Retirement Services. Perspectives 2014: Defined contribution retirement plan benchmarks

Transcription

1 Retirement Services Perspectives 2014: Defined contribution retirement plan benchmarks

2 Perspectives 2014: Defined contribution retirement plan benchmarks Employer-sponsored retirement plans are often the only retirement savings vehicle for most employees. In fact, an employer-sponsored retirement plan, which generally is a 401(k), will be the main source of retirement income for the majority of plan participants; more than 80 million Americans are covered by defined contribution plans, with assets now in excess of $4 trillion. For this reason alone, your plan is a critically important benefit to your employees. Employers face a difficult balancing act as they weave through the difficulties present in a fragile economic recovery.

3 Overview A well-designed benefit package must keep costs in check, but at the same time provide an effective total rewards program attractive to current and prospective employees. As one component in the benefit program, a qualified retirement plan should offer employees the opportunity to achieve retirement security. Comparing your plan to industry benchmarks is one way to look at the big picture and determine how your plan compares to peers. In this publication, we ve compiled a summary of statistics and trends related to common features of retirement plans. The information and benchmarks included in Perspectives 2014 provide a useful comparison for evaluating the current status of your retirement plan program, and they may help you identify potential changes to consider. Survey data presented in this booklet, representing the most recent information available, is taken from the following surveys: The Profit Sharing Council of America s 56th Annual Survey ( PSCA Survey ) This survey reports on the 2012 plan year experience of 686 profit sharing and 401(k) plans covering 10.3 million participants and $769 billion in plan assets. The data is collected from plan sponsors invited to complete an online or hard-copy survey and represents a diverse array of plan sizes ranging from fewer than five participants to hundreds of thousands of participants. Company sizes, geographic locations, asset sizes and industries are quite diverse, as well. The Deloitte 401(k) Benchmarking Survey, 2011 Edition (Deloitte Survey) Information in this survey is compiled from the online responses of 430 employers collected in the first half of Respondents were evenly distributed geographically and included both publicly and privately held companies. The size of respondents varied, but the largest segment was employers with between 1,000 and 5,000 participants. The Deloitte/Investment Company Institute Defined Contribution/401(k) Fee Study (Deloitte Fee Study) The Investment Company Institute (ICI) engaged Deloitte to conduct this survey of defined contribution plan sponsors. The survey reviewed data from ICI, as well as a Web-based survey conducted by Deloitte during A total of 525 plan sponsors participated in the survey, providing detailed information regarding plan characteristics, design, demographics, products, services and associated fees. While the survey is not intended to be a statistical representation of the defined contribution/401(k) marketplace, Deloitte and ICI reported that the demographics of the plans participating in the survey appeared similar to the broader market. Vanguard How America Saves 2013 (Vanguard Survey) The data in this survey is drawn from the universe of the Vanguard qualified plan clients consisting of more than 2,000 plans, 1,600 clients and more than three million participants. The data represents information reported as of December 31, Table of contents Executive summary Eligibility and participation Automatic enrollment Other plan design elements Employer contributions Total company contributions Employee contributions Participant account balances Investments Plan expenses Other benefits Closing thoughts BMO Retirement Services received more Best in Class awards overall than any other provider ranked in PLANSPONSOR magazine s (k) DC Survey.

4 Perspectives 2014: Defined contribution retirement plan benchmarks Executive summary The recovery of the fragile American economy continues as employers respond to the challenge of offering reward strategies aimed at benefitting employees. The demands of health care and saving for retirement are placing stress on employers and employees alike. The population is aging, which causes more employees to focus on rising healthcare costs, drawing attention away from the concern of establishing adequate retirement income. If income from Social Security and private sources, such as personal savings and retirement accounts, is not sufficient to maintain a standard of living, many retirees will face difficult and perhaps unexpected choices. Some may be forced to reduce or eliminate some post-retirement expenditures, while others may become more dependent on their adult children for financial support. Attention focused on retirement outcomes is crucial to helping American workers retire comfortably. According to the Health and Retirement Study presented in the Social Security Bulletin (Vol. 72 No. 3, 2012), the median replacement ratio for persons born between 1931 and 1941 is 73% for the first or second year of retirement. That number fell to 65% in the third year and 58% in the 10 th year. Individuals born in later years will likely have a slightly different target number since they are less likely to retire with a defined benefit pension, will have had different lifetime earnings profiles and will have somewhat different sources of income during retirement. In short, steps are needed now to help workers achieve replacement ratios somewhere in the 6 to 9 range. Despite efforts, the overall retirement landscape has not changed significantly. Participant and deferral rates have changed only slightly over the years reported in this booklet. Employees are still facing rising healthcare costs, de-leveraging from personal debt and recovering from high unemployment levels. In today s changing environment, plan sponsors and participants alike must play an active role in producing better retirement outcomes through the implementation of automatic features, such as enrollment and deferral rate step-up features, optimized plan design, investment monitoring and plan benchmarking. The surveys summarized in this booklet review current and historical trends in employee benefits. A few highlights of the data compiled include: The percentage of participants deferring below is nearly unchanged, holding at 29%; surveys reflect that 6 of participants deferred between and 15% in 2012; the percentage deferring above 15% remains unchanged at 7%. An automatic enrollment feature is utilized in 47% of plans, a increase. Studies also reflect the average default deferral rate is moving up, with 3 of plans now auto enrolling at rates higher than 3%, an increase of over 2011 and 9% over 2010 levels. Retirement plans remain in the cross-hairs of Congress. Will that attention bring surprises or dramatic changes? The outcome remains to be seen. In the meantime, our relationship management team is ready and willing to discuss how your plan can better help your employees achieve retirement readiness. The average participation rate climbs to 8 at the end of 2012, still below pre-economic collapse levels. But, don t set your sights on just achieving average. In most cases, even being above average would not set your employees on a course for retirement security. Employee deferral rates hover at 7% for the third year in a row. 2

