ability to accumulate retirement resources while increasing their retirement needs; and

Transcription

1 Consulting Retirement Consulting Talent & Rewards The Real Deal 2012 Retirement Income Adequacy at Large Companies RETIREMENT YOU ARE HERE

2 About This Report This study assesses whether employees of large companies are expected to have the financial resources to meet their postretirement needs. Projected retirement needs for 2.2 million employees at 78 companies were compared to the projected retirement resources they can expect to derive from their companies benefits programs and government benefits. The results depict the Real Deal because they reflect real employee behaviors, real employee accounts, and real benefit plans. Concern about employees being adequately prepared for retirement is on the rise. Recent surveys report waning confidence by employers, employees, and the government, because of factors such as: n Defined contribution plans replacing traditional pensions as the primary retirement income plan; n Investment market volatility that has adversely impacted defined contribution balances; n Employee behaviors that fail to optimize employer-provided retirement benefits; n Lack of retirement planning and failure to establish meaningful retirement income targets; n Increasing life expectancies that make it harder for employees to accumulate sufficient assets to last through their retirement years; n Reluctance by employers and employees alike to pursue opportunities to manage or insure risks; n Rising medical costs and declining employer-provided retiree medical subsidies impeding employees ability to accumulate retirement resources while increasing their retirement needs; and n Continuing concerns about the ability of Social Security and Medicare to deliver benefits at the levels currently promised. These concerns have created significant focus on retirement security in the media and in the halls of Congress. For example, the ongoing discussions about national health care reform, defined contribution plan fee disclosure, and lifetime income solutions highlight government recognition of the need for action. This report will help organizations and their employees understand the projected outcomes and manage the associated risks to retirement income adequacy. The results can serve as a benchmark for employers as they measure the effectiveness and sufficiency of their programs. This study is the fifth Real Deal study issued by Aon Hewitt. The study updates and enhances Aon Hewitt s prior Real Deal analyses (2010) while leveraging the findings from the Aon/Georgia State Replacement Ratio study (2008).

3 The Real Deal 2012 Retirement Income Adequacy at Large Companies Road Map 4 Study Highlights 11 Methodology and Assumptions 17 Summary of Key Findings Baseline Case: Full-Career Contributors 31 Summary of Findings for Other Employee Groups All Contributors, Noncontributors, and All Employees Gender-Specific Results Employer Plan Structure 43 Key Retirement Income Adequacy Risks Investment Risk Longevity Risk Inflation Risk Retirement Age Inadequate Savings Automatic Contribution Escalation and Automatic Enrollment 59 Appendix Demographics Participating Companies Methodology and Assumption Details Additional Hot Zones

4 Study Highlights Retirement Income Adequacy There is increasing concern over employees not having enough money to meet their retirement needs. Employees face the risk of having to work longer than desired or decreasing their living standards. Employers face workforce risks if employees are not able to retire as planned. And in light of growing deficits and economic difficulties, the country s social systems are at risk of becoming overwhelmed by retiring workers who are financially ill-prepared for retirement. To confront these risks, several key questions need to be addressed: n How much do workers need to retire? n Will employees be prepared for retirement if they continue doing what they are doing today? n What can employees and employers do to improve the outcomes? Aon Hewitt s Real Deal study answers these questions by studying the retirement resources and needs for 2.2 million employees of 78 large US employers. The study projects employees retirement resources and needs assuming their current behaviors continue. The report then analyzes the risks, measuring employer and employee actions to help improve the outcomes. The Real Deal study focuses on full-career contributing employees as the baseline. For this purpose, we define full career as an employee with the potential to work 30 years or more with their current employer prior to retirement. This allows analysis of the theoretical potential for delivering adequate retirement income through the plans and savings behaviors of today s environment, an analysis of projected risks, and possible solutions to help manage the risks. Focusing on full-career contributing employees allows the study to analyze the effect of an employer s retirement benefits as if they were delivered through a full career, even if employees do not choose to work for a single employer for this length of time. The study also analyzes different segments of the population under multiple future scenarios. In doing so, the study addresses which employees may fare best, how plan design influences behavior, and how different future scenarios might impact retirement income. Key Findings n 11.0 times pay: An average full-career contributing employee needs this much at age 65, after Social Security, to expect to have sufficient assets to get through retirement. n 85% replacement ratio: The pay replacement needed in the first year of retirement (foundation of 11.0 times pay through retirement). n 2.2 times pay shortfall: An average full-career contributing employee is expected to have 8.8 times pay in resources at retirement, leaving this shortfall. 4 Aon Hewitt

5 Results The Real Deal study shows that more employees are on track to retire with adequate retirement income when compared to prior studies. Projected retirement income shortfalls for the Real Deal full-career contributor population have improved on average, although only slightly (now 2.2 times pay, down from 2.4). Some of the reasons for this improvement include strong market returns in 2009 and 2010 (compared to the poor market returns of 2008, at the time of our last study), and continued retirement savings by most employees. Almost 30% of employees are now on track to retire comfortably at age 65. The study projects that the employees who currently contribute to their employers savings plans and who retire at age 65 after a full career will, on average, accumulate retirement resources of 8.8 times their pay. These resources include accumulations of employee savings in their employers defined contribution plans (4.1 times pay), accumulations of employers additions to defined contribution plans (2.6 times pay), and defined benefit pensions (2.1 times pay). The study does not reflect savings or other retirement assets outside of the employer-sponsored plans. Figure 1 Retirement Resources Versus Needs Baseline Full-Career Contributing Employees Defined Contribution Plan Employee Portion Defined Contribution Plan Employer Portion Defined Benefit Plan Retirement Income Surplus/(Shortfall) Private Retirement Needs Social Security Total Retirement Needs Private Resources Shortfall Private Needs Social Security Total Needs While significant, these resources fall 20% short of the average projected retirement needs of 11.0 times pay at retirement for these employees times pay represents the retirement resources needed to maintain preretirement living standards throughout an average life expectancy, after reflecting the expected value of Social Security benefits. Retirement Income Adequacy at Large Companies: The Real Deal 5

