MetLife Qualified Retirement Plan Barometer

Transcription

1 CORPORATE BENEFIT FUNDING A Study of Retirement Income Culture Among the FORTUNE 1000 MetLife Qualified Retirement Plan Barometer JANUARY 2011

2 ABOUT METLIFE MetLife, Inc. is a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 60 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, visit The MetLife enterprise serves 90 of the top 100 FORTUNE 500 -ranked companies and has $617 billion in total assets and over $570 billion in liabilities. 1 The operating companies, Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut, have $383 billion in total assets and $364 billion in liabilities. 2 These operating companies manage $67 billion of group annuity assets 3 and lead the market 4 with over $36 billion of transferred pension liabilities. 3 The company also has over a 35-year track record in stable value with $32 billion of stable value business 3 and has $18 billion of nonqualified benefit funding assets. 3 ABOUT THE RESEARCH PARTNERS Mathew Greenwald & Associates, Inc. is a full-service market research company that specializes in serving the needs of the financial services industry. They have conducted customized research for more than 200 organizations, the large majority of them financial services companies. Mathew Greenwald & Associates is a member of the Council of American Survey Research Organizations (CASRO), an invitation-only industry governing body comprised of the 325 leading survey research practitioners in the United States. Asset International is a privately held publisher and information provider to global pension funds, asset managers, financial advisers, banking service providers and other financial institutions in the private and public sector. Asset International produces and distributes print and digital publications, conferences, research and data resources via its industry-leading brands PLANSPONSOR, PLANADVISER, Global Custodian, aicio, ai5000, Strategic Insight, The Trade and most recently Plan for Life in Australia. The company was acquired in January 2009 by Austin Ventures and has offices in New York, London, Hong Kong, Melbourne and Stamford, CT. JANUARY MetLife, Inc. as of September 30, Total assets include general account and separate account assets and are reported under accounting principles generally accepted in the United States of America. 2 Metropolitan Life Insurance Company and MetLife Insurance Company of Connecticut as of September 30, Total assets include general account and separate account assets and are reported on a statutory basis. 3 As of September 30, LIMRA, Terminal Funding and Single Premium Buyouts Survey, Third Quarter, 2010.

3 Executive Summary Major Findings Barometer Scores Reveal Wide Variations in Progress Toward a Retirement Income Culture, with Room for All to Improve Despite Retirement Plan Costs, Plan Sponsors Leaving Value on Table Contents Despite Good Intentions on the Part of Many, Plan Sponsors Are Struggling to Translate Retirement Income Philosophy into the Creation of a Retirement Income Culture Retirement Income Plays Second Fiddle to Accumulation in Employee Education and Communications; Online Calculators No Substitute for Effective Educational Support Plan Design Focuses on Encouraging Savings and Stable Investments Rather than Creation of Lifetime Income Many DC Plan Sponsors Cite Fiduciary Concerns as a Barrier to More Widespread Offering of Income Annuities Unless Retirement Income is a Primary Plan Objective, Program Success Measures Place More Emphasis on Participation Than Income Conclusion/Call to Action Methodology > MetLife Qualified Retirement Plan Barometer

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5 Executive Summary At the peak of defined benefit (DB) coverage in 1980, about 84% of all private-sector employees were covered under DB pension plans, 1 representing about 38 million active workers. 2 However, while the number of private-sector workers covered by DB plans has stayed relatively stable since it reached about 40 million in 1985, the number of DB plans and the percentage of active workers covered have both dropped dramatically over the last few decades to their current levels of about 48,000 3 and 19%, 4 respectively. Competitive pressures, increased worker mobility, corporate cost cutting, the movement towards employee self-sufficiency and the heavy marketing of defined contribution (DC) plans, such as 401(k) plans, by financial institutions have all fueled this movement away from traditional DB pension plans to DC plans, which have grown in number to over 650,000 in place today at firms of all sizes. 5 Today, even among those employers that sponsor one or more DB plans, some are closing the plans accrual of benefits or, in some instances, doing both as employers have come to understand what being in the pension business means once their retired employees reach significant numbers. DC plans have now become the primary source of retirement savings for an increasing number of employees. Yet, they were originally designed as supplemental retirement savings vehicles and were generally never intended to do the same job as a pension provide for guaranteed lifetime income once active working years were over. In addition to the movement away from DB plans, which typically accrue benefits for workers based on years of service and earnings, many plan sponsors introduced lump sum features for all or a portion of their DB plan benefits. This, combined with the ascendancy of DC plans, under which participants by and large finance their own retirements, has increased the degree to which the critical burden to new workers, ending or limiting current workers 1 U.S. Department of Labor statistics show that in 1980, the percentage of private sector workers covered by private DB plans was at a high of 84%, which at that time represented 38 million active workers. In subsequent years, the number of beneficiaries grew to about 40 million, where it has remained level since 1985, but the percentage of active workers covered by such plans has dropped steadily to 19% in U.S. Department of Labor, Bureau of Labor Statistics, Employee Benefits in Industry, May, U.S. Department of Labor, Private Pension Plan Bulletin, Abstract of 2008 Form 5500 Annual Reports, December, Note that 2008 is the most recent year for which this data is available. 4 U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the United States, March, U.S. Department of Labor, Private Pension Plan Bulletin, Abstract of 2008 Form 5500 Annual Reports, December, > MetLife Qualified Retirement Plan Barometer

