the changing workforce - nhrma conference...40 why this matters the costs retiring on time (win-win)...

SEPTEMBER 6, 2018

Arthur Rains-McNally, FSA, EA, MAAAAttraction, Retention, and Orderly Exit

The Changing Workforce

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Agenda

▪ Get them in and keep them

▪ Give them what they want

▪ Delayed retirement

▪ Orderly exit

▪ Retirement plan risks

▪ A new way to think about retirement

▪ Summary

Get them in and keep them

It is always hard to find the right workers.

“Even with unacceptably high unemployment in the national economy…

─ Steve Nyce. Attraction and Retention: What Employees Value Most - March 2012

U.S. companies are struggling to attract talented employees with critical skills.

The right mix of benefits can be a critical component in a successful long-term plan for attracting and retaining employees, proving to be the competitive advantage employers need…”

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Where are all the workers?

Source: Society for Human Resource Management (SHRM). 2018 Employee Benefits – Evolution of Benefits.

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Your workforce is agingBut you are not alone!

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United States aging

Increased Longevity Decreased Fertility

Life expectancy at birth

▪ 67 years in 1955

▪ 78 years in 2010

Total fertility rate

▪ 3.3 in 1965

▪ 2.1 in 2010

Source: Global Aging Institute, UN Population Division (2013)

Delayed Retirement

Full Social Security

▪ 65 born before 1937

▪ 67 born after 1960

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Global agingRising life expectancy & lower fertility

Life Expectancy Total Fertility Rate

1950-55 1980-85 2005-10 1950-55 1980-85 2005-10

Canada 69.0 75.8 80.5 3.7 1.6 1.6

China 44.6 67.7 74.4 5.6 2.6 1.6

France 67.3 74.8 80.9 1.9 1.9 2.0

Germany 67.5 73.8 79.8 2.5 1.5 1.4

Mexico 50.7 67.7 76.3 6.8 4.3 2.4

Japan 62.2 76.9 82.7 2.0 1.8 1.3

UK 69.3 74.1 79.6 2.8 1.8 1.9

US 68.6 74.3 78.1 3.3 1.8 2.1

Source: Global Aging Institute, UN Population Division (2013)

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American population by age group

0

5,000

10,000

15,000

20,000

25,000

1980

1990

2000

2010

Source: US Census

In t

housands

2,000

22,000

42,000

62,000

82,000

102,000

122,000

5 to 24 25 to 44 45 to 64 65 to 84 85 and over

2000

2010

2030

2050

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American population (projected)

Source: US Census

In t

housands

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Older workers are valuableNot about trying to “get younger”

▪ As a world-wide phenomenon, you will need older employees.

▪ How will you manage the implications?

▪ How will you maintain the appropriate mix of young and old in your organization?

▪ What investments should you make today?

▪ What demographic management tools should you deploy?

Replacing workers is expensive

It costs an average of one-fifth of anemployee’s annual salary to replace them.

For positions with stringent credential requirements, up to two times the annual salary.

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Source: Center for American Progress. There are significant business costs to replacing employees, November 16, 2012

Give them what they wantTo maximize your dollar

And what do they want?

92% of employees indicated that benefits are important to their overall job satisfaction

29% of employees cite overall benefits package as a top reason to leave their job

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Everything…or just about.

Source: Society for Human Resource Management (SHRM). 2018 Employee Benefits – Evolution of Benefits.

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Trade offs!

Maximizing the benefit dollar

▪ To attract

▪ To retain

▪ To not fall behind

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What we’ll cover

▪ Health plan offerings

▪ Health savings accounts (HSA)

▪ Paid parental leave

▪ Retirement benefits

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Health care benefits saturation

Source: Society for Human Resource Management (SHRM). 2018 Employee Benefits – Evolution of Benefits.

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Paid parental leave

Source: Society for Human Resource Management (SHRM). 2018 Employee Benefits – Evolution of Benefits.

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Health savings accounts (HSA)

Source: Society for Human Resource Management (SHRM). 2018 Employee Benefits – Evolution of Benefits.

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Quick quiz!What is the most important goal of your retirement plan?

a. Provide guaranteed money every month to cover your living costs in retirement

b. Ensure that your savings will be safe regardless of what happens in the market

c. Allow you to save a specific amount

d. Allow you to earn a competitive rate of return on your savings

Source: TIAA 2017 Lifetime Income Survey

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Source: TIAA 2017 Lifetime Income Survey

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Quiz part 2!If your retirement plan does not offer an option for a monthly payment for the length of your retirement, would you like it to?

a. Yes

b. No

c. Unsure / Don’t Know

Source: TIAA 2017 Lifetime Income Survey

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Source: TIAA 2017 Lifetime Income Survey

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Source: 401(k) Specialists

Source: Fidelity

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“Some companies in certain industries say they need to spend more to retain the best employees and motivate staff…They also need to ensure that older, relatively expensive workers can afford to retire on time and make way for younger staff…”