6 In addition to the average 2.2 times pay shortfall, the following graph shows a somewhat broad distribution of results among full-career contributing employees. 29% of these employees are expected to satisfy all of their financial needs through retirement. At the other end of the spectrum, about 21% of employees are expected to have a shortfall of more than 6 times pay at age 65. Individual circumstances such as retirement benefit plan details, individual savings plan behaviors, income levels, and gender all help explain some of the variation in results. Figure 2 Distribution of Retirement Income Surplus/(Shortfall) Multiples of Final Pay Baseline Full-Career Contributing Employees Baseline Average = (2.2) 2 or Greater 17.3% % (2) (0.1) 15.7% (4) (2.1) 18.0% (6) (4.1) 16.4% (8) (6.1) 11.8% Less than (8) 9.0% Full-career employees represent only about half of the total Real Deal population. Projections for the other half of the study employees, including mid-career hires and those not currently contributing to their defined contribution plans, reveal significantly worse results. When analyzing all employees in the Real Deal study, the average shortfall increases to 5.3 times pay. Only about 15% of all 2.2 million employees in the study have positioned themselves to have sufficient resources to meet their needs if they retire at age 65. Results for the general U.S. population would likely reveal even larger retirement income shortfalls, compared to the results of this study. The Real Deal study uses data from large employers who generally provide larger retirement benefits and more robust employee communication about the need for retirement savings than smaller employers. Many circumstances have contributed to so many employees being at risk of having insufficient retirement income. Inadequate retirement savings represent the most basic cause of the projected shortfalls. A 25-year-old whose employer provides only a defined contribution plan needs a total annual contribution (employee plus employer) of approximately 15% of pay to retire at 65 with adequate resources. Employers without traditional pensions generally contribute about 6% of pay toward their employees retirement each year. That means employees need to save about 9% of pay in each of the next 40 years in order to stay on track. According to other Aon Hewitt research, total contributions into defined contribution plans, including employee and employer contributions, comprised 10.2% of pay on average. If employees wait until age 30 to begin contributing, the total annual contribution needed increases to about 19% of pay, highlighting the importance of starting early. Within the entire Real Deal study population, only 1 in 10 under age 30 have 15% of pay or more each year in combined employee and employer contributions. 6 Aon Hewitt

7 Saving To Versus Through Retirement Total needs Social Security Private needs To Retirement 85% 29% 56% Through Retirement 15.9 times pay 4.9 times pay 11.0 times pay To retirement is the percentage of preretirement income a person needs in the year of retirement to maintain their standard of living in that year. Through retirement is the multiple of pay a person needs at retirement to keep their standard of living throughout the retirement years. To understand the findings, readers need to be familiar with how this study defines and calculates adequate retirement income. The calculation starts by assuming a participant will want to maintain their standard of living after retirement. Building on methodology established in the 1981 President s Commission on Pension Policy, we updated assumptions to reflect key findings from the Aon/Georgia State Replacement Ratio studies. Current income is adjusted for expected changes at retirement: elimination of retirement savings, changes in taxes, and changes in expenditures, including medical costs. Medical costs reflect the 2010 Patient Protection and Affordable Care Act (PPACA) provisions as they stand at the time this report was published. This methodology produces an average need in the first year of retirement of 85% of pay. The amount needed at retirement age to cover retirement expenses through an average life expectancy (age 87 for males, age 88 for females) is 15.9 times pay. This assumes the cost of goods and services will increase over time as will medical expenses, due to inflation. Since Social Security will pay for some of these expenses, the employee will need to have saved 11.0 times pay at retirement through their employer plans and their own savings. How Can We Improve Results? Employers and employees need comprehensive plans to adequately prepare for retirement. Successful employer strategies will likely include, among other tactics, implementing and expanding automatic plan features, offering an array of investment advisory help, and thoughtfully designing plans to motivate and drive optimal employee behavior. Individual employees will need to consider the appropriate retirement age, savings rate, and income distribution solution to achieve a comfortable retirement for their specific situation. The Real Deal study assesses risks to employers and employees strategies, testing the impact of various potential actions. Based on this work, the following actions seem most noteworthy given their potential to directly improve, or substantially mitigate, the risks confronting employees retirement income adequacy. Retirement Income Adequacy at Large Companies: The Real Deal 7