6 According to the Social Security Administration, one of the first company pension plans was introduced in 1882 by the Alfred Dolge Company, a builder of pianos and organs. Dolge argued that the company s pension was a business cost like any other just as his company had to provide for the depreciation of its machinery, it should also provide for the depreciation of its employees. 6 of providing for retirement adequacy sits on the shoulders of the American worker. These changes have caused both plan sponsors and participants to focus, almost exclusively in the short-term, on increasing participation levels and growing account balances in DC plans. However, as the recent instability of both the stock market and the general in focus is generally thought of as changing the conversation with employees to help them recognize that defined contribution plans should increasingly be thought of as retirement income plans. Outlined below are the key findings from MetLife s inaugural Qualified Retirement Plan Barometer: economy have highlighted all too clearly, a focus on asset accumulation alone will not result in long-term retirement security. Hence going forward, the new challenge laid before plan sponsors and participants of DC and DB plans is to utilize these vehicles to create retirement income and, in turn, long-term retirement security in America. Even assuming that changes are made so that Social Security will continue to play a role for tomorrow s retirees, it is important to note that at about $12,000 annually, 7 the average Social Security benefit is not, and was never intended to, provide the majority of retirement income for workers eligible for its benefits. MetLife commissioned this research of FORTUNE BAROMETER SCORES REVEAL WIDE VARIATIONS IN PROGRESS TOWARD A RETIREMENT INCOME CULTURE, WITH ROOM FOR ALL TO IMPROVE The MetLife Qualified Retirement Plan Barometer was constructed to measure, at a point in time, how companies are doing with regard to creating a retirement income culture within their respective companies. The mean Barometer score for all plan sponsors who participated in the survey is 59 out of a possible 100 points. Individual company scores ranged from a low of 19 to a high of 89. JANUARY plan sponsors to assess whether and to what extent a new culture is taking hold in the largest U.S. companies one which places equal emphasis on retirement savings and retirement income. The survey also sought to determine the extent to which employers are contemplating how to help DC participants convert a portion of their retirement savings into guaranteed lifelong income. This shift Companies that make both DB plans and DC plans broadly available to their employees 8 score higher than average on the Barometer at 74. This Barometer score is notably higher than the overall Barometer score for all respondents as well as the score ascribed to companies that only offer a DC plan or that offer a DC plan with an incidental DB plan (55 points). 6 U.S. Social Security Administration, Historical Background and Development of Social Security, Social Security Online, 7 In the beginning of 2010, the average monthly Social Security benefit for a retired person was $1,164 according to the U.S. Social Security Administration, 8 For the purposes of this study, broad coverage DB plans are defined as where at least 70% of the employee population is covered by a DB plan. Incidental DB plans are those where less than 70% of the firm s employee population overall is covered.

7 DESPITE GOOD INTENTIONS ON THE PART OF MANY, PLAN SPONSORS ARE STRUGGLING TO TRANSLATE RETIREMENT INCOME PHILOSOPHY INTO THE CREATION OF A RETIREMENT INCOME CULTURE A substantial majority of plan sponsors appear to recognize the importance of cultivating a retirement philosophy that not only focuses on providing costeffective retirement benefits that help them remain competitive but also inculcates the importance of their employees creating retirement income for their futures. When asked about their corporate philosophy when it comes to retirement benefits, plan sponsors most often focus on a desire to offer cost-effective retirement benefits that help them to be competitive. The second-largest share of respondents believes their corporate philosophy is most closely aligned with supporting their employees needs to create retirement income. Despite recognizing the importance of retirement income, plan sponsors remain more focused on retirement savings than on income as a key objective of their programs. For example, while 93% say that retirement savings is extremely or very important as a focus of their retirement plans, only 65% say retirement income has a comparable level of importance for their retirement program. How plan sponsors structure their retirement programs supports this focus on retirement savings as well. For example, across all companies, most (82%) say their company does not set income replacement goals for any or all of its qualified plans. Likewise, fewer than half of the companies have written policy statements that deal with more than just investment issues (44% of all companies), and fewer than one-third of them address retirement income in these statements. Across all DB plans, respondents reported that, on average, employees would receive about 17% of their current salary after 10 years of service, rising to 41% of their current salary after 30 years of service. Among the DB plan sponsors that also have a DC plan, few estimated income replacement levels generated by their DC plans. RETIREMENT INCOME PLAYS SECOND FIDDLE TO ACCUMULATION IN EMPLOYEE EDUCATION AND COMMUNICATION; ONLINE CALCULATORS NO SUBSTITUTE FOR EFFECTIVE EDUCATIONAL SUPPORT With most plan sponsors focused on the importance of savings and investing, less emphasis is given to retirement income as a focus of retirement education and communication. Retirement plan communications are skewed toward encouraging employees to save rather than to plan for retirement income. While the majority of plan sponsors provide education about the need to save for retirement and the risks of investing, very few include information about retirement income-related issues such as longer life spans 3 > MetLife Qualified Retirement Plan Barometer