5 Eligibility and participation Age and service requirements have been reduced for a number of years as one way to engage participants, but this trend seems to have reached a stall point. In fact, perhaps as a reaction to a more mobile and part-time workforce, the percentage of plans without a minimum age requirement dropped during Figure 1: Minimum age requirement by plan size In Figure 1, the high variability among plan size as it relates to a minimum age requirement is evident. Among large plans, 59% of sponsors don t impose an age requirement, while smaller plans still favor age 21. None Other 3% 5% 3% 13% 23% 2 29% 28% 29% 33% 2 25% 2 17% 3 38% 4 43% 38% 59% 63% Plan Size ,000 4, All plans Figure 2: Minimum months of service required Minimum service requirements continue the trend toward shorter time periods, with a increase noted in the number of survey respondents reporting no service requirement to make salary deferrals. However, the percentage of employers providing a matching contribution immediately did not change between 2011 and Figure 2 shows the percentage of plan sponsors incorporating a minimum service requirement, as reported in the PSCA Survey. None 28% 1 12 months 23% 2 18% 12 months 1 29% Other 8% 4 47% 6 Employee Match Profit Sharing Figure 3: Plan entry dates To maximize the probability of encouraging new employees to begin participating in the company-sponsored plan, employers have opened the enrollment entry window. As shown in Figure 3, data for the 2012 plan year reflects the majority of employers allow employees to enter the plan at any time, providing maximum opportunity for employees to engage in active saving. While not reflected in the chart, the numbers are statistically unchanged from 2011 data. 5% 1 77% Anytime 1st of month 1st of quarter Semi-annually Annually 3

6 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 4: Participation rate by number of participants Data from the PSCA Survey in Figure 4 indicates that participation rates vary among plans of different sizes. However, the spread is not significant. The economic rebound that started in the 2011 plan year continues, with participation rates increasing another reaching 8 in 2012, after rebounding from the 77% low point reported in 2010 following the economic decline of 2008 and Participation rates show recovery across all plan sizes, except plans below 200 participants. All plans 5,000+ 1,000 4, % 8 83% 7 75% 73% 8 78% 8 78% 73% % % % Figure 5: Dispersion of participation rates Figure 5 highlights the dispersion in the rate of participation among retirement plans. According to the Vanguard Survey, 55% of plans had a participation rate of at least 8, an increase of over Only 28% of plans reported a participation rate below 7, a decline of. These numbers may be the result of automatic enrollment features. 2 29% 1 17% 1 < % 6 69% 7 79% 8 89% 9 10 Figure 6: Participation rate by age and plan design The impact of age on retirement plan participation is shown in Figure 6. As shown in the Vanguard Survey data, participation generally rises with advancement towards retirement. The participation rate can be significantly impacted by plan design. The information in the next three charts clearly shows how an automatic enrollment feature impacts participant behavior, especially among those under age 25 showing almost a 4 difference between automatic versus voluntary enrollment plans. Even at ages above 25, a 2 difference is evident in participation rates, clearly reflecting that automatic enrollment provisions work. < % 43% % 6 78% 8 73% 65% 83% 7 67% % All plans Voluntary enrollment Automatic enrollment 4

7 Figure 7: Participation rate by salary and plan design As with age, higher salary levels correlate with better participation rates. Figure 7 clearly reflects this trend, again highlighting the importance of automatic programs to encourage participation, particularly among lower-paid participants. A significant point evidenced by the data in Figure 7 is that 13% of the eligible workers earning above $100,000 fail to take advantage of their employer s retirement plan, a number largely unchanged from prior years. < $30K $30K $50K $50K $75K $75K $100K > $100K % 63% 67% 57% 7 77% 68% % 83% 9 All plans Voluntary enrollment Automatic enrollment Figure 8: Participation rate by years of service and plan design Service tenure is another way to examine participation. As shown in Figure 8, longer-term employees are more apt to become plan participants. These results indicate the importance of shorter eligibility requirements as a way to engage the new employee. They also highlight the importance of ongoing educational programs relating the benefits of plan participation % 7 63% 68% % 77% 7 85% All plans Voluntary enrollment Automatic enrollment Figure 9: Participation rate by industry Participation rates differ widely by industry, as reflected in Figure 9. Industries with larger populations of lower-paid or part-time workers often report the lowest participation, while industries with higher-paid employees and professional groups report some of the highest participation rates. A more positive outlook among employees is evident in the increased participation rate in almost all reporting categories. Construction 8 78% 7 Durable goods manufacturing 8 79% 78% Financial 87% 8 8 Health care Insurance and real estate 83% 8 8 Non-durable goods manufacturing 83% 8 77% Services 8 79% 77% Technology and telecommunication 83% 79% 78% Utility and energy % Wholesale and retail trade 67% 6 6 Other 67% 7 68% 5