8 Employer Actions 1. Expand automation. The 64% of employers who offer automatic enrollment have 15% more employees on track to achieve adequate retirement income compared to employers who do not offer automatic enrollment. Additionally, 53% of the employees who are enrolled in automatic contribution escalation programs are expected to achieve adequate retirement income compared to 26% of those who are not currently automatically escalating their contribution rates. Despite these positive results, employers could do more. Plan sponsors should consider automating their plans using robust defaults. Automatically enrolling employees at 6% of pay (rather than 3%), combined with automatic contribution escalation with a maximum savings rate default equal to IRS-legislated limits (rather than 6% or 10%), can provide a strong foundation for adequate retirement income. Employers should also consider sweeping in eligible non-participants, implementing quick enrollment, and encouraging automatic escalation through communication initiatives. Figure 3 Private Retirement Resources Versus Needs Employees With and Without Automatic Contribution Escalation Full-Career Contributing Employees With Contribution Escalation Private Resources Surplus Private Needs Without Contribution Escalation Private Resources Shortfall Private Needs Private Retirement Resources Retirement Income Surplus/(Shortfall) Private Retirement Needs 2. Offer an array of investment advisory help. A recent Aon Hewitt and Financial Engines Study 1 showed that employees who take advantage of investment help can increase returns by as much as 2% or 3%. The Real Deal study shows that just a 1% difference in future return on assets can increase retirement resources by 2 times pay. Employers should consider offering investment advisory help through an array of alternatives to meet employee needs. These include access to online investment advice, managed accounts, pre-mixed investment alternatives such as target date funds, seminars, personal financial planning, and lifetime income solutions. 3. Design plans thoughtfully. Employers should consider the impact their plan design may have on participant behavior. Many employees choose to save at the maximum match rate in their retirement plan. For example, if the plan matches 100% on up to 6% of pay, many employees save 6% of pay, even though this is below the rate needed to deliver adequate retirement income. The study demonstrates that if low-savings employees increase their savings rate to the maximum match rate in their employer s plan, they would still face an average shortfall of 1.5 times pay. 1 Help in Defined Contribution Plans: 2006 Through 2010, September 2011 by Financial Engines and Aon Hewitt. 8 Aon Hewitt

9 Employee Actions 1. Retire later. The Real Deal analysis shows that deferring retirement to age 67 allows almost 50% of employees to achieve adequate retirement income compared to 29% of employees when retiring at 65. Retiring later improves the outcomes in two ways. It allows extra contributions and investment returns to grow for two more years. At the same time, it reduces retirement needs by shortening the period over which resources will need to be spread. However, many employees actually end up retiring before age 65 and often before they had planned to retire. Early retirement both curtails savings opportunities and increases retirement needs. Figure 4 Private Retirement Resources Versus Needs Age 65 (Baseline), Age 62, and Age 67 Retirement Full-Career Contributing Employees Private Resources Baseline Shortfall Private Needs Private Resources Age 62 Retirement Shortfall Private Needs Private Resources Age 67 Retirement Surplus Private Needs Private Retirement Resources Retirement Income Surplus/(Shortfall) Private Retirement Needs 2. Save more. As employers reduce their retirement benefit programs, employees need to increase their focus on personal savings. Increasing the savings rate by just 1% of pay each of the next 5 years, and then maintaining that higher savings rate until retirement, will allow the average employee to retire at age 65 with adequate income. Increased savings drives significant improvement for younger employees, and somewhat limited change for those closer to retirement. A median combined employer and employee contribution rate of 17% of pay produces adequate retirement income for all current full-career contributors (some of whom have pension benefits). Figure 5 Private Retirement Resources Versus Needs Baseline and Escalation of Savings Rate 1% for 5 Years Full-Career Contributing Employees Private Retirement Resources Retirement Income Surplus/(Shortfall) Private Retirement Needs Private Resources Baseline Shortfall Private Needs Increased Employee Savings Private Resources Surplus Private Needs Retirement Income Adequacy at Large Companies: The Real Deal 9

10 3. Manage income efficiently through retirement. A retiree self-managing the distribution of their retirement assets will likely need to plan for a period longer than the average life expectancy or they will face a 50% risk of running out of money. In order to cut the risk from 50% to only 20%, an employee must save an additional 2.4 times pay, which would cover roughly six additional years in retirement. Many would argue group-insured lifetime income products, with features such as minimum monthly benefits and preservation of principal, provide more efficient protection than self-insuring against longevity risk. Figure 6 Retirement Income Surplus/(Shortfall) 50th Percentile (Baseline) and 80th Percentile Life Expectancy Full-Career Contributing Employees Baseline (2.2) Longevity Risk (4.6) Conclusion The results of this study provide an indication of how well employees at large companies are preparing for retirement. Results have improved slightly compared to prior studies, because of factors such as strong asset returns and continued employee savings for retirement. The study indicates employees who save for retirement over long periods of time and who invest appropriately can accumulate benefits that are reasonably close to what they might need to maintain their preretirement standard of living during retirement. However, the study also indicates that approximately 70% of full-career contributing employees are not on track to retire with adequate financial resources. Specific future action steps should improve the projected results. Most importantly, employers can expand their use of automation (to get more money in the system) and the defaults associated with automated features, help employees improve their results through an array of investment advisory help, and pay careful attention to their retirement plan design. Employee actions include targeting a realistic retirement age, saving at robust rates, taking advantage of financial help when offered, and seeking lifetime income solutions. Other action steps, beyond the specific details of this report, include minimizing leakage (e.g., retirement plan loans and withdrawals), and increasing retirement plan communications. The ability to improve retirement readiness in the U.S. will require a concerted effort by all stakeholders. There are many ways for employers and employees to address the risks of retirement adequacy. Important future initiatives include employers measuring and monitoring the projected results for their workforce, focusing on the key influencing factors such as automation, investment help, and plan design, while increasing awareness and promoting employee action through personalized communication. Ideal solutions will improve outcomes with little or no increase in employer cost. 10 Aon Hewitt