8 JANUARY (longevity risk), how to create retirement income, the pros and cons of taking a lump sum versus periodic payments, and when to begin taking Social Security benefits. Given this focus, plan sponsors even those who fund traditional DB plans appear to be under-communicating with employees about the importance of retirement income. A majority of plan sponsors gravitate towards educational programs and support, such as online calculators, yet many give such tools low effectiveness ratings in encouraging employees to make appropriate decisions regarding their retirement plans. Further, retirement planning seminars are held infrequently by most companies for plan participants and there is considerably less emphasis on providing this type of educational opportunity to non-participants in DC plans. PLAN DESIGN FOCUSES ON ENCOURAGING SAVINGS AND STABLE INVESTMENTS RATHER THAN CREATION OF LIFETIME INCOME Plan sponsors focus on encouraging retirement savings through automatic enrollment and autoallocation features, as well as stable investments. Roughly half of sponsors report that they include all employees in automatic enrollment features and default allocation to a target date fund. Stable value funds are the most popular investment option offered by plan sponsors overall, followed by target date funds. Although for decades most DB plans only paid benefits in the form of an annuity, about half of DB plans now allow a full lump sum to be paid. An additional one-third allow a partial lump sum. While nearly all employers correctly say their qualified retirement program has standard annuity distributions within their defined benefit plan (if they offer a DB plan), the incidence of an annuity option from a DC plan is much less prevalent, as is partial annuitization. MANY DC PLAN SPONSORS CITE FIDUCIARY CONCERNS AS A BARRIER TO MORE WIDESPREAD OFFERING OF INCOME ANNUITIES Among those firms that offer any type of annuity option in connection with their DC plans, a standard annuity is offered more frequently than more flexible annuity options. Over half of respondents indicated that fiduciary concerns are discouraging them from offering lifetime annuity options. As a point of reference, two-thirds of plan sponsors believe they are knowledgeable about fiduciary standards in general.

9 As 401(k) plans look back at their 30 th birthday, especially following the effects of the economic crisis of , it is clear that the expectations and assumptions held by many in 1978 that individual choice and direction would foster employee engagement, involvement and financial success have not developed that way in actual practice. UNLESS RETIREMENT INCOME IS A PRIMARY PLAN OBJECTIVE PROGRAM SUCCESS MEASURES PLACE MORE EMPHASIS ON PARTICIPATION THAN INCOME In general, plan sponsors indicate they use measures pertaining to plan participation to gauge their program s success, whether or not they rate other areas as important or more important. The large majority of plan sponsors measure the success of their retirement plan by their employees overall participation rate or the participation rate of nonhighly compensated employees, followed by the overall deferral rate of non-highly compensated employees and the percentage of eligible employees taking full advantage of the company match. On average, only about half of plan sponsors think that the ability to generate retirement income is extremely or very important in determining how successful their retirement plan is in relation to their corporate philosophy. A slightly lower percentage assigns very high importance to average balances. One notable exception is that plan sponsors who have retirement income as a key focus of their philosophy regarding their retirement plans are much more likely than other plan sponsors to recognize the ability to generate retirement income as a very important measure of plan success (68% vs. 23%). DESPITE RETIREMENT PLAN COSTS, PLAN SPONSORS LEAVING VALUE ON THE TABLE Although retirement plans represent a major investment by companies, plan sponsors do not seem to be using them as strategically as they might. Specifically, while attraction and retention are the primary objectives stated for retirement programs, two-thirds of plan sponsors have not conducted a survey of employees to measure their satisfaction with the education and support they receive about retirement plans meaning that they never evaluate if the programs are successful. Plan sponsors also report that they do not believe that many of their employees fully appreciate the value of the guaranteed income associated with DB plans. Plan sponsors who offer both DB and DC plans report that their employees are fairly evenly split in terms of whether they appreciate their DC plan more than their DB plans, which raises the question of whether or not companies are reaping the benefits of the value of this rich benefit. When asked what improvements they would like to make to their retirement plans if cost and regulations were not barriers, plan sponsors are most likely to mention plan design features, such as increasing the company match, rather than additional flexibility on communication or education. 5 > MetLife Qualified Retirement Plan Barometer

10 Annuities, in some form, are most often viewed as a way that employees can receive part of their DC plan savings for as long as they live when they retire. Overall, it s notable that while some plan sponsors whose only retirement program is a DC plan do see retirement income or retirement security as a program goal, a sizeable minority do not. As 401(k) plans look back at their 30 th birthday, especially following the effects of the economic crisis of , it is clear that the expectations and assumptions held by many in 1978 that individual choice and direction would foster employee engagement, involvement and financial success have not developed that way in actual practice. Since these same assumptions lay at the heart of the tax preferences associated with DC plans, this recognition has set the stage for current efforts by public policymakers to grapple with aligning regulatory rulemaking and tax incentives with public policy goals of retirement adequacy. JANUARY

