Financial Wellness: A path to fitness Ruth Schau, FSA, EA, FCA Senior Director, Head of Practice, Retirement Strategy for ConsultEDU, a TIAA company
Who am I? Ruth E. Schau, FSA, EA, FCA Senior Director, Head of Practice, Retirement Strategy for ConsultEDU, a TIAA company Ruth has been a consulting actuary for over 30 years with prestigious, international consulting firms. Extensive knowledge of both Defined Benefit and Defined Contribution plans are used to support clients with a broad range of retirement strategy projects including plan design, retirement adequacy, retirement windows, compliance, M&A, and a broad range of additional projects. She has served as an advisory board member of the Pension & Investments (P&I) DC West conference. She has moderated multiple P&I sessions, presented at WPBC meetings and has presented to multiple large groups including employee meetings, advisory boards and committees. Ruth holds a Bachelor s degree in Actuarial Science with minors in Business and Spanish from Ball State University in Muncie, IN. She is a Fellow of the Society of Actuaries, an Enrolled Actuary licensed by the Joint Board of the Department of the Treasury and the Department of Labor, and a Fellow of the Conference of Consulting Actuaries. 2
Agenda Financial wellness A deeper dive into a retirement plan for the future Summary 3
Financial wellness Think about financial wellness like health and wellness Goals Fitness Flexibility Strength Ready to challenge yourself 4
Too many choices Benefit choices Retirement How much to save? How much to spend? Payment options Social security start date information Medicare Medical coverage Disability coverage Life insurance Health Savings Account (HSA) Retiree Health Savings Account Other employer offered benefits Other spending/saving choices Debt School loans Home loans Car loans Credit card debt Loans from retirement savings plans Savings Emergency fund Other medical savings or allpurpose savings Children s educational funds 5
Benefits burden Annual mandatory benefit costs Medical penalty for non-coverage Retirement savings true mandatory or desire to save to match threshold Impact on discretionary income Long-term effect Home mortgage affordability Creation and funding of emergency/all-purpose savings Retirement versus health versus college loans/debt 6
Financial burden Source: TIAA Gen Y website quick survey comparison 7
Saving for the unexpected Can t predict unexpected events but we can manage risk of unexpected events with creation of emergency or all-purpose additional savings account How can we help employees? Source: Q1 2015 AICPA CPA Personal Financial Planning Trends Survey 8
Communication SEGMENTATION Multi-dimensional segmentation helps us deliver right information using right format at right time Employees with different needs Financial Complexity A framework to address their needs ACCUMULATORS TRANSITIONERS ESTABLISHED DOLLAR STRETCHERS LIFE BUILDERS 9 Life stage
Communication Communication Gender Age / life stage Gen X Gen Y or Millennials Baby boomers Not quite baby boomers, but not officially Gen X Ethnicity Interest / lifestyle groups Financial interest Intranet Interoffice email or mail Home mail or email Postcard Video link Podcast Social media Face to face Group meeting Text Telephone call 10
Engagement versus effectiveness Study of behavioral economics on retirement plans led to: Auto enrollment Defaults Deferral rate Investment (generally target date fund but others available) Pretax deferral Auto increase (corrected problem with auto enrollment at lower default rates) How else can we apply these principles? Can you achieve both effectiveness and employee engagement? Defaults may not lead to employee engagement 11
Engagement versus effectiveness Focus on retirement Plan change Increases participant engagement Increases plan outcome / effectiveness Adding match to voluntary plan Unclear Unclear Adding automatic enrollment No Unclear Adding both automatic enrollment and automatic increases occurring annually Soliciting annual participant elections with strong communication strategy No Yes Yes Yes 12
Retirement plan for the future Key Design Ingredients Education of Plan Participants Retirement Savings Target ER Provided Retirement Benefits Reduce EE Contributions/Savings Needed Employer Invests Employer Monies Annual Reset Maximize Participant Dollars 13
Goals Accumulation: Guide participant to save enough in combination with employer provided retirement benefits to have adequate retirement benefits during retirement Define adequate retirement benefit On individual basis, formulaic approach may differ from individual retirement needs analysis Expectations may differ from savings practice: desire to maintain current spending, increase spending, or reduce current spending during retirement Define retirement: age 65, 67, or 70 Decummulation: Retiring with adequate savings does not guarantee achievement of intended goals throughout retirement Offer payment options and education to guide participant to appropriate spend-down during retirement 14 Adequate Retirement Benefit Formulaic approach 80% final salary works well if good sound principals applied during employment Individual retirement needs analysis Individual goal will differ based upon spending and saving practices during employment and Desired spending after retirement
Retirement plan for the future Education of Plan Participants How much does each participant need to save each year for retirement? Provide robust modeling tool with retirement savings target goal Include ability for plan participants to input outside savings and other assets into modeling tool (particularly important for higher paid individuals) 15
Retirement plan for the future Retirement Savings Target Share information each year with employees providing default savings rate with opt-out Default savings rate may vary by employee Minimum savings rate exists, even if employee within range of target 16
Retirement plan for the future ER Provided Retirement Benefits Reduces EE Contributions / Savings Needed DB plan, if present, converted to DC account balance using reasonable assumptions DB or DC plan provides offset to retirement savings target 17
Retirement plan for the future Employer Invests Employer Monies Creates more uniformity in benefits and improves outcome Relieves employees from full investment burden May increase diversification of investments 18
Retirement plan for the future Annual Reset Resetting of (1) enrollment, (2) employee savings rate, and (3) default investment may occur each year Occurs during annual benefit enrollment Make use of time to focus participants on entire benefit spend 19
Retirement plan for the future Maximize Participant Dollars HSA, RHSP, 401(k), 403(b), and all other benefits included in futuristic modeling tool Annual benefit enrollment becomes budget exercise Use examples of what others in different situations select Create tool to maximize use of participant dollars using practical guidelines Create HSA or RHSP balance for those who need it possibly forgoing portion of an employer match 20
Retirement plan for the future Step 1 Employer Savings Step 2 Employee Savings Pick One or Two Options Pick One or Two Options DB DB DC DC Income = Employer contributions/benefits + Employee contribution/savings + Social Security, if applicable + Retiree Medical, HSA, RHSP and HRA, if applicable Target Income Income = Deficit or (Surplus Retirement Savings) 21
Retirement plan for the future Target Income: Calculation based on compensation, age and expected retirement age. If final salary at age 65 (assumed age and retirement age) is $100,000, then retirement target is approximately equal to: Selected Percentage Final compensation Annual annuity factor 80% x $100,000 x 12 = $960,000 Each year target and resulting deficit/surplus adjusted to reflect updated data. Employee s default savings rate equal to calculated % to reach savings goal. Retiree medical savings and additional after tax savings (e.g. bank accounts, investments) may also be needed. Highly compensated and high performing employees may need additional deferred compensation or outside savings to reach target. Assumptions: Hire at age 25 at $46,200. Compensation increase and cost of living are 2%. Interest is 6%, mortality table RP2014 generational, male, no collar, born 1949. 22
Retirement plan for the future Employer Provided Savings Employee Contributions/Savings Annuity only payable from employer contributions No Lump Sum option No loans No hardship withdrawals Employee savings have multiple payout options Lump sum Payout/drawdown Annuity Loan availability Hardship withdrawal availability 23
In summary: Retirement plan for the future 24 Education of Plan Participants Retirement Savings Target ER Provided Retirement Benefits Reduce EE Contributions/Savings Needed Employer Invests Employer Monies Annual Reset Maximize Participant Dollars How much do they need for retirement? Provide robust modeling tool with retirement savings target goal Share information each year with employees providing default savings rate with opt-out Default savings rate will vary by participant DB plan converted to DC account balance using reasonable assumptions DB or DC plan provides offset to retirement savings target Creates more uniformity in benefits and improve results Relieves employees from full investment burden May increase diversification of investments Resetting of enrollment, participant savings rate, and default investment will occur each year Occurs during annual benefit enrollment HSA, RHSP, 401(k), 403(b), and other benefits included in tool Annual benefit enrollment becomes budget exercise designed to maximize participant dollars
In summary: Financial wellness considerations Which medical plan is right for me? Individual guidance and defaults beyond retirement plans Education and communication focuses on financial wellness Knowing how to allocate $5,000 on benefits/savings for next year Recognizing open enrollment is big budget exercise and offering more (e.g. emergency savings opportunity) Right communication strategy (beyond age classification) 25
In summary: Life happens College loan(s) Dental expense Retire early Housing down payment needed Children s college savings HSA versus 403(b)? Dream vacation Credit card debt example of compound interest Oh no, a house fire with large insurance deductible It s Staff twins! 26
Q&A or just Questions & Responses 27
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