Source: Wall Street Journal

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Changes in 401(k) plans

▪ Auto-Enrollment – 51% of plans use auto-enrollment

▪ Can improve participation rates from 50 to 87%

▪ Auto-Escalation

▪ Target Date Funds

▪ Annuitization

Source: Fidelity. Plan sponsors’ top concern shifts from reducing plan costs to helping employees prepare for retirement, August 13, 2018

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Source: 401(k) Specialists

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Characteristics of auto-enrollment plansStudy of 206 plans with auto-enrollment

▪ 94% participation rate among newly hired employees

▪ 3.49% initial default contribution

▪ 79% have automatic escalation by default

▪ 14% have optional automatic escalation

▪ 97% have employer match

▪ 81% have initial default less than match cap

▪ 44% have immediate vesting of employer contributions

▪ 98% have Target Date Funds as default

Source: RAND Labor and Population. Opting out of Retirement Plan Default Settings – Working Paper, September 2016

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More quiz!What do you expect your target-date fund to provide when you retire?

a. Guarantee a monthly paycheck for the length of my retirement

b. Provide a pool of savings that I can draw on in retirement

c. Not sure

Source: TIAA 2017 Lifetime Income Survey

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Source: TIAA 2017 Lifetime Income Survey

“The assumption that everybody will figure out how much they have to save and then will just implement that plan is obviously preposterous…I'm all for empowerment and education, but the empirical evidence is that it doesn't work.”– Richard Thaler, Behavioral Economist

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Final Quiz!What percentage of your current annual income do you think you will need each year in order to live comfortably in retirement?

a. Less than 25%

b. 25-49%

c. 50-69%

d. 70-99%

e. 100% or more

f. Don’t know

Source: TIAA 2017 Lifetime Income Survey

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Source: TIAA 2017 Lifetime Income Survey

“Most people are going to arrive at retirement and not have adequate money. This is serious. None of us are good at doing our own retirement savings.”– Alicia Munnell, Ph.D., Director of the Center for Retirement Research, Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, 2006

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Source: New York Times

Bankruptcy filing rates up over 200% since 1991 for those aged 65 to 74.

Delayed retirementWhy it matters

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Delayed retirementU.S. retirement statistics

▪ Average retirement age was…

▪ 60 in 2012*

▪ 62 in 2014*

▪ Percentage of workforce over 55…

▪ 18% in 2010, 4% were over 65

▪ 25% in 2020, 7% will be over 65

▪ DC participants retire one to two years later than DB participants

Source: Prudential. Why employers should care about the cost of delayed retirement, 2017

*Self reported

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Two types of delayed retirement

The Good The Bad

▪ More experience

▪ Historical perspective

▪ Institutional knowledge

▪ Mentorship

▪ Unique skill sets

▪ Unable to retiree

▪ Lack of engagement

▪ Lower productivity

Wants to stay Needs to stay

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Why this mattersThe costs

▪ Retiring on time (win-win)

▪ Employees enjoy retirement when they wish

▪ Employers can better manage workforce resources and costs

▪ Delayed retirement (expensive)

▪ Incremental cost = $50,000 for a one-year delay in retirement for one employee

▪ Incremental annual workforce costs ~1.0%-1.5% for entire workforce

▪ 2-Year delay in retirement ~as expensive as an average retirement plan

Source: Prudential. Why employers should care about the cost of delayed retirement, 2017

Orderly exit

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Retirement & workforce management

1. Retirement program features to help employees retiree on time

▪ Lifetime annuity options (or DB plan)

▪ Matching contribution formulas

▪ Auto enrollment / escalation

▪ Default investment alternatives (target date funds)

2. Providing education

▪ Savings and investment

▪ Ways to fund college

▪ Income needed in retirement

▪ Potential sources of income

▪ Financial risks

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Retirement & workforce management (cont.)

3. Adopt holistic approach to employees’ financial wellness

▪ Financial wellness programs

▪ Budgeting

▪ Expense management

▪ Debt repayment tools

▪ Student loan repayment programs

▪ Payroll deduction savings vehicles (such as 529 plans)

▪ Health and wellness programs

Bonus side effect: May lower employee stress & increase productivity!

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Potential barriers to retirement

▪ Future reduction in social benefits?

▪ Social Security

▪ Medicare

▪ Savings rates

▪ American population has not saved enough to retire

▪ Many are close enough to retirement that additional savings is not a practical alternative

▪ Economy

▪ Uncertain outlook

Retirement plan risksWho gets the risk?