11 MAJOR FINDINGS BAROMETER SCORES REVEAL WIDE VARIATIONS IN PROGRESS TOWARD A RETIREMENT INCOME CULTURE, WITH ROOM FOR ALL TO IMPROVE A key goal of this research study was to measure whether large companies are moving beyond their well-ingrained culture of retirement accumulation toward the creation of a culture that places equal emphasis on retirement accumulation and retirement income. Specifically, the study sought to assess the extent to which plan sponsors at the FORTUNE 1000 companies are encouraging and supporting ways for workers to prepare for their income needs in retirement. Toward that end a Barometer was constructed to measure, at a point in time, how companies are doing with regard to creating a retirement income culture within their respective companies. Reported in the aggregate, the Barometer score in this inaugural Qualified Retirement Plan Barometer Study should serve as a baseline against which future changes may be measured. The Barometer score was constructed in four steps: Step 1 A composite Barometer score was calculated for each company, based on responses to 60 of the survey questions that covered four distinct areas: objectives/philosophy; program/plan design; communications/education; and evaluation. Step 2 Questions were identified in terms of whether or not they aligned more closely with asset accumulation at one end of the spectrum or retirement income at the other. Scores are scaled from zero (extremely weak retirement income culture) to 100 (extremely strong retirement income culture). Step 3 The scoring algorithm was tailored to the company s plan configuration different weights were used for companies with: A) DC Plans only; B) Incidental DB plans (covering <70% of salaried, non-highly compensated employees) and DC plans; and, C) DC plans and broad coverage DB plans (covering _> 70% of salaried, non-highly compensated employees). The major impact of using a different scoring system by plan configuration was to give companies with broad coverage DB plans extra credit in their score for the income replacement they provide to a large majority of their workers. For reporting purposes, sponsors with DC plans only and those with incidental DB plans as well as DC plans were combined since there were minimal differences in the scores of the two groups. Step 4 The overall Barometer score is the average of the composite Barometer score for all survey respondents. 7 > MetLife Qualified Retirement Plan Barometer

12 Qualified Retirement Plan Barometer Scores (Among Plan Sponsors, n =117) 9 Retirement Income Culture Strong All Plan Sponsors DC only or Incidental DB and DC Plans Broad Coverage DB and DC Plans Weak 0 As shown above, the mean aggregate Barometer score across all plan types is 59 out of a possible 100 points. The higher the value on the Barometer, the stronger the overall culture of retirement income. cost-efficient manner possible, quite a few plan sponsors recognize the importance of cultivating a culture of retirement income. More than onethird (35%) of the plan sponsors surveyed describe JANUARY Individual company scores ranged from a low of 19 to a high of 89. Companies with a broad coverage DB plan and a DC plan scored higher than average at 74, whereas companies with DC plans or incidental DB plans and DC plans scored only 55 on the Barometer scale. Broad coverage DB plan and a DC plan, as one might imagine, scored much higher in certain areas such as plan design, and communication and education. DESPITE GOOD INTENTIONS ON THE PART OF MANY, PLAN SPONSORS ARE STRUGGLING TO TRANSLATE RETIREMENT INCOME PHILOSOPHY INTO THE CREATION OF A RETIREMENT INCOME CULTURE Qualified Plan Philosophy While a plurality of plan sponsors (45%) describe their corporate philosophy regarding the provision of retirement benefits based on a desire to be successful in a competitive workforce environment and focus primarily on providing them in the most their retirement benefits philosophy as to support employees efforts to create retirement income for the future when taken together with Social Security and their personal savings. Even fewer plan sponsors (20%) describe their philosophy as our business needs are served by proactively creating a program that offers the best financial and other resources to support our employees needs to determine and achieve their retirement savings goals. Interestingly, companies with participation rates of 70% or higher are more likely than those with lower participation rates to have a corporate philosophy that emphasizes supporting employees retirement income goals (43% vs. 17% for those with participation rates less than 70%). While the competitive and cost-effective philosophical approach is the most common, the fact that one-third of employers say they are seeking to create a retirement income culture is significant. When the survey delved deeper into the objectives and practices, it s apparent that, at this juncture, a 9 Ten of the 127 total respondents to the survey were excluded from the Barometer construction due to their pattern of non-response or other data quality issues.

13 While the competitive and cost-effective philosophical approach is the most common, the fact that onethird of employers say they are seeking to create a retirement income culture is significant. Corporate Philosophy Regarding Retirement Benefits (All Plan Sponsors, n=127) We provide retirement benefits primarily because our business needs are served by proactively creating 20% a program that offers the best financial and other resources to support our employees needs to determine and achieve their retirement savings goals. 45% 35% We provide retirement benefits primarily to support our employees efforts to create retirement income for the future, when taken together with Social Security and their personal savings. We provide retirement benefits primarily to be successful in a competitive workforce environment and we focus primarily on providing them in the most cost-efficient manner possible. culture of retirement income hasn t yet taken hold, even among these companies. This is perhaps not surprising, since focus on retirement income in DC plans at the plan sponsor level is relatively recent. Overall Plan Objectives Today, while the lion s share of plan sponsors (93%) say that retirement savings 10 is an extremely or very important objective of their retirement plans, only two-thirds (65%) say that retirement income has a comparable focus. Further, plan sponsors are two and a half times more likely to say that retirement savings, as opposed to retirement income, is an extremely important objective (42% vs. 17%). It is notable that one in 10 respondents indicated that retirement income was not at all/not too important Retirement Plan Objectives* (All Plan Sponsors, n=127) Retirement savings = 93% Retirement income = 65% 42% 51% 47% 17% 6% 23% 1% 11% Retirement savings Retirement income 9 Extremely Important Very Important Somewhat Important Not Too/Not At All Important *Figures have been rounded to nearest whole number. 10 Unlike the question on corporate philosophy where the responses are mutually exclusive, plan sponsors could have said that both retirement savings and retirement income are very important objectives of their retirement program. > MetLife Qualified Retirement Plan Barometer