11 11 Methodology and Assumptions 40 Retirement Income Adequacy at Large Companies: The Real Deal 11

12 Methodology and Assumptions The Real Deal study compares the projected retirement resources and needs of 2.2 million employees of 78 large U.S. companies. Retirement resources are the assets each employee is projected to have at retirement. In this study, retirement resources include assets employees can derive from participation in their current employer-provided retirement benefit plans, plus the assets expected to be available from Social Security. Retirement needs are the expected value of assets required at retirement for each employee to maintain their preretirement standard of living during their retirement years. Employees whose retirement resources are projected to meet or exceed their retirement needs are likely to have adequate income during retirement. Those whose retirement resources are projected to fall short of their needs are more likely to have inadequate retirement income. In this report, a positive difference between retirement needs and resources indicates a surplus of resources, and a negative difference indicates a shortfall of resources. This study expresses each employee s retirement needs and resources as a multiple of their projected pay at retirement. In this way, we are able to compare retirement resources and needs of employees retiring at different times in the future and at different compensation levels. In this report, a single value of retirement needs, resources, or surplus/shortfall represents the average of the results for every individual in the reported group. The study also expresses baseline results in terms of replacement ratios for the first year of retirement. The replacement ratio is the annual amount of resources or needs required in the first year of retirement as a percentage of projected pay at retirement. The remainder of this section summarizes how retirement resources and needs are determined and the assumptions used. Refer to the Appendix section for a more detailed description of the companies included, methodology, and assumptions. Retirement Resources Total retirement resources are the single-sum value of amounts projected to be available to employees at retirement. The study reflects retirement resources from three sources employer defined contribution plans (both employee and employer money), current employer defined benefit plans, and Social Security. Resources are depicted with blue colors throughout this report. n Defined contribution plans. The study projects each individual s actual defined contribution balance as of January 1, 2011, with future contributions to retirement age. We do this using actual contribution rate elections (including automatic escalation elections) plus matching and non-elective company contributions (based on current plan design). The study accumulates the account with investment earnings at an assumed preretirement rate of return. n Defined benefit plans. The study projects to retirement age the pension benefit for each employee covered by a defined benefit plan. This includes ongoing (open) defined benefit plans, as well as plans that have been frozen or closed in the past five years. The projection reflects additional years of service and increasing pay levels as appropriate. For cash balance or pension equity plans, retirement resources are the lump-sum value of the benefit. For traditional final average pay or career average pay plans, retirement resources are the single-sum value of the projected benefit. This value represents the amount of assets which, when combined with postretirement investment returns, provides for a lifetime of the periodic payments promised by the annuity. 12 Aon Hewitt

13 n Social Security. The study projects an individual s primary insurance amount payable at retirement assuming no change in Social Security provisions. Retirement resources are the single-sum value of these benefits. This amount represents the assets which, when combined with postretirement investment returns, provide for a lifetime of expected Social Security payments (including anticipated future cost-of-living increases). Because of the data limitations, this report does not include retirement income sources such as former employer retirement plans, other personal investments, home equity, long-term care insurance, and spouses retirement income benefits. To the extent an employee has other financial resources such as these, the results will change. Retirement Needs Retirement needs are the sum of money an average employee needs at retirement to last through all their retirement years. Traditional studies, such as the 1981 Report of the President s Commission on Pension Policy and the ensuing updates in the Aon/Georgia State Replacement Ratio studies, are based on the idea an individual needs an income just after retirement that will allow them to maintain their preretirement living standards. We define the retirement need as the amount that would allow the employee the same amount of spendable income before and after retirement. The study takes into consideration changes that occur at retirement primarily changes in the level of taxes, the fact that retirees no longer need to save for retirement, and changes in consumption patterns. Retirees may choose to reduce their standard of living in retirement but that is a personal decision. This study builds on the traditional approach of assuming employees will want to maintain their preretirement standard of living. Needs are depicted with green colors throughout this report. The study determines needs as follows: 1. Estimate the amount of income a person needs in their first year of retirement to maintain their standard of living ( to retirement ). This need is generally less than 100%, primarily because taxes are less in retirement and there s no need to continue saving. Taxes tend to decrease because retirees are typically no longer paying FICA taxes on wages, Social Security benefits may be only partially taxed, and many retired individuals tend to fall into a lower tax bracket than active workers. These factors offset the impact of health care expenses, which generally increase at retirement. This study reflects the 2010 Patient Protection and Affordable Care Act (PPACA) as it stands as of the writing of this report. This analysis reflects other expenditure changes at retirement, based on data from the 2008 Aon/Georgia State Replacement Ratio study. 2. Project how the retiree s expenses will change each year after retiring. For this purpose, health care costs increase with an assumed medical trend rate of 6.5% per year, and other costs increase with an assumed inflation rate of 3% per year. Thus, the standard of living replaced will remain constant over the retiree s lifetime, and the replacement ratio needed in each subsequent year of retirement increases with future inflation. 3. Calculate the single-sum amount a person needs at retirement to maintain their preretirement standard of living throughout their retirement ( through retirement ), assuming resources grow at 5.5% per year during retirement. The report also adjusts the amount determined in (3) to reflect that some of the retirees future expenses will be covered by their Social Security benefit. We refer to the resulting needs, after Social Security, as private needs. Retirement Income Adequacy at Large Companies: The Real Deal 13