8 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 10: Participation rate by contribution type It is no secret that we have become an instant society. With the advent of the smart phone, we have access to everything at our fingertips. That same instant desire rolls into our expectations as it relates to employer retirement plan contributions. Perhaps one of the largest factors leading to higher plan participation rates is the existence of some type of company contribution. As reported by the PSCA, Figure 10 points out that the existence of a company contribution generally leads to an increase in the participation rate among plan respondents. This data, too, reflects the positive impact employer contributions have on participation rates. The participation rate in plans incorporating a fixed match increased and those with a discretionary match rebounded 5% over prior year rates, while participation in plans with no employer contribution declined by between 2011 and Fixed match Safe harbor match Graded match Discretionary match Other contributions No contribution % % 79% 87% % 78% 73% 73% 83% 88% 78% 83% 78% 87% 88% 78% 79% 7 77% 67% Actions to consider: Review your plan s age and service requirements. Are the requirements consistent with your company s goals and objectives? Are your plan requirements appropriate for your employee demographics, or do you have a larger population of seasonal, intern or part-time employees you wish to exclude? Are your employees engaging in the plan when they become eligible, or do you need to revisit your enrollment campaign to give them a nudge? 6

9 Automatic enrollment Automatic enrollment, putting employees retirement on auto-pilot, continues to grow in popularity. Embraced as a way to engage plan participants who lack planning skills and overcome inertia or procrastination when participants are faced with complex decisions, the PSCA Survey reports that 9 of sponsors implement automatic enrollment for new enrollees only; however, 18% automatically enroll their entire employee population. Figure 11: Percentage of plans with automatic enrollment by number of employees Figure 11 depicts the percentage of plans included in the PSCA Survey, by participant count, incorporating an automatic enrollment feature. The survey shows that a total of 47% of plans now reframe the savings decisions for employees by incorporating automatic enrollment. This number is up 2 since 2005, the year automatic enrollment usage was first reported. The chart further shows that larger companies are more likely to incorporate automatic enrollment ,000 4, All plans Figure 12: Percentage of automatic enrollment plans by industry Figure 12 provides insight into the adoption rate of an automatic enrollment feature within various industrial groups. While 47% of all plans incorporate such a provision, there is a wide variance, with the highest usage rates reported among manufacturing sectors, which is consistent with prior years. Construction and engineering Durable goods manufacturing Financial Health care Insurance and real estate Non durable goods manufacturing Services Technology and telecommunication Utility and energy Wholesale and retail trade Other

10 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 13: Default deferral percentage of pay Figure 13 shows the spectrum of default employee salary deferral rates among plans since 2006, the first year default rates were reported. During this time period, 3% of pay remains the most common, according to the PSCA Survey, likely due to the fact that an informal IRS publication reflected 3% as the sample default rate. Despite industry efforts to raise the default rate since 2006, the percentage of plans using a default rate higher than 3% is making only modest gains, increasing in 2012 to 3 of survey respondents; however, this is significantly higher than the 2 of plans reported defaulting above the 3% level in < 3% 3% 5% > 5% While increased participation rates are welcome news to any plan sponsor, it is important to realize that automatic enrollment plans may have a negative effect on deferral rates and testing results, as reported by a small number of respondents in the Deloitte Survey. While the results may improve dramatically upon implementation, if a significant population of employees stays at a low default rate, it can pull down the plan s average deferral rate and negatively impact testing results. Our experience indicates that starting employees at a higher rate or combining automatic enrollment with auto-escalation can easily navigate a poor outcome. To help employees achieve retirement goals and improve retirement income replacement ratios, 49% of plan sponsors responding to the Deloitte Survey incorporate an automatic deferral step-up feature where a participant s deferral rate is increased automatically each plan year, generally in one percent increments; another 1 of sponsors are considering adding such a feature. The step-up is most typically set to occur on a specific date once per year Sponsors generally report positive results when an automatic enrollment feature is utilized. The Deloitte Survey reports a higher average deferral rate for 5 of respondents, improved nondiscrimination testing results for 5 of respondents and improved participation rates in 8 of respondents, while 68% of respondents report increased participant awareness of the retirement plan benefit. Actions to consider: Is automatic enrollment right for your company? Would your plan benefit from a re-enrollment campaign designed to capture current employees who haven t engaged in saving? Should you utilize an auto-escalation feature as a tool to drive savings rates higher? 8