14 Savings Sufficiency by Corporate Philosophy (All Plan Sponsors, n=127) Meeting Retirement Savings Goals (n=26) 19% 46% 65% Creating Retirement Income (n=44) 14% 23% 37% Being Competitive/Cost Effective (n=57) 5% 30% 35% Strongly agree Somewhat agree an objective for their qualified plans, suggesting that some plan sponsors either do not see a need to connect savings to income in their qualified retirement plan design, or do not see this as part of the sponsor s role. Savings Sufficiency Although nearly all plan sponsors believe retirement savings is an important plan objective, they are evenly divided about whether employees are accumulating sufficient assets in their retirement plans 42% agree and 42% disagree. Only 1 in 10 (11%) strongly agree. Notably, companies with both a DB and a DC plan are twice as likely as those with just DC plans to think that non-highly compensated employees are doing a good job of accumulating assets in their retirement plans (49% vs. 24%). Belief that their rank and file employees are saving enough increases as participation rates increase. Perhaps not surprisingly, confidence that their nonhighly compensated employees are accumulating sufficient assets is especially high (65%) among those whose corporate philosophy is aligned most with supporting employees savings goals. But it is also more prevalent among companies in which retirement income is considered a very important plan objective, compared to those who feel retirement income is less important as a plan objective (48% vs. 33%). Addressing Retirement Income in Policy Statements Of the companies that have written policy statements that deal with more than just investment issues (44% of all companies), fewer than one-third (29%) JANUARY 2011 Written Policy Statement Broader Than Investment Issues (All Plan Sponsors, n=127) 10 56% No 44% Yes Does this policy statement typically deal with the subject of retirement income? Percent of Plan Sponsors (n=56) Yes 29% No 68% Don t know/refused 4%

15 Setting Income Replacement Goals (All Plan Sponsors, n =127) Income Replacement Goals Percent of Plan Sponsors (n=22) 82% No 17% Yes 1% Don t Know/ Refused Less than 50% 9% 50% to 59% 36% 60% to 69% 23% 70% to 79% 18% 80% or higher 9% Don t know/refused 5% address retirement income. Over two-thirds (68%) of plan sponsors who have written policy statements say they do not deal with the subject of retirement income. The likelihood of having a written policy statement that deals with more than investment issues increases as plan participation rates increase. Among companies that have a written policy statement, those with both DC and DB plans are more likely than those with only DC plans to have statements that deal with retirement income (36% vs. 15%). Companies founded before 1970, whose plans are generally more mature, 11 are also more apt than younger companies to have a written policy statement that addresses retirement income (34% vs. 13%). Not surprisingly, companies that feel retirement income is very important as a focus of their retirement plan are more likely than those that place lower importance on retirement income to have a written policy statement on that same subject (38% vs. 6%). Setting Income Replacement Goals According to the Employee Benefits Research Institute, retirement income replacement rates have traditionally been used to establish minimum targets for future retirees by calculating the amount needed to provide the same amount of after-tax income in retirement as that received prior to retirement after adjusting for differences in savings, age, and work-related expenses. 12 Since calculating how much income one should have in retirement is such a critical component of retirement planning, one would think that nearly all companies would offer guidance to employees about income replacement rates. Yet, across all companies surveyed, 82% say that their company does not set income replacement goals for any or all of its qualified plans; only 17% say their company does this. Among the few companies who have income replacement goals, two-thirds (68%) say they set the bar at less than a 70% replacement level; this includes 23% whose goals are between 60% to 69%, 36% with goals between 50% and 59%, and 9% who say their goals are less than 50%. The median replacement goal is 62%, which is well below the 77% to 94% recommended by experts. 13 Companies that offer both a DB and DC plan are more likely than those with only a DC plan to set income replacement goals for at least one of their plans (24% vs. 3%); companies with a cash balance/ hybrid plan are especially inclined to do so (34%) For the purposes of this study, these are defined as firms established in 1970 or prior. 12 Employee Benefit Research Institute, Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates, September 2006, EBRI Issue Brief # Aon Consulting and Georgia State University, 2008 Replacement Ratio Study, August, > MetLife Qualified Retirement Plan Barometer