14 Example: Male, Age 40, Current Salary of $60,000, Current Savings Rate of 6% % of Pay Pay at Age 65 Retirement $160, % Decrease for Savings Rate $(9,600) (6%) Taxation Difference $(17,600) (11%) Postretirement Non-Medical Expenditures Difference $(3,600) (2%) Multiple of Pay Pre-Medical Need in First Year of Retirement $129,200 81% Calculate the Present Value with 3% Inflation and 5.5% Assumed Return on Resources Postretirement until age Medical Expenditures Difference Need in First Year of Retirement $7,300 4% $136,500 85% Calculate the Present Value with 6.5% Medical Trend and 5.5% Assumed Return on Resources Postretirement until age Social Security in First Year of Retirement $47,500 30% Calculate the Present Value with 3% Inflation and 5.5% Assumed Return on Resources Postretirement until age Private Needs $89,000 55% 10.3 Defining Retirement Income Adequacy We can analyze retirement income adequacy based on the surplus or shortfall of retirement resources versus retirement needs. If retirement resources exceed retirement needs, then the individual can anticipate a retirement income surplus through an average postretirement lifetime. Conversely, if resources are not sufficient to cover needs, then the individual can anticipate a shortfall, and may need to consider actions to increase retirement resources prior to retiring, or reduce retirement needs. Surpluses and shortfalls are depicted with red colors throughout this report. We acknowledge the active debate about what constitutes an adequate level of retirement income at retirement and how much retirees may need throughout their postretirement lifetimes. Our analysis does not include all assets individuals may have set aside for retirement, and it does not reflect every possible retirement need. We also realize there may be a range of income levels individuals are willing to accept as being adequate in retirement. Even so, this study provides a reasonable way to evaluate how effectively current employer-sponsored benefits and Social Security might financially prepare employees to have adequate retirement income throughout retirement. The Real Deal study is the most comprehensive assessment of its kind, using actual employee data, to determine if employees might be able to retire comfortably with income to sustain them throughout their retirement years. 14 Aon Hewitt

15 Assumptions Used in Projections The baseline assumptions for the analysis represent a reasonable basis for determining the likely retirement income adequacy for a large population of employees. Outcomes could vary, however, based on actual events. The study evaluates a number of alternative scenarios to test the sensitivity of the results versus the baseline assumptions and to model the impact of various changes employees and employers could make in an effort to improve retirement income adequacy. The chart below summarizes the baseline assumptions and alternative scenarios considered. Refer to the Appendix section for additional detail. Covered employees Retirement age Employee contribution rates Employer contribution rates Preretirement rate of return Postretirement rate of return General inflation Employer s retiree medical benefit Medical inflation Pay growth National wage base increase rate Plan fees Postretirement mortality Baseline Assumption All full-career (hired by age 35) employees currently contributing (nonzero contribution rates) on 1/1/ Actual individual rates, as of 1/1/2011, including scheduled automatic increases Contributions derived from current plan formulas, both matching and non-elective or profit sharing contributions 7% annual (nominal) rate of return (net of fees) 5.5% annual (nominal) rate of return (net of fees) 3% pre- and postretirement Access only, with retiree paying 100% of the group-rated cost of coverage 6.5% per annum 4% per annum (inflation plus 1%) 3.5% per annum (inflation plus 0.5%) 0.25% of assets per annum 50th percentile life expectancy from the RP-2000 table for healthy annuitants projected to 2051 (i.e., approximately age 88 for females and age 87 for males) Alternative Scenarios Analysis of all employees, all contributing employees, and all noncontributing eligible employees 62, 67 Actual individual rates, as of 1/1/2011, escalated by 1 percentage point each year for 5 years; rate necessary to obtain the maximum employer match Same as Baseline 6% 4.5% 4% Same as Baseline 7.5% 5% 4.5% Same as Baseline 80th percentile life expectancy from the RP-2000 table for healthy annuitants projected to 2051 (i.e., approximately age 94 for females and age 93 for males) Retirement Income Adequacy at Large Companies: The Real Deal 15

16 17 Summary of Key Findings This section summarizes the key findings of the Real Deal report for full-career contributors. This includes: n Retirement Resources; n Retirement Needs; and n Surplus/Shortfall Retirement Income Adequacy at Large Companies: The Real Deal 17

