2 “Buk made Chrysler's huge re‐enrollment look easy” P&I, November 11, 20133 “Exelon powers up major 401(k) plan changes” P&I, September 29, 20144 “Bemis cuts investment overlap, saves on DC plan expenses” P&I, January 6, 2014
“There was very extensive education” — Cindy Cattin, Director of Investment Options, Exelon
“People appreciated the question‐and‐answer sessions.” —Doug Brown, CIO, Exelon3
“There was a lot of concern about employee disruption, but in the end, only a few people opted out.”— Rob Whitaker, Treasurer, DHL1
“Comprehensive communication is the best way to address participants' concerns, she said.”
“We didn't experience a negative response,” —Angela Buk, Head of Investment Options, Chrysler2
“If you communicate early and often, you won't get the pushback from employees,” Melanie Higgins, Director of Global Retirement Plans, Bemis4
An Inconvenient Truth
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Retirement is evolving with profound consequences for employees and employers
Definition of a Career is Rapidly Evolving Starting behind the Curve
75767778798081828384
Participants have been living longer2
Ages
2 United Nations, Department of Economic and Social Affairs, Population Division (2013). Life expectancy for individuals at age 60.
Last 30 Years Next 20 Years
European Equities
0.0% Growth‐recovery Scenario Slow‐Growth Scenario Historical Real ReturnsLast 30 Years Next 20 Years
US Equities
Last 30 Years Next 20 Years
US Bonds
Last 30 Years Next 20 Years
European Bonds7.9%
4.0%–6.5%7.9%
4.5%–6.0%5.0%
0%–2.0% 0%–2.0%
5.9%
1 McKinsey Global Institute (May 2016) — Diminishing Returns: Why Investors may need to lower their expectations. Historical returns for Western European fixed‐income are based on treasury bonds using data from the Dimson‐
Marsh‐Staunton Global Returns database, which targets a bond duration of 20 years. Future returns show ranges across a set of countries, and are based on ten‐year bonds; numbers reflect the range between the low‐end of the slow‐growth scenario and the high end of the growth‐recovery scenario. Past performance is not a guarantee of future results. Estimated returns reflect subjective judgments and assumptions.
There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
Diminishing Expected Returns1
40% growth rate of ‘gig’ economy1
39% of private sector employees do not have access to a DC plan2
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2 averaged # of job changes by 32, for people born in 1960s — 1980s3
Young millennials are on track to surpass four changes by the time they reach age 325
1 EBRI Databook on Employee Benefits, Legislative History, ebri.org/pdf/publications/books/databook/dbappxe.pdf 2 The Cerulli Report, Retirement Markets 2015., 3 BLS, 4 US Department of Labor Employee Benefits Security Administration December 2014, 2012 Data Release Version 2.0; 5 LinkedIn “Will This Year’s College Grads Job‐Hop More Than Previous Grads?” April, 12, 2016
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Appendix B: Important Disclosures
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Important Disclosures
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Investing involves risk including the risk of loss of principal.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Assumptions and forecasts used by SSGA in developing the Portfolio’s asset allocation glide path may not be in line with future capital market returns and participant savings activities, which could result in losses near, at or after the target date year or could result in the Portfolio not providing adequate income at and through retirement.
SSGA Target Date Fund are designed for investors expecting to retire around the year indicated in each fund’s name. When choosing a Fund, investors should consider whether they anticipate retiring significantly earlier or later than age 65 even if such investors retire on or near a fund’s approximate target date. There may be other considerations relevant to fund selection and investors should select the fund that best meets their individual circumstances and investment goals. The funds' asset allocation strategy becomes increasingly conservative as it approaches the target date and beyond. The investment risks of each Fund change over time as its asset allocation changes.
Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.
Investments in mid/small‐sized companies may involve greater risks than in those of larger, better known companies.
Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self‐liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).
Important Disclosures (continued)
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Investing in high yield fixed income securities, otherwise known as junk bonds, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower‐quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
Diversification does not ensure a profit or guarantee against loss.
Investing in commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.
Increase in real interest rates can cause the price of inflation‐protected debt securities to decrease. Interest payments on inflation‐protected debt securities can be unpredictable.
International Government bonds and corporate bonds generally have more moderate short‐term price fluctuations than stocks, but provide lower potential long‐term returns.
State Street Global Advisors, One Lincoln Street, Boston, MA 02111–2900.
Web: www.ssga.com
© 2017 State Street Corporation —All Rights Reserved.
Tracking Number: DC‐4007
Expiration Date: August 31, 2017
Appendix C: Biographies
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Biographies
Brendan Curran, CFA Mary K. Guy
Brendan is a Vice President of State Street Global Advisors and an Investment Strategist within the Defined Contribution team. In this role, he is responsible for representing SSGA’s DC investment strategies, supporting current relationships and expanding SSGA’s DC initiative. He also serves as a resource to plan sponsors working with them on a variety of plan design considerations.
Brendan joined the Investment Strategy team from his most recent position as a Relationship Manager on the Defined Contribution team focused on the intermediary and recordkeeping channels. Prior to that, Brendan was a Senior Associate within SSGA's Investment Operations Group where he provided support to the Active International Equity and Currency Portfolio Managers.
Brendan earned a BA in Economics from Connecticut College. He earned the Chartered Financial Analyst designation and is a member of the Boston Security Analysts Society and CFA Institute.
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Mary is a Vice President of State Street Global Advisors and a Senior Relationship Manager. She is responsible for managing institutional client relationships located in the Midwestern United States. Mary has 24 years of experience in the investment management industry.
Prior to joining SSGA, Mary was at David L. Babson & Company for seven years, most recently as Client Service Officer and previously as manager of the Request for Proposal and consultant questionnaire processes. She has also worked at Concert Capital Management Inc. and Keystone Investment Management Corporation in institutional marketing roles.
Mary received her BA from the University of Wisconsin, Eau Claire and her MBA from Boston College. Mary also holds the FINRA 7 and 63 registrations. Mary also holds the NFA Series 3 and is an Associated Person of SSGA Funds Management, Inc. ('SSGA FM'). SSGA FM is a Commodity Trading Advisor registered with the Commodity Futures Trading Commission.
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