16 The Employee Benefit Research Institute notes that one of the biggest weaknesses of replacement rate models is that one or more of the most important retirement risks are ignored: investment risk, longevity risk and risk of potentially catastrophic health care costs. 14 Average Income Replacement from DB Plans One way to measure the richness of a DB plan is to examine the approximate percentage of current salary that an employee covered by the DB plan would receive if that employee retired after a given number of years of service. In the survey, plan sponsors responded about the estimated benefit relative to earned income at the point of retirement. It should be noted, however, that it was difficult for many respondents to estimate the income which is reflected in a high level of Don t know responses. On average, the estimated share of salary that DB plans replace more than doubles from 10 years of service to 30 years of service. Across all DB plans, employees would receive 17% of their current salary after 10 years of service and 41% of their current salary after 30 years of service. However, actual benefit levels earned vary as a result of both voluntary and involuntary job changing. replacement level for all the DB plans they offer, Percentage of Salary from DB Plan (All Defined Benefit Plans, n=217)* 46% 52% 47% 41% 35% For employees with 10 years of service For employees with 30 years of service 17% 3% 6% 5% 6% JANUARY 2011 Average Replacement Rate of Salary Under 20% of Salary 20% to 29% of Salary 30% or more of Salary Don t Know/ Refused 12 *In some cases survey respondents said they offered multiple DB plans. 14 Employee Benefit Research Institute, Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates, September 2006, EBRI Issue Brief #297.

17 Perceived Awareness/Impact of Materials Provided* (All Plan Sponsors, n=127) For the most part, our employees are aware of the company-provided materials available to them pertaining to the importance of saving for retirement and tax-deferred savings 18% 59% 9% 11% 3% The materials/tools/personal support we provide to employees gives them a clear idea of how to generate retirement income from their retirement plan(s) 15% 43% 20% 19% 3% We provide extensive material on the pros and cons of taking a lump sum versus a periodic income distribution from a DB plan (if has a DB plan, n=89) 8% 12% 20% 16% 15% 28% Strongly Somewhat Neither agree Somewhat Strongly Not agree agree nor disagree disagree disagree applicable *Figures have been rounded to nearest whole number. Don t know/refused responses have not been included. RETIREMENT INCOME PLAYS SECOND FIDDLE TO ACCUMULATION IN EMPLOYEE EDUCATION AND COMMUNICATIONS; ONLINE CALCULATORS NO SUBSTITUTE FOR EFFECTIVE EDUCATIONAL SUPPORT Perceived Awareness/Impact of Materials Provided With most plan sponsors focused on the importance of savings and investing, less emphasis is paid to retirement income as a focus of retirement education and communication. While the majority of plan sponsors provide education about the need to save for retirement and the risks of investing, very few plan sponsors concentrate on providing education on retirement income-related issues such as longer life spans/longevity risk, how to create retirement income, the pros and cons of taking a lump sum versus periodic payments, and when to begin taking Social Security benefits. Given their current focus, plan sponsors even those who fund traditional DB plans appear to be under-communicating with employees about the importance of retirement income. Over three-fourths (77%) agree that their employees are aware of company-provided materials available to them pertaining to the importance of saving for retirement and tax-deferred savings. Further demonstrating that retirement plan communications tend to be skewed toward savings rather than income, a lower share (58%) think that the materials, tools and/or other support their company provides to employees gives them a clear idea of how to generate retirement income from their retirement plans. Only 15% strongly agree with this assertion and just over four in 10 (43%) somewhat agree. Perhaps even more telling, just 20% of companies offering a DB plan agree that they provide extensive materials on the pros and cons of taking a lump sum vs. a periodic income distribution from a DB 13 > MetLife Qualified Retirement Plan Barometer

18 Information provided by plan sponsors focuses on savings topics such as investment risks and the purpose of the plan rather than retirement income. plan. This suggests that even among large plan sponsors, lump sum features are not as universal as is commonly supposed, and that where lump sums are offered as a feature, they are generally offered without much related communication. Communication Focused on Assets More Than Income Information provided by plan sponsors focuses on savings topics such as investment risks and the purpose of the plan rather than retirement income. Communications to employees are more likely to focus on investment issues than they are on various income-related topics. Seven in 10 plan sponsors (69%) report that all their employees receive information on the risks of investing, which is likely attributed to the regulations under ERISA, (among them ERISA Section 404(c)), which requires that companies that offer individual account plans provide employees with enough fee, expense and performance information about their plans investments to make educated investment decisions. Perhaps because no similar requirement exists regarding retirement income, only a minority (38%) say all employees receive communications about retirement income throughout the participant s tenure in the plan. Additionally, over half of plan sponsors (54%) report that all their employees Communications on Various Topics: Extent of Coverage* (All Plan Sponsors, n=127) The risks of investing Explanation of the primary purpose of the plan(s) 69% 20% 7% 5% 57% 30% 5% 5% 3% The benefits for eligible employees of making catch-up or 55+ contributions (among those for whom it applies) 50% 24% 10% 14% 2% JANUARY 2011 Communications about retirement income throughout the participant s tenure in the plan(s) 38% 17% 14% 19% 12% The importance of establishing target retirement income levels for retirement in relation to current pay 32% 20% 15% 18% 14% 14 The potential impact of longer life spans on retirement security 28% 20% 13% 24% 15% Strategies for coordinating retirement benefits with Social Security benefits 20% 13% 11% 30% 24% All employees Most employees About half of Some employees No employees employees *Figures have been rounded to nearest whole number. Don t know/refused responses have not been included.