17 Baseline Case: Full-Career Contributors This study focuses on the projected retirement resources and needs of full-career contributors at large employers. These are employees who started with their current company by age 35, with a potential career of 30 years or more at age 65, and are currently saving in their defined contribution plans. Focusing on this group allows us to analyze the effect of an employer s retirement benefits as if they were delivered through a full career. The report uses roughly one million full-career contributing employees as a baseline; not because we expect employees to stay with the same employer for 30 years or more, but because this approach avoids possible skewing of results due to lack of information about benefits earned during prior employment. Mid-career hires or short-service employees cannot show the full effect of retirement programs, as our data does not consistently reflect all benefits provided throughout their full careers. Retirement Resources Defined benefit Employer defined contribution Employee defined contribution Private resources Replacement Ratio in First Year of Retirement 16% 20% 31% 67% Multiple of Pay at Retirement Social Security Total resources 29% 96% The average level of privately held retirement resources for the full-career contributors is 8.8 times pay at retirement, or 67% of pay replaced in the first year of retirement. These resources consist of defined benefit plans and defined contribution plans (employer- and employee-funded). In addition, the average employee can expect a Social Security annuity of 29% of pay in the first year of retirement, with an expected total value of 4.9 times pay. The replacement ratio calculations shown here assume level future dollar withdrawals from defined contribution accounts, to illustrate a typical pattern of installment payments designed to draw all assets from the accounts by the average life expectancy. We recognize employees may choose other withdrawal patterns, such as the 4% rule (or others), but those results are not shown here. The defined benefit and Social Security replacement ratios represent the annuity a retiree would expect to receive in their first year of retirement. While the resources are significant at the time of retirement, their value quickly erodes by inflation since only Social Security includes automatic cost-of-living increases. 18 Aon Hewitt

18 Figure 7 shows the distribution of total retirement resources for full-career contributing employees. This figure illustrates that the levels of retirement resources are broadly distributed, with the majority clustered around accumulation levels between 10 and 16 times pay at retirement. Figure 7 Distribution of Total Retirement Resources Multiples of Final Pay Baseline Full-Career Contributing Employees Baseline Average = or Greater 13.9% % % % % % Less than 8 4.4% Private resources tend to vary by age and income levels, as shown in Figure 8. The majority of retirement income comes from defined contributions plans; therefore, younger employees who are already participating in their defined contribution plans have the potential to accumulate significant resources through their careers. Conversely, older employees may not have begun saving as early in their careers and may have been more significantly impacted by recent market volatility. Additionally, defined contribution resources generally increase by income level as employees have additional means and ability to save. However, levels of retirement resources drop off as some participants reach tax-qualified plan limits. Unlike in defined contribution plans, the resources from defined benefit plans increase by age because older employers are more likely to have been covered by defined benefit plans. Almost 80% of employees over age 55 have some defined benefit resource, compared to only 20% of employees under age 30. Retirement Income Adequacy at Large Companies: The Real Deal 19

19 Figure 8 Projected Private Retirement Resources Defined Benefit and Defined Contribution Resources Full-Career Contributing Employees 2011 Limited Total Pay Under 30,601 34,820 23,495 15,378 6,737 4,186 2,955 1,867 1, ,324 $30,000 $23,040 $24,078 $24,149 $23,829 $24,139 $24,304 $24,732 $24,897 $24,680 $23, $30,000 11,808 30,571 26,255 18,976 10,833 7,129 6,184 4,854 2, ,859 to $34,488 $34,850 $35,092 $35,166 $35,374 $35,474 $35,500 $35,481 $35,328 $35,072 $39, $40,000 8,403 25,265 24,849 18,859 14,309 10,393 9,566 6,854 2, ,308 to $44,824 $44,969 $44,897 $44,829 $44,842 $45,154 $45,222 $45,249 $45,312 $44,967 $49, $50,000 6,068 20,628 20,611 18,133 12,931 10,238 10,338 7,497 3, ,655 to $54,910 $54,839 $54,860 $54,922 $54,910 $54,895 $54,994 $54,908 $55,085 $54,901 $59, $60,000 4,776 18,396 18,146 16,239 12,080 10,017 9,746 6,999 3,224 99,623 to $64,863 $64,981 $64,911 $64,913 $64,898 $64,974 $65,016 $64,938 $64,984 $64,941 $69, $70,000 2,500 15,046 16,355 15,202 10,867 9,940 9,556 7,401 3,021 89,888 to $73,979 $74,745 $74,880 $74,848 $74,870 $74,895 $74,967 $74,898 $74,887 $74,838 $79, $80, ,266 13,786 12,932 9,947 8,970 8,372 6,246 2,499 72,813 to $84,151 $84,597 $84,866 $84,895 $84,947 $84,899 $84,958 $84,967 $84,823 $84,862 $89, $90, ,568 11,467 11,100 7,872 7,479 7,332 5,633 2,322 59,142 to $94,666 $94,613 $94,783 $94,949 $94,891 $94,935 $94,925 $94,949 $94,948 $94,871 $99, $100, ,253 23,841 31,458 25,790 24,263 23,495 17,061 6, ,183 to $120,090 $116,970 $118,241 $119,724 $120,644 $121,501 $121,598 $121,141 $121,420 $120,271 $149, ,896 8,078 13,965 16,421 17,524 16,855 10,533 4,091 89,481 $150,000+ $177,811 $190,829 $194,586 $198,337 $202,358 $201,404 $200,504 $199,147 $198,303 $199, , , , , , , ,399 74,945 31,272 1,043,276 Total $37,863 $53,792 $68,414 $79,858 $90,161 $97,424 $98,540 $95,794 $92,457 $77, Age Employee Count Average 2011 Limited Pay Private Retirement Resources as Multiple of Pay Under to to to to Hot zone graphs divide the population into boxes by two criteria, such as age and service. Each box contains data relevant to the hot zone. The retirement resources hot zone above includes the following data: employee count, average 2011 pay, and retirement resources as a multiple of pay at retirement. Each box is shaded based on the bottom data component, such as retirement resources as a multiple of pay at retirement. For example, in the retirement resources hot zone, if average retirement resources as a multiple of pay for a group are between 10 and 11, the coloring is yellow. As retirement resources decrease, the box coloring becomes hotter (cool = green, average = yellow, hot = red). 20 Aon Hewitt