11 Other plan design elements Roth deferrals and in-plan conversions The number of plans permitting Roth contributions continues an upward trend, reaching 5 after seven years of availability, as reflected in Figure 14. Consistent with prior years, Roth is more common among smaller plans. Among plans offering Roth in 2012, only 19% of participants made a Roth contribution. As reflected in Figure 15, highest use of the Roth feature is reported in the business, professional and nonprofit sector. Figure 16 highlights the importance of tax-free earnings growth with higher usage reported among the under 25 population. Figure 16: Roth participation by age 18% 7% 1 1 9% < Figure 14: Plans permitting Roth by number of employees All plans % % % 6 58% 57% % 53% 5 47% % Figure 15: Roth participation by industry 13% 17% 1 9% 8% 8% 9% % 33% 33% % 1,000 4,999 53% % 3 17% 13% 5, % 29% 25% 17% Business, professional and nonprofit Agriculture, mining and construction Media, entertainment and leisure Education and health care Transportation, utilities and communication Finance, insurance and real estate Manufacturing Wholesale and retail trade Effective in 2010, a new law gave employees the option of converting non-roth balances in a retirement plan to Roth after-tax balances. According to the Deloitte Survey, just 2 of respondents added the feature by the end of This law was further expanded in 2012 to permit in-plan transfers of pre-tax amounts to Roth to all plan participants, however, lack of interest may still limit the speed at which employers and participants alike embrace Roth conversions. Safe harbor The PSCA Survey reports a decline in the percentage of plans incorporating some sort of safe harbor contribution. As of 2012, approximately 2 of plans used a safe harbor contribution design, down from the 3 of plans reported in A traditional safe harbor plan design is used by 8 of respondents; 1 use an automatic enrollment matching contribution design. Catch-up contributions Catch-up contributions are permitted in 98% of plans responding to the PSCA Survey, a number unchanged from prior years. These catch-up contributions are eligible for matching contributions in 43% of plans. Overall, 2 of eligible participants make a catch-up contribution, a statistic unchanged from prior years. Actual usage rates vary by plan size, ranging from 4 of participants in smaller plans to just 15% in plans with more than 5,000 participants. 9

12 Perspectives 2014: Defined contribution retirement plan benchmarks Contribution in employer stock The Deloitte Survey reports that the matching contribution is made in the form of employer stock in 1 of plans. Employees can diversify the contribution immediately in 7 of those same plans. The survey also reports that only 8% of plans fund the profit sharing contribution in the form of employer stock. Participant loans Participant loans continue as a popular plan feature, since they tend to ease apprehension among employees who are hesitant to participate without some sort of escape hatch. According to the PSCA Survey, 88% of plans responding offered such a loan program at the end of 2012, unchanged from A few additional highlights of loan programs reported in the PSCA Survey follow: 5 of plans permit only one loan When multiple loans are available, 47% permit a maximum of two or three 8 of plans set the loan minimum range between $500 and $1,000 87% of plans charge a loan origination fee, generally averaging $75 3 of plans charge an annual loan servicing fee, typically averaging $35 2 of participants have outstanding loans The average loan balance is $9,503 Loans average 2. of plan assets The following charts reflect loan usage as reported in the Vanguard Survey: Figure 17: Participant loan activity by income < $30,000 2 $30,000 $49,999 2 $50,000 $74,999 2 $75,000 $99,999 18% >$100,000 13% Figure 18: Participant loan activity by age < 25 5% % > 65 Figure 19: Percentage of participants with loans by industry Transportation, utilities and communications 2 Agriculture, mining and construction 2 Finance, insurance and real estate 2 Manufacturing 2 Wholesale and retail trade 19% Education and health 1 Media, entertainment and leisure 13% Business, professional and nonprofit 1 In-service and hardship withdrawals Distribution and withdrawal provisions are also important plan design elements, providing employees with additional access to plan balances prior to separation from service. According to the PSCA Survey, 87% of all plans permit hardship withdrawals. Generally, hardships are made available under the IRS safe harbor reasons; only 3% of plans permit distributions for other reasons. Approximately of participants requested a hardship distribution during 2012, unchanged from prior years. In-service distributions, other than hardships, are available in 8 of plans responding to the PSCA Survey in 2012, a 5% increase over 2011 rates, most often only after a participant reaches age 59½. This increase over the percentage reported in the 2011 study is reflective of employers reacting to employee needs and requests. 10

13 Figure 20: Vesting schedules Vesting Figure 20 provides PSCA Survey data on the most common vesting schedules in use for company contributions. Given the operational difficulties of incorporating multiple vesting schedules, plan sponsors typically apply a single schedule across multiple contribution sources within a plan. Vesting of profit sharing contributions, as reported in the PSCA Survey, is largely unchanged, however more plan sponsors report immediate vesting for both matching and non-matching (profit sharing) sources. Forfeitures According to the Deloitte Survey, 68% of plans use match forfeitures to reduce future company contributions. Forfeitures are allocated as additional contributions in 5% of plans, while 3 of plans apply forfeitures to reduce plan expenses first. Forfeitures arising from profit sharing contributions receive slightly different treatment. The Deloitte Survey reports they are used to reduce employer contributions in 88% of plans and offset fees in 5 of plans. No plan reports that they are reallocated to participants, however. Immediate 2 yr cliff 3 yr cliff yr graded yr graded 3% 3% 5 yr graded 19% 19% 6 yr graded 17% Other 3% 28% Match Profit Sharing Distribution options The PSCA Survey reports that, at preretirement, installment distributions were available in 48% of plans at the end of Annuities were only available in 1 of plans. The PSCA Survey also reports 4 of plans force distributions to terminated participants if the vested balance is $5,000 or less at time of termination; 43% of plans incorporate a $1,000 minimum force-out limit. Only 1 of plans do not force out small balances. Rollovers Rollovers from other retirement plans into a sponsor s plan are accepted in 98% of plans. Rollovers are generally accepted from other profit sharing or 401(k) plans, IRAs, 403(b) plans, 457 plans and pension plans. According to the PSCA Survey, 6 of respondents require the participant to meet eligibility requirements before accepting the rollover contribution, with the remaining 39% accepting rollovers at any time prior to eligibility. As the desire to prevent leakage of retirement assets through taxable distributions garners more attention, more liberal rollover eligibility is expected. Actions to consider: Could highly compensated employees benefit from the tax planning options provided through a Roth deferral or transfer feature? Would a safe harbor plan design permit your highly compensated employees to defer at a higher level? Is your vesting schedule consistent with peer group standards? Are your plan s distribution or loan provisions meeting the needs of your participants or consistent with corporate goals? 11

