7 Best Practices for Qualified Retirement Plans. Scott D. Knapp, CFA Director of Investment Strategy CUNA Mutual Group

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1 7 Best Practices for Qualified Retirement Plans Scott D. Knapp, CFA Director of Investment Strategy CUNA Mutual Group

2 Before we begin Objective of all retirement plans: Financial security for your employees! Defined as adequate income replacement at retirement.

3 Before we begin How to effectively manage a defined benefit plan: Calculate liabilities Liabilities are discounted to PV Current assets are compared to the PV of liabilities Any shortfalls are made up via increased contributions Allocate assets to match liabilities Convert accumulated assets to a sustainable benefit stream 3

4 Before we begin Retirement security is contingent on: 1. Employer s decision to offer a well-designed retirement plan 2. Employee s decision to participate in the plan 3. Employee s decision to save enough 4. Employee s decision to invest appropriately 5. Employee s ability to covert savings to a sustainable income

5 Best Practice #1: Frequent Plan Design Reviews Key questions: Is the plan s design optimal relative to the retirement security objective? Are incentives modifying behavior in a positive way? Can employees understand the plan s investments? Are common employee behaviors (procrastination, apathy, etc.) offset by the plan s design? Are employee education programs working? These questions address the 1 st contingency to retirement security.

6 Best Practice #2: Use of Defaults Automatic enrollment ensures high participation Automatic deferral increases encourage sufficient savings to achieve adequate income replacement Deferral amount and company match can be set to target an income replacement ratio Numerous studies have confirmed substantial improvement in retirement readiness after implementation of default features These features address the 2 nd and 3 rd contingencies to retirement security.

7 Best Practice #3: Personalized Guidance Retire on Target Present information that addresses the needs of individual employees Alternative to general education Retire on Target Establish an ALM framework Proactively present a on time status report to each employee Indicate adequacy of current savings versus liabilities (future replacement paychecks) Allow the employee to easily make adjustments This approach addresses the 2nd and 3rd contingencies to retirement security.

8 Best Practice #4: Target Date Funds By far the most popular QDIAs Automatically adjusts the underlying asset mix as an employee approaches retirement Assets and liabilities stay in synch Employees do not have to become investment experts to invest in target date funds Caution: Not all target date funds are the same You must know your target date fund strategy and make sure it matches the specific characteristics of your situation! Addresses the 4 th contingency to retirement security.

9 Best Practice #5: Annuitization Assume accumulated assets will be converted into an income stream at retirement Risks that should be addressed: Purchasing power risk Longevity risk Annuitization at retirement should be enabled in some way From the plan Separate from the plan, but still a feature of the plan Should be a prominent feature in an employee education program Addresses the 5 th contingency to retirement security.

10 Best Practice #6: Measure Results Key measures that indicate overall plan health: 1. Participation rate 2. Deferral rate 3. Forecast income replacement ratio 4. Optimal allocation among major asset classes Measure at the plan and participant levels React when data point to areas of improvement Addresses all contingencies to retirement security.

11 Best Practice #7: Keep a Clean Fiduciary House Adopt proper governance processes to be used by trustees and committees Write an Investment Policy Statement (IPS) Adhere to the IPS Establish a reasonable basis supported by research for decisions Document activities and decisions Seek assistance when internal resources or expertise are insufficient

12 How did we do? Calculate liabilities = Determine required income replacement during retirement Liabilities are discounted to PV = Funding requirement PV of liabilities is compared to current assets = On time status Any shortfalls are made up via increased contributions = Deferral rate adjustments Allocate assets to match liabilities = Target Date Funds Convert accumulated assets to a sustainable benefit stream = Annuitization Your 401(k) plan is now a personal DB plan!

13 What Does the Future Hold?

14 What does the future hold? ALM influences drive 401(k) plan design and investment strategy: Deferral rates automatically set to achieve sufficient retirement income Outside assets, such as a other savings or a DB plan, are considered Custom Target Date funds will earn a position in the industry: Record keeping systems feed ALM profile for individual participants to a managed account of investments Assets and liabilities are progressively matched Defined benefit plans will de-risk: Liability-driven investment strategies Total pension risk transfer to outside financial institutions

15

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