20 The study results further explain the distribution of resources by age and income by looking at savings behavior across these variables in Figure 9. Employees are contributing to their defined contribution plans at an average rate of 7.4%, and employers are providing matching or other contributions at an average rate of 4.7%, for a 12.1% total annual contribution into defined contribution accounts. When employers do not sponsor a defined benefit pension plan, they tend to provide larger annual defined contribution amounts (5.2%) compared to those who also offer a pension plan (4.4%). Total contribution rates steeply increase with both age and income levels, representing both an ability to save more with higher pay levels and an increasing sense of urgency for retirement savings as employees approach retirement. While these contribution amounts may seem significant, they are still projected to fall short for most employees. We can attribute these shortfalls to several risk factors, including: n Inadequate employee savings rates; n Insufficient employer contributions; n Inefficient investment choices and inappropriate risk levels; n Loans and/or hardship withdrawals; and n Employees starting to save for retirement later in their careers. Retirement Income Adequacy at Large Companies: The Real Deal 21

21 Figure 9 Average Contribution Rates Full-Career Contributing Employees 2011 Limited Total Pay Under 30,601 34,820 23,495 15,378 6,737 4,186 2,955 1,867 1, ,472 $30, $30,000 11,808 30,571 26,255 18,976 10,833 7,129 6,184 4,854 2, ,020 to $39, $40,000 8,403 25,265 24,849 18,859 14,309 10,393 9,566 6,854 2, ,497 to $49, $50,000 6,068 20,628 20,611 18,133 12,931 10,238 10,338 7,497 3, ,847 to $59, $60,000 4,776 18,396 18,146 16,239 12,080 10,017 9,746 6,999 3,398 99,797 to $69, $70,000 2,500 15,046 16,355 15,202 10,867 9,940 9,556 7,401 3,204 90,071 to $79, $80, ,266 13,786 12,932 9,947 8,970 8,372 6,246 2,673 72,987 to $89, $90, ,568 11,467 11,100 7,872 7,479 7,332 5,633 2,493 59,313 to $99, $100, ,253 23,841 31,458 25,790 24,263 23,495 17,061 6, ,617 to $149, ,896 8,078 13,965 16,421 17,524 16,855 10,533 4,384 89,774 $150, , , , , , , ,399 74,945 33,391 1,045,395 Total Age Employee Count Average Total DC Employer Contribution Percentage Average Total Employee Contribution Percentage Under to to to to Aon Hewitt

22 Social Security provides another key retirement resource for employees, particularly for those at lower income levels as shown in Figure 10. Social Security provides from 2.3 times pay to 7.2 times pay, depending on income level. The amount provided ranges from less than 25% to almost 50% of total projected needs for employees at various income levels. Figure 10 Distribution of Social Security Retirement Resources By Current Pay Baseline Full-Career Contributing Employees Under $30,000 $30,000 $39,999 $40,000 $49,999 $50,000 $59,999 $60,000 $69,999 $70,000 $79,999 $80,000 $89,999 $90,000 $99,999 $100,000 $150,000 or $149,999 Greater Retirement Needs Total needs Social Security Private needs To Retirement 85% 29% 56% Through Retirement 15.9 times pay 4.9 times pay 11.0 times pay To retirement is the percentage of preretirement income a person needs in the year of retirement to maintain their standard of living in that year. Through retirement is the multiple of pay a person needs at retirement to keep their standard of living throughout the retirement years. As defined in the Methodology section of this report, the study calculates the amount needed at retirement as the amount of assets required for an individual to maintain their preretirement standard of living throughout retirement. The average projected needs for full-career contributors are 15.9 times pay at retirement, or 11.0 times pay after reflecting Social Security. Retirement Income Adequacy at Large Companies: The Real Deal 23

