Voluntary Pension Savings: Helping the Middle Class Achieve Retirement Income Adequacy

Transcription

1 Voluntary Pension Savings: Helping the Middle Class Achieve Retirement Income Adequacy XIII FIAP International Seminar Renee Schaaf Vice-President, Strategy and Business Development Principal International

2 UNITED STATES: MULTI-PILLAR PENSION SYSTEM Government Social Security Employment-Based Plans Voluntary Personal Savings Compulsory pay-as-you-go public pension system - Defined benefit - Defined contribution (profit share and 401k plans) - Annuities - Bank accounts - IRAs - Life insurance - Mutual funds - Stocks and bonds 2

3 UNITED STATES REPLACEMENT RATIO FOR THE AVERAGE WORKER 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Gross Replacement Rates 76.1% 37.8% 38.3% Voluntary DC 85% Needed Income Replacement 38.3% Social Security 3 Source: OECD Pensions at a Glance 2013

4 EMPLOYER SPONSORED VOLUNTARY DC PLANS: MUST HAVE IN THE U.S. LABOR MARKET Percent of Companies with DC Plan in 2015 (by number of employees) 100% 80% 69% 82% 94% 95% 60% 52% 57% 40% 20% 6% 24% 0% < ,000 1,000-5,000 5, % of U.S. private industry workers had access to a retirement plan in Sources: 2015 Retirement Resources Inc. and March 2015 National Compensation Survey

5 WHY EMPLOYEES PARTICIPATE IN DC PLANS Financial Incentives Employee Match Tax Incentives EMPLOYEE PARTICIPATION Ease of Saving Payroll Deduct Automatic Enrollment 5

6 EMPLOYER SPONSORED VS. PERSONAL PENSION SAVINGS The single most important factor in determining if a worker is saving for retirement is whether or not there is a plan at work. Participation Rates: Workers save in IRA only vs. Workplace Retirement Plan Source: 2010 EBRI 6

7 U.S. CASE STUDY EMPLOYER SPONSORED PLANS: REACHING THE MIDDLE CLASS More than 75 million American workers were active participants in a defined contribution (DC) plan* 80% of 401k participants come from households making less than US $100,000 in income Source: 2014 US Department of Labor and Investment Company Institute 7

8 GLOBAL BEST PRACTICES: STRENGHTENING EMPLOYER SPONSORED PENSION PLANS Policy Makers Better Outcomes: All stakeholders benefit from on track workforce Employers Retirement readiness Retirement Providers All stakeholders play an important role Workers 8

9 STRENGTHENING EMPLOYER SPONSORED PLANS: SUMMARY OF KEY ROLES Policy Makers: Strengthen fully-funded mandatory plan Develop framework for voluntary system Appropriate tax incentive structures Employers: Sponsor voluntary plans Educate workers Adopt effective plan design Provide matching contribution Retirement Providers: Partner with employers Provide employees with services, tools and retirement education Diversified set of investment options Workers: Take personal responsibility Set goals to achieve retirement readiness Save early and consistently 9

10 ENCOURAING EMPLOYEE PARTICIPATION Ease through Payroll Deduct Employer Matching Contributions Tax Advantaged Savings Simple, Do it for me Plan Design KEY DRIVERS 10

11 DO IT FOR ME PLAN DESIGN AUTOMATIC ENROLLMENT: at least 6% elective deferral default AUTOMATIC ESCALATION: at least 1% per year up to at least 10% ONE-TIME SWEEP of all eligible employees (at default deferral rate) TARGET DATE: a diversified investment option 89% RESULTS FROM OUR CLIENTS AUTOMATIC PLAN FEATURES SHOW 1 stay enrolled when their employer automatically enrolls them 86% keep automatic increases when their employer automatically offers it 11 1 Principal Financial Group data based on a combination of 66,798 participants opting out of Automatic enrollment or automatic Increase, as of December 31, 2013

12 TARGET DATE FUNDS: IMPROVING INVESTMENT OUTCOMES % 4 2% # of Investment Options Used Do-It-Myself Do-It-For-Me Asset Allocation and Diversification % Auto Rebalancing Do-It-Myself Do-It-For-Me Auto Rebalancing 12

13 DO IT FOR ME INVESTMENTS VS. DO IT MYSELF Annual Return Median Returns for Participants across Age Groups 14% 12% 10% Target Date Fund/ Managed Accounts Participant Directed 8% 6% 4% 2% > 60 Age 13 Source: Financial Engines & Aon Hewitt Help in Defined Contributions Plans: 2006 through 2012

14 STRENGTHENING VOLUNTARY PENSION SAVINGS: A COLLABORATIVE EFFORT POLICY MAKERS RETIREMENT READINESS EMPLOYERS RETIREMENT PROVIDERS WORKERS 14

15 THANK YOU