14 Perspectives 2014: Defined contribution retirement plan benchmarks Employer contributions The employer contribution is perhaps the primary tool in the arsenal to entice employee participation. In this section we will explore it in greater detail. Figure 21: Types of employer contribution Figure 21 shows the percentage of plans using different contribution formulas as reported in the PSCA Survey. While the match continues as the primary vehicle of employer contributions, appearing in 83% of plans, the numbers reflect the effect of positive economic conditions on all contribution types. When a matching contribution is utilized, 7 of companies offer a fixed match, with 28% of reporting companies using a graded match structure. The number of companies without any company contribution holds at just 5% of companies in Match only Non-match only % Match and non-match No contribution 5% 5% 7% % 4 4 Fixed match 7 Graded 28% Figure 22: Structure of fixed match formulas According to the PSCA Survey, the most popular match remains at $0.50 per dollar deferred, a number unchanged since Figure 22 provides the PSCA s perspective on matching contributions. Evidence of an economic recovery is reflected, with a 1 increase in the percentage of companies reporting a match greater than $0.50 in % 5% 3% % 48% % 38% 28% 28% % < $0.25 $0.25 $0.25 $0.50 $0.50 $0.50 $1.00 $1.00 > $

15 Figures 23 and 24 The frequency of employer contribution deposits to a retirement plan can positively influence participation. As shown in Figures 23 and 24, the PSCA Survey reports that matching contributions are most often funded each payroll period, with non-match contributions generally funded on an annual basis. Figure 23: Frequency of match deposit 73% 7 7 Figure 24: Frequency of non-match deposit 7 73% 7 7% 8% 9% 19% 18% 19% 2 18% 19% 8% Payroll period Quarterly or monthly Annually Other Payroll period Quarterly or monthly Annually Other Figure 25: Frequency of true-up contribution by plan size To ensure that participants receive their maximum match as if deferrals were level throughout the plan year, 55% of plan sponsors incorporate a match true-up provision in their plan design in 2012, as shown in Figure 25, down from 57% in An increase is noted only in plan sizes between 200 and 999 participants. All plans ,000 4,999 5, % 57% 5 57% 53% 55% 5 53% % 13

16 Perspectives 2014: Defined contribution retirement plan benchmarks Figures 26 through 28 Figures 26 through 28 provide a glimpse into the average match amount and the maximum percentage of pay matched within industry sectors, with All Plans also including data for plan sponsors reporting outside of the sectors listed. The percentage of companies matching at $0.50 per deferral dollar dropped dramatically in However, the good news to this change is that the numbers reflect a general shift in the percentage of companies matching above the $0.50 level. Figure 26: Matching contribution by industry sector 19% 1 17% 1 7% 3% 7% 3% 9% 15% 47% 55% 35% 4 39% 3 48% % Durable goods Non-durable goods Wholesale and retail Financial Insurance and real estate Services < $0.25 $0.25 $0.25 $0.50 $0.50 $0.50 $1.00 $1.00 > $1.00 Figure 27: Match per dollar by industry sector $0.55 $0.59 $0.57 $0.56 $0.59 $0.60 $0.65 $0.67 $0.57 $0.59 $0.59 $0.68 $0.66 $0.57 $0.55 $0.51 $0.44 $0.60 $0.75 $0.69 $0.65 $0.65 $0.69 $0.72 $0.67 $0.61 $0.67 $0.62 $0.65 $0.73 $0.65 $0.57 $0.59 $0.58 $0.63 $0.62 $0.71 $0.63 $0.61 $0.60 $0.61 $0.66 Durable goods Non-durable goods Wholesale and retail Financial Insurance and real estate Services All plans

17 Figure 28: Percent of pay matched by industry sector Durable goods Non-durable goods Wholesale and retail Financial Insurance and real estate Services All plans Actions to consider: Stretch your match dollars to encourage higher savings rates among your employees. Changing your match formula from 5 on the first 3% to 25% on the first is revenue neutral, but may push some employees to higher deferral levels, resulting in an increased highly compensated employee (HCE) deferral limit. Ensure employees understand how your company s match or overall company contribution benchmarks against industry peers. Total company contributions Information on the following charts is presented by industry segment as well as plan size. Contributions can be in the form of a match, a profit sharing or non-elective contribution, or a combination of each. Eligible participants include employees who are eligible for any portion of a plan, such as the ability to make 401(k) contributions, or receive matching and/or profit sharing contributions. Figure 29: Contribution as a percentage of total net profit by plan size Figure 29 compares company contributions (match and/or profit sharing) as a percentage of total net profit ,000 4, , All plans