23 The study determines the multiple of pay needed at retirement by first calculating the required replacement ratio in the first year of retirement, including changes in retirement savings, taxes, and expenditures as measured by the Aon/Georgia State Replacement Ratio study. In the first year of retirement, an average employee needs to replace 85% of pay to maintain their preretirement standard of living. Figure 11 shows the needs in terms of replacement ratios by age and income level. As with resources, needs vary greatly by age and service levels. At younger ages, future medical trend will outweigh increases in salary, increasing needs. Similarly, at lower income levels medical costs require a higher percentage of resources than at higher income levels. Figure 11 Projected First Year Total Retirement Needs Replacement Ratio Full-Career Contributing Employees 2011 Limited Pay Age Total Under 30,601 34,820 23,495 15,378 6,737 4,186 2,955 1,867 1, ,324 $30, % 83.3% 81.9% 81.5% 79.9% 78.9% 78.2% 77.5% 77.3% 82.3% 103.3% 100.0% 96.7% 94.8% 91.6% 89.1% 87.1% 85.3% 84.4% 98.0% $30,000 11,808 30,571 26,255 18,976 10,833 7,129 6,184 4,854 2, ,859 to 84.7% 84.5% 83.3% 82.3% 80.6% 78.6% 77.4% 76.2% 75.7% 82.3% $39, % 95.7% 93.3% 91.1% 88.3% 85.5% 83.5% 81.6% 80.6% 91.8% $40,000 8,403 25,265 24,849 18,859 14,309 10,393 9,566 6,854 2, ,308 to 81.0% 82.1% 82.1% 81.4% 80.1% 78.2% 76.3% 74.9% 74.2% 80.3% $49, % 90.7% 89.8% 88.3% 86.2% 83.5% 81.1% 79.1% 78.0% 87.3% $50,000 6,068 20,628 20,611 18,133 12,931 10,238 10,338 7,497 3, ,655 to 78.1% 79.4% 79.9% 79.6% 78.1% 75.9% 74.0% 72.2% 71.5% 77.8% $59, % 86.5% 86.2% 85.1% 83.1% 80.3% 77.9% 75.7% 74.6% 83.3% $60,000 4,776 18,396 18,146 16,239 12,080 10,017 9,746 6,999 3,224 99,623 to 75.5% 77.7% 78.6% 78.7% 78.1% 75.8% 72.6% 70.1% 68.9% 76.5% $69, % 83.7% 83.9% 83.4% 82.3% 79.5% 75.9% 73.0% 71.6% 81.1% $70,000 2,500 15,046 16,355 15,202 10,867 9,940 9,556 7,401 3,021 89,888 to 74.5% 76.9% 77.8% 77.8% 77.4% 76.1% 73.5% 69.5% 67.8% 75.9% $79, % 82.9% 82.8% 82.0% 81.1% 79.4% 76.3% 72.0% 70.0% 80.0% $80, ,266 13,786 12,932 9,947 8,970 8,372 6,246 2,499 72,813 to 74.5% 75.8% 77.2% 77.2% 77.2% 76.2% 73.9% 70.9% 67.5% 75.6% $89, % 81.8% 82.5% 81.6% 80.8% 79.1% 76.4% 73.2% 69.5% 79.6% $90, ,568 11,467 11,100 7,872 7,479 7,332 5,633 2,322 59,142 to 73.7% 75.5% 76.4% 76.6% 76.3% 75.8% 74.2% 72.0% 69.5% 75.3% $99, % 82.1% 81.8% 81.1% 80.0% 78.8% 76.6% 74.0% 71.3% 79.3% $100, ,253 23,841 31,458 25,790 24,263 23,495 17,061 6, ,183 to 76.6% 77.0% 77.5% 77.5% 77.1% 76.6% 74.9% 73.9% 72.9% 76.3% $149, % 83.7% 83.3% 82.5% 81.3% 80.1% 77.7% 76.2% 74.9% 80.4% 118 1,896 8,078 13,965 16,421 17,524 16,855 10,533 4,091 89,481 $150, % 80.0% 80.7% 81.1% 81.3% 81.1% 79.3% 79.0% 78.9% 80.4% 83.9% 86.4% 86.4% 86.1% 85.5% 84.7% 82.2% 81.5% 81.1% 84.2% 65, , , , , , ,399 74,945 31,272 1,043,276 Total 81.9% 80.7% 79.9% 79.4% 78.6% 77.4% 75.4% 73.6% 72.5% 78.5% 96.0% 90.4% 87.6% 85.6% 83.7% 81.6% 78.9% 76.6% 75.2% 85.1% Employee Count First Year Needs Before Retiree Medical as Percent of Pay First Year Total Needs as Percent of Pay Under 70% 70% to 79% 80% to 89% 90% to 99% 100% to 109% 110%+ 24 Aon Hewitt

24 The Real Deal analysis considers the impact of postretirement medical cost trends and general inflation by translating replacement ratios from the amount needed at retirement to the amount needed through retirement. The differences by current age become more pronounced when postretirement medical costs are factored in because of additional years of medical trend. Figure 12 shows the total need grouped by current age and income. Figure 12 Projected Total Retirement Needs Multiple of Pay Full-Career Contributing Employees 2011 Limited Pay Age Total Under 30,601 34,820 23,495 15,378 6,737 4,186 2,955 1,867 1, ,324 $30, $30,000 11,808 30,571 26,255 18,976 10,833 7,129 6,184 4,854 2, ,859 to $39, $40,000 8,403 25,265 24,849 18,859 14,309 10,393 9,566 6,854 2, ,308 to $49, $50,000 6,068 20,628 20,611 18,133 12,931 10,238 10,338 7,497 3, ,655 to $59, $60,000 4,776 18,396 18,146 16,239 12,080 10,017 9,746 6,999 3,224 99,623 to $69, $70,000 2,500 15,046 16,355 15,202 10,867 9,940 9,556 7,401 3,021 89,888 to $79, $80, ,266 13,786 12,932 9,947 8,970 8,372 6,246 2,499 72,813 to $89, $90, ,568 11,467 11,100 7,872 7,479 7,332 5,633 2,322 59,142 to $99, $100, ,253 23,841 31,458 25,790 24,263 23,495 17,061 6, ,183 to $149, ,896 8,078 13,965 16,421 17,524 16,855 10,533 4,091 89,481 $150, , , , , , , ,399 74,945 31,272 1,043,276 Total Employee Count Needs Before Retiree Medical as Multiple of Pay Total Needs as Multiple of Pay Under to to to to Retirement Income Adequacy at Large Companies: The Real Deal 25