19 Educational Programs and Support: Extent Offered* (All Plan Sponsors, n=127) Programs designed to encourage non-contributors to start contributing 54% 17% 7% 19% 3% Access to your corporate website which has a retirement focus 53% 17% 3% 6% 20% Participant statements that show both their balance and what it would convert to as an income stream in retirement 46% 9% 3% 7% 35% Defined benefit communications that provide information on income earned to date (if has a DB plan, n=89) 44% 13% 3% 20% 19% DB communications targeted to employees at key milestones (if has a DB plan, n=89) 19% 11% 3% 30% 35% Analysis to determine the time to begin Social Security benefits 7% 6% 3% 18% 65% All employees Most employees About half of Some employees No employees employees *Figures have been rounded to nearest whole number. Don t know/refused responses have not been included. are exposed to programs designed to encourage non-contributors to start investing in the retirement plan. A similar share (53%) say all employees have access to their corporate website which has a general retirement focus. Even fewer plan sponsors report that the following retirement-income related topics are communicated to all employees: the importance of establishing target retirement income levels for retirement in relation to current pay (32%); the potential impact of longer life spans on retirement security (28%); and strategies for coordinating retirement benefits with Social Security benefits (20%). Fewer than half say that all their employees receive each of the following: participant statements that show both their balance and what it would convert to as an income stream in retirement (46%), and for those with a DB plan, information on income earned to date in the DB plan (44%). Finally, just 7% of plan sponsors report that all employees are offered an analysis to help them determine when they should begin claiming Social Security benefits, and twothirds (65%) say no employees receive information on this issue. One silver lining is that companies for which retirement income is a strong objective in their retirement program place greater emphasis on both savings and income in their communications. These companies are more likely than other plan sponsors to agree that their employees are aware of companyprovided materials pertaining to the importance of saving (87% vs. 60%). They are also more likely to agree that their company provides materials and support that gives their employees a clear roadmap on how to generate retirement income from their plan (62% vs. 47%). This suggests that positioning the DC plan in this way pays dividends to the degree in which employees understand, engage with and appreciate the plan, in addition to an increased likelihood of using it in an effective manner for retirement security. 15 > MetLife Qualified Retirement Plan Barometer

20 Tools and Calculators Availability* (All Plan Sponsors, n=127) Online calculators to assess retirement savings goals 85% 11% 2%1% 2% Calculators or modeling support that focus on determining retirement income needs 82% 11% 2% 6% Access to a consolidated view of their benefits if employees are covered by multiple plans (if has multiple plans, n=102) 58% 10% 3% 6% 24% All employees Most employees About half of Some employees No employees employees *Figures have been rounded to nearest whole number. JANUARY Tools and Online Calculators Are Prevalent About 8 in 10 plan sponsors (85%) say that all their employees have access to online calculators to assess retirement savings goals. A comparable (82%) say that all employees have access to calculators or modeling support that focuses on determining retirement income needs. Among those with multiple retirement plans, only 58% report that all their employees have access to a consolidated view of their benefits across all their retirement plans so they can make appropriate decisions about retirement security. Tools and Calculators: Extent of Influence in Encouraging Appropriate Decision-Making* (All Plan Sponsors, n=127) 58% Some influence 27% Little influence 3% No influence 11% A great deal of influence Although plan sponsors also appear to gravitate toward offering online tools and calculators, only one in 10 plan sponsors (11%) believes that the tools and calculators offered provide a great deal of influence in terms of encouraging employees to make appropriate decisions regarding retirement. Retirement Planning Seminars Not Frequently Held Retirement planning seminars are held relatively infrequently by most respondent companies, with most of the emphasis placed on providing this type of educational opportunity to employees currently participating in a DC plan. While half of plan sponsors (49%) say that they hold retirement planning seminars for their DC plan participants on an occasional basis, 12% report that they never do so. Another 39% report holding retirement planning seminars for plan participants very often or fairly often. Only 19% say their company holds seminars or webinars that are specifically targeted to nonparticipants in their DC plan(s) very or fairly frequently. Indeed, nearly half (46%) never hold meetings for employees who are not participating in their DC plan. Among the FORTUNE 1000 companies with a DB plan, just over one-third (36%) say they *Figures have been rounded to nearest whole number.

21 hold seminars or webinars, either directly or through a third party, that include the DB plan. Interestingly, plan sponsors with both DC and DB plans are twice as likely as those with DC plans only to hold seminars directed at non-participants in the DC plan at least fairly often (22% vs. 11%). Plan sponsors who say retirement income is an important objective of their retirement plans are more likely than other plan sponsors to offer, at least fairly often, retirement planning seminars or webinars for plan participants (45% vs. 30%) as well as for non-participants (24% vs. 9%). Sponsors offering retirement planning seminars very or fairly often are twice as likely as those offering them occasionally or never to have deferral rates of 7% or higher (46% vs. 23%). A similar relationship is evident in the share with high deferral rates (7% or higher) among companies offering seminars targeted to non-participants very/fairly often compared to occasionally/never (45% vs. 29%). Among companies with DB plans, those offering seminars/webinars that focus on the DB plan are far Holding Seminars or Webinars that Focus on DB Plan(s) (Among Plan Sponsors that have a DB plan, n=89) 36% Yes more likely than those who do not to have deferral rates of 7% or higher (47% vs. 26%). 64% No Nearly half (48%) of plan sponsors say they give access to accredited financial planning professionals to all their employees, with another 14% providing it to executives or management-level only. Nearly four in 10 (38%) report giving no access to financial professionals at all. Although the use of accredited financial planners can create fiduciary concerns Frequency of Seminars or Webinars* (All Plan Sponsors, n=127) 49% 46% 29% 34% For employees who participate in DC plan(s) 10% 14% 12% For employees who do not participate in DC plan(s) 17 5% Very Often Fairly Often Occasionally Never *Figures have been rounded to nearest whole number. > MetLife Qualified Retirement Plan Barometer