18 Perspectives 2014: Defined contribution retirement plan benchmarks Figures 30 and 31 Figures 30 and 31 provide a historical perspective of total plan sponsor contributions as a percentage of eligible participants total annual payroll. Figure 30: Contribution as a percentage of eligible participants total annual payroll by plan size (no defined benefit plan available) ,000 4,999 5, Figure 31: Contribution as a percentage of eligible participants total annual payroll by sector Non-durable goods Financial Technology Insurance and real estate Durable goods Construction Services Wholesale and retail Utility Health care Engineering and construction * 3.7 Other * * Includes transportation category and, prior to 2011, engineering and construction Actions to consider: Share your company s contribution statistics and benchmark rankings with employees so they can fully appreciate the benefit you provide. Is your company contribution reflecting how you want to compare, relative to your peers? 16

19 Employee contributions Vanguard Survey data indicates that the average employee contribution rate is 7% for actively contributing employees, regardless of plan size, which is similar to prior years. Figure 32: Dispersion of employee deferral rates by percent of compensation deferred Figure 32 reflects the dispersion of employee deferral rates as a percentage of salary in the Vanguard Survey that shows a gain in the percentage of rates between 0. and 3.9%, which may be a result of increased automatic enrollment usage % % % Figure 33: Deferral rate by industry sector Figure 33 highlights the deferral rates of actively deferring employees by industry sector, which also reflect no statistical change from historical numbers. Agriculture, mining and construction 7.8% 7.8% 7.9% Business, professional and nonprofit 7.7% % Education and health care % Media, entertainment and leisure Finance, insurance and real estate 6.5% 6.7% 6. Manufacturing Wholesale and retail trade 5.8% 5.9% 6. Transportation, utilities and communications Overall % 17

20 Perspectives 2014: Defined contribution retirement plan benchmarks Figures 34 through 37 Figures 34 through 37 provide a holistic overview of the deferral rates of actively deferring participants, segmented by demographic data, including job tenure, age, salary and account balance. The impact of stagnation on the overall deferral rate is evidenced by only minor changes in year-over-year rates. Figure 34: Deferral rate by salary Figure 36: Deferral rate by job tenure (years) < $30K 4.7% 4.8% 4.8% 4.7% 4.8% $30K $50K 5.7% 5.8% 5.8% 5.7% 5.9% $50K $75K % $75K $100K $100K % 8.3% % % 8.3% 8.3% < % 4.8% % 4.9% % % % 6.8% 6.5% % % % 7.7% Figure 35: Deferral rate by age Figure 37: Deferral rate by account balance < % % 3.8% 3.9% % % 5.5% % 8.7% % < $10K 3.8% 3.8% 3.7% $10K $25K 5.9% 5.9% 5.7% 5.8% 6.8% $25K $50K % % $50K $100K $100K $250K > $250K % % 9.9% % 10.7% 10.7% 10.3% Actions to consider: Automatically enroll employees at rates above 3%, perhaps at your match level. Incorporate an auto-escalation campaign to combat employee inactivity. 18

21 Participant account balances Average participant balances are just one factor used to determine the health of a participant s retirement savings. However, balances reflected in the survey data presented may not reflect the entire picture of a participant s lifetime of saving toward retirement. It is possible that some employees rolled plan assets from a prior employer into an IRA, or they may have left a balance in a prior employer s plan. According to the PSCA Survey, at year-end 2012, terminated participants constitute 2 of total retirement plan participants with an account balance, a increase over 2011 year-end data. Actual rates vary among plan size, with terminated participants representing 1 of plan participants in plans with fewer than 50 participants and plans with 5,000 or more reporting 2 terminated participants with a plan balance. Figures 38 through 41 In the following charts, median account balances represent the midpoint in reported data, with half of the participants covered by the survey above the median number and half below. Notably, balances reported in the Vanguard Survey represent retirement funds in the employer-sponsored accounts reported; balances in a participant s prior plan or IRA are not included. Figures 38 through 41 reflect data as reported in the Vanguard Survey, which is based on 2012 account balances. As reflected, account balances rise with age and job tenure and can vary greatly by industry, and they may be affected by plan design, employee demographics and company culture. The need to engage employees in saving for retirement is evidenced by the dispersion of account balances as reflected in Figure 38. As reported in the Vanguard Survey, 6 of participants have an average account balance below $60,000, and only 2 of participants have an average balance greater than $100,000. The Vanguard Survey also reports the average account balance of $102,889 and a median account balance of $33,887. Women are reported to have an average account balance of $65,833 and a median balance of $22,780. The median account balance for households with income between $50k and $75k is $29,305 versus an average of $72,083. Among households with income greater than $100k, the median account balance is $67,792 and the average is $150,430 reflecting the ability to save at higher rates as income rises. Figure 38: 2012 distribution of account balances 2 9% Figure 39: Account balance by age < 25 $3,865 $1, $21,524 $9, $54,054 $24, $45,588 $67,239 $65,193 $103,269 $154,421 $176,696 < $10k $10k $20k $20k $40k $40k $60k $60k $80k $80k $100k > $100k Average Median 19

22 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 40: Account balance by job tenure (years) Figure 41: Account balance by industry sector < 2 $9,860 $2, $23,243 $9, $42,748 $20, $65,006 $33, $82,611 $156,467 Average Median Agriculture, mining and construction $198,005 $64,251 Manufacturing $87,183 $32,898 Finance, insurance and real estate $86,564 $33,462 Business, nonprofit and professional $91,629 $31,819 Media, leisure and entertainment Average $66,376 Median $22,920 Transportation, utilities and communication $76,499 $25,996 Education and health care $60,463 $17,159 Wholesale and retail trade $62,217 $17,928 Investments The array of investment options available to participants in a retirement plan continues to expand. The focus has resulted in closer scrutiny of the number and type of options provided for participant direction, as well as the associated expenses. Figure 42: Default investment vehicle To limit fiduciary liability, plan sponsors have enhanced their review process and embraced the use of a Qualified Default Investment Alternative as the default option for participants who make no affirmative investment election upon plan enrollment. Figure 42 identifies the default options offered among automatic enrollment retirement plans, as reported in the PSCA Survey. A majority of plan sponsors use target lifecycle funds as the default, a finding that is consistent across surveys and reflects the trend towards greater diversification of participant accounts. 73% 7 53% 57%6 49% 27% % 13% 3% 5% 3% 7% % 1 1 9% 1 5% 3% 7% Stable value/mmrkt Balanced Lifestyle, target risk Lifecycle, target date Other

23 Figure 43: Number of investments available for participant direction While fiduciaries limit exposure by choosing a default fund appropriate for the participant population, the plate of plan investments available for participant direction generally consists of mutual funds, stable value funds or collective funds. Separately managed accounts are typically found only in the largest plans, due to cost; the use of Exchange Traded Funds (ETFs) is not reported, as these are generally not available to daily-valued retirement plans. Figure 43 reflects the trend shown in the PSCA Survey regarding the number of funds offered for participant direction % 3% 3% 3% % 7% 9% % % % 39% 3 27% 27% 27% 28% % 2 23% Figure 44: Number of investments available by plan size (reflects a series of lifecycle or target age funds counted as one fund) The average number of funds available for participant direction has not changed in recent years. When a series of lifecycle risk-based or target age funds is counted as one fund, the average number of funds is 19; when counted individually, the average number available is 27. There is a slight difference, however, when viewed by plan size, as shown in Figure 44. Smaller plans, with tighter administrative control, tend to offer a higher number of funds ,000 4,999 5,

24 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 45: Core investment fund options offered While no two plans are exactly alike due to company and participant demographics, the overall mixture of asset classes available is similar. Figure 45 identifies the most common asset classes offered as a percentage of plans reporting in the PSCA Survey. Balanced stock/bond 55% Bond, domestic managed 77% 8 78% 79% 7 Bond, domestic index 4 43% Bond, international 19% 23% 1 1 Brokerage window 23% 27% 27% 2 2 Cash equivalent 48% % Company stock 23% Equity, domestic index 8 83% Equity, domestic managed % 87% 8 Equity, international index % 28% Equity, international managed 83% 87% % Target risk 17% Target date 6 69% % Real estate % 33% 25% Sector, other % 2 13% Stable value 58% Other 19% 1 8% 15% Figure 46: Average number of funds offered by asset class When establishing a plan s investment lineup, it is also important to consider the overall mix of options offered within each asset class. The data in Figure 46 reflects how a typical investment array may appear. Most generally, only one option per asset class is offered as a way to provide diversification but minimize participant confusion, which may arise when multiple funds are offered of similar investment style. The exception to this generalization is in the actively managed domestic equity category, which is comprised of a nine-array style box covering large-, midsize and small-company stocks, as well as value, blend and growth investment styles. Balanced Stock/Bond Fund 2 Bond, actively managed domestic 2 Bond, indexed domestic 1 Bond, international 1 Cash equivalent/money market 1 Equity, actively managed domestic 7 Equity, actively managed international 2 Equity, indexed domestic 2 Equity, indexed international 1 Sector (generally used by less than 2 of plans) 2 Real estate 1 Stable value 1 22

25 Figure 47: Average retirement plan asset allocation Although the typical plan lineup includes a number of options representing different asset classes, usage of those options among participants can paint a substantially different picture, as evidenced by the data in Figure 47. There is strong correlation to the average retirement plan asset allocation, however, with a higher percentage of participants choosing to invest in equity funds, attributing to a greater percentage of plan assets directed to equity sectors. Investment % of plan offering % of participants using Stable value Active Index Bond fund Inflation protected 31 6 High-yield 19 6 International 4 4 Traditional Balanced fund Target risk Target date Active Index Large-cap value Domestic Large-cap growth Large-cap blend Mid-cap Small-cap Active International Index Emerging market 25 9 REIT 27 9 Health care 12 8 Energy 9 8 Sector Precious metals 5 3 Technology 3 7 Communications 1 5 Utilities 1 6 Company stock Self-directed brokerage 12 1 Figures 48 and 49: Average asset allocation Figure 48 outlines the typical asset allocation of all plan assets reported in the PSCA Survey. The percentages reported are largely unchanged over the years, a reflection that most employees do not actively manage their plan account. Overall asset allocation does vary by industry group, as reported in Figure 49, reporting data from the Vanguard Survey. Figure 48: Average asset allocation Balanced stock/bond 5% 7% 5% 8% Bond, domestic managed 8% 8% 7% 1 Bond, domestic index Bond, international Brokerage window 3% 3% Cash equivalent Company stock Equity, domestic index 1 9% 9% 8% 8% Equity, domestic managed 2 25% 25% 29% 23% Equity, international index Equity, international managed 8% 8% 8% 1 8% Target risk 5% 5% Target date 13% 1 13% 1 8% Real estate Sector, other Stable value Other 3%