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Retirement Funding

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Risk comparisonTraditional defined benefit plan

Employer bears most of the risks

EMPLOYER PARTICIPANT

Interest

rate risk

Investment

risk

Inflation

risk

Longevity

risk

84%

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DB plan sponsors’ risk aversion

Private sector

American workers

with a DB plan

1979

Source: Employee Benefit Research Institute (EBRI)

84%

1979

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DB plan sponsors’ risk aversion

Private sector

American workers

with a DB plan

2011

31%

Source: Employee Benefit Research Institute (EBRI)

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Risk comparisonDefined contribution plan

▪ Employer bears none of the risks

▪ Participants bear all of the risks

EMPLOYER PARTICIPANT

Investment

risk

Inflation

risk

Longevity

risk

Interest

rate risk

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“Many early backers of the 401(k) now say they have regrets about how their creation turned out... Some say it wasn’t designed to be a primary retirement tool …”

Source: Wall Street Journal

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Get more for your money with a DB or alternative planThe National Institute of Retirement Security states that the benefit can be up to 48% higher.

30% higher

benefit

Value of 401(k) benefits is eroded by:

▪ Higher fees in retirement

▪ Lack of longevity pooling

▪ Lack of professional management

401(k)

DB

Alt.OR

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Maximizing benefit per dollar

Source: Center for Retirement Research. Investment Returns: Defined Benefit vs. Defined Contribution Plans, December 2015

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Retirement plan risk allocations

▪ DB plans have risks that are difficult for employers to manage

▪ Many employers have eliminated risks they could not tolerate by transitioning to DC plans

▪ Participants struggle to manage retirement risks in their DC plans

▪ DC plans are not the most efficient way to deliver retirement benefits

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Risk comparisonReminder: Traditional defined benefit plan

Employer bears most of the risks

EMPLOYER PARTICIPANT

Interest

rate risk

Investment

risk

Inflation

risk

Longevity

risk

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Risk comparisonReminder: Defined contribution plan

▪ Employer bears none of the risks

▪ Participants bear all of the risks

EMPLOYER PARTICIPANT

Investment

risk

Inflation

risk

Longevity

risk

Interest

rate risk

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Risk comparisonMilliman SIP

Risks are minimized where possible, then shared in a rational way

EMPLOYER PARTICIPANT

Longevity

risk

Inflation risk minimized

Interest rate risk minimized

Investment

risk

A new way to think about retirementSustainable Income Plan

Both of the 20th century’s major retirement vehicleshave struggled.

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If we could start from scratch…

▪ Stays fully funded

▪ Weathers all market conditions

▪ Stable and predictable contributions

▪ Balance sheet stability

▪ Maximizes retirement benefit provided per dollar of contribution

For Finance

▪ Provides lifelong income

▪ Doesn’t require complex investment decisions

▪ Provides some inflation protection

▪ Maximizes retirement benefit provided per dollar of contribution

For Participants

A retirement plan design wish list

▪ Recruitment and retention tool

▪ Orderly exit from workforce

For Human Resources

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It’s the 21st century.It’s time to rethink retirement plan design

Introducing the Milliman Sustainable Income Plan® (SIP)

▪ Equitably shares risk between employers and employees

▪ Provides benefit growth despite volatile markets

▪ Doesn’t require individuals to make complex investment decisions

▪ All with contribution stability

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Best of both worlds

SIP provides:

▪ Stable, predictable contributions for the employers, like a DC plan

▪ Lifelong retirement income for participants, like a DB plan—plus inflation protection

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SIP development

▪ SIP is a variation on Variable Annuity Plan (basic VAP)

▪ Legal since 1953

▪ It is not an insurance product

▪ Plan stays funded in all market environments

▪ Not popular due to routine benefit declines even for retirees

▪ 2014 regulations issued allowing for creation of SIP

▪ Participant earns a benefit for each year of service

▪ Career average or flat dollar accumulation

▪ Employer funds the benefit earned

▪ Contributions must be at least as large as normal cost, plus expenses

▪ Earned benefits fluctuate annually based on investment return

▪ Hurdle rate, usually set between 4% and 5%

▪ Plan stays funded in all market conditions

▪ Keeps assets and liabilities in balance by adjusting liabilities

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Basic VAPHow it works

Return = Hurdle Rateaccrued benefits do not change

Return > Hurdle Rateaccrued benefits increaseby excess

Return < Hurdle Rateaccrued benefits decreaseby shortfall

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The SIP improves on basic VAP

▪ Manages unwanted benefit volatility using a stabilization reserve

▪ Has a cap, which limits benefit increases in years with particularly high returns

▪ Stabilization reserve, which is built in years when the cap is reached, is used to “shore-up” benefits when returns are less than the hurdle rate

▪ High-water-mark is highest benefit level ever paid, and is paid as long as there are sufficient stabilization reserves

SIP stores excess returns for use when needed.

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SIP Example 1Downside volatility management

▪ Suppose a retiree’s benefit is $1,000/month in a plan with a 4% hurdle rate

▪ The Plan gets a -1% return

▪ The new underlying benefit is $952, which is fully funded

▪ The retiree receives the $952 underlying benefit plus a $48 “shore-up” from the stabilization reserve, so the high-water-mark benefit of $1