22 DC Plan Design Options: Extent of Participation* (All Plan Sponsors, n=127) Default allocation with target date fund as the vehicle Auto enrollment features Automatic escalation or step-up of contributions 28% 4% 3% 27% 38% Re-enrolling non-participants periodically 11% 2% 9% 47% 6% 3% 13% 31% Bump ups in employer match based on age and/or tenure 7% 2% 2% 6% 52% 5% 4% 14% 24% All employees Most employees About half of Some employees No employees employees *Figures have been rounded to nearest whole number. Don t know/refused responses have not been included. 84% 76% among plan sponsors, strategies such as utilizing non-commissioned planners and reviewing the presentations beforehand can help to alleviate this concern. all their employees are subject to features in which non-participants are re-enrolled periodically in the DC plan; over three-quarters (76%) say that they have not implemented this option for any of their employees. JANUARY PLAN DESIGN FOCUSES ON ENCOURAGING SAVINGS AND STABLE INVESTMENTS RATHER THAN CREATION OF LIFETIME INCOME Auto Features Introduced by Many Encouraged by provisions in the Pension Protection Act of 2006, automatic enrollment of participants in 401(k) plans, which is designed to get more workers to save in their DC plan, appears to have taken hold among large plan sponsors. Slightly fewer than half of sponsors report that they include all employees in automatic enrollment features (47%) and many have implemented a default allocation to a target date fund (52%). Take up of other DC plan features is far less common. Almost 3 in 10 plan sponsors (28%) say that all their defaulted employees participate in automatic step-ups of their contributions. Only 1 in 10 (11%) reports that Stable Value Is the Most Popular Investment Option Stable value funds are the most popular investment option offered by plan sponsors, followed by target date funds. Eighty-seven percent say that all employees across their corporation are offered stable value funds. A strong majority (76%) of plan sponsors also include target date funds in the investment lineup offered to all their employees. Just over half (54%) of plan sponsors say all their employees are offered a range of target date funds that are targeted to employees with different risk tolerances. Companies that have both DB and DC plans are twice as likely as those with only DC plans to offer DB-like investment vehicles in their DC plans to all employees (26% vs.13%). The likelihood of offering DB-like investments, such as collective trusts or individually managed non-registered options, in DC plans increases

23 According to MetLife s 8th Annual Employee Benefits Trends Study, 4 in 10 employees (40%) are interested in learning more about how they could use annuities as part of their DC plan, and 44% would like their employer to offer an annuity option in their 401(k), 403(b) and/or 457 plan. 15 with company size (as measured by number of employees), total assets of retirement plan and average deferral rate. Distribution Options Don t Currently Encourage Creation of Lifetime Income While nearly all employers correctly say their qualified retirement program has standard annuity distributions within their defined benefit plan (if they offer a DB plan), the incidence of an annuity option from a DC plan is much less prevalent, as is partial annuitization. A DB plan must offer to pay a monthly benefit for the life of a retired worker, no matter how long the worker lives. If the value of the benefit is $5,000 or less, the plan may pay the benefit in a single payment. Ninety-four percent of plan sponsors who offer a DB plan say those plans provide standard annuity distributions. Although, for decades, most DB plans only paid benefits in the form of an annuity, today a little more than half (54%) of the study respondents now offer full lump sum distributions from a DB plan. Additionally, one-third (35%) of these sponsors now allow a partial lump-sum to be paid under their DB plan. Younger companies 16 are more likely than older firms to offer full lump-sum distributions from a DB plan (79% vs. 45%). Among all plan sponsors, the most popular nonmandated distribution option at retirement is installment payments (e.g., for a defined time period) (61%), followed by systematic withdrawal plans (46%). One in four plan sponsors (24%) reports that their program offers lifetime annuity payment options from a DC plan, a number that skews higher than other industry studies. 17 Partial annuitization options are less common, with about one in five (21%) reporting that such an option is available. Plan sponsors were informed about a recent study that Investment Options in DC Plans: Extent Offered* (All Plan Sponsors, n=127) Stable value funds Target date funds 87% 4% 1% 9% 76% 4% 1% 19% Range of target date funds targeted to employees with different risk tolerances Replacing all or some DC plan mutual fund options with vehicles more commonly employed in DB plans 22% 2% 1% 54% 5% 1% 39% 73% 19 All employees Most employees About half of Some employees No employees employees *Figures have been rounded to nearest whole number. Don t know/refused responses have not been included. 15 MetLife, 8th Annual Study of Employee Benefits Trends, For the purposes of this study, this is defined as firms established after Towers Watson, 2010 Defined Contribution Survey, June 2010; AonHewitt, Trends and Experience in 401K Plans, > MetLife Qualified Retirement Plan Barometer