26 Perspectives 2014: Defined contribution retirement plan benchmarks Figure 49: Average asset allocation by industry sector Agriculture, mining and construction 1 9% 1 27% 33% Business, professional and nonprofit 1 1 8% 19% 45% Media, entertainment and leisure % Transportation, utilities and communications 18% 1 9% 1 4 8% Manufacturing 18% 9% 9% 19% 39% Education and health care % 1 4 Wholesale and retail trade 2 9% 9% 19% 39% Finance, insurance and real estate 19% 1 7% 2 4 Cash/Equivalent Bond funds Balanced funds Target-date funds Diversified equity Company stock Plan sponsors should offer a diverse investment mix and follow an established discipline to minimize fiduciary exposure. The Deloitte Survey reports that 9 of investment committees establish a formal operating framework and 9 of respondents have adopted a formal written investment policy. The Deloitte Survey also reports that 6 of committees generally review their policy on an annual basis, with another 3 following a one- to three-year cycle. To demonstrate regular monitoring of plan investments, 6 of plan committees review investments against benchmarks on a quarterly basis, according to the Deloitte Survey, a number similar to earlier years. Another 18% review investments semi-annually and 15% review investments annually. The frequency is largely dependent on plan size and complexity. When an investment change is implemented, 68% of sponsors replace the under-performing investment with another choice according to the Deloitte Survey. That survey also reports that 1 of respondents add a fund of the same style, with 1 of sponsors phasing out the fund over a period of time. Policies implemented to curb frequent trading activity continue to apply, with 6 of respondents in the Deloitte Survey indicating that a fund trading restriction applies either at the plan or investment level. This number is up dramatically from the 2010 survey, in which only 55% of sponsors indicated some sort of restriction applied. Also according to the Deloitte Survey, if enforcement is necessary, 7 of plan sponsors typically advise the participant to stop such action or suspend the participant from further trading. Actions to consider: Ensure your investment menu is meeting plan objectives. Tier your investment menu for participant profiles that exist in your plan population. Provide investment education to participants on a routine basis. Provide investment fiduciary education to committee members. Implement, review and follow investment policies; take action as necessary to manage the investment lineup. 24

27 Plan expenses Retirement plan expenses continue to be a major focus point for plan sponsors and participants alike. The Department of Labor issued guidance on specific fee information that was provided to plan sponsors and participants in Plan expenses cover a broad range of services and may be best understood when examined by underlying components. Expenses can be grouped into administrative, recordkeeping, investment and consulting services: Administrative services generally include compliance, legal, audit, trustee, communication and education services. Recordkeeping expenses can cover plan systems, compliance and participant services. Investment fees typically include the fund expense ratio or other fund-level fees. Consulting fees typically include the expenses associated with an investment consultant or financial advisor. Plan expenses can be charged directly to the plan sponsor or participant balances. More commonly, plan services are funded in whole or in part by a portion of the fund-level revenue (12b-1 or other shareholder servicing fees). Perhaps the easiest way to understand and compare plan fees is on an all-in basis. This bottom line approach simplifies the analysis and permits an apples-to-apples comparison. Remember, however, that participant activity fees, such as distribution or loan fees, are not often covered by the all-in fee. These fees are generally passed through directly to the participants. According to the Deloitte Fee Study, the average all-in fee is 0.83% of plan assets, and the median is 0.78%, or approximately $248 per participant. Fees are affected by both the average plan account balance and the number of participants. According to the same study, a small plan with 10 participants and a $10,000 average balance can expect a fee of near 1.4 of assets, while a plan with 1,000 participants and an average account balance of $150,000 can expect a fee of approximately 0.7 of assets. In addition to total plan assets and average account size, two of the largest factors influencing fees and plan costs can be affected by a number of other variables, including: Number of plan participants Plan sponsor industry Geographic location Number of locations/payrolls Contribution/distribution rates Number of investment options Proprietary/non-proprietary fund ratio Investment allocation Provider size/relationship/tenure Figure 50: All-in fees by plan asset size Figure 50 reflects fees as a percentage of plan assets according to plan size, as reported by respondents to the Deloitte Fee Study during < $1M % 0.99% $1M $10M $10M $100M 0.78% 0.85% 1.23% 0.6 $100M $500M 0.78% % 0.45% $500M $1B % 0.4 > $1B 0.38% 0.35% % Median Average 10th% 90th% Source: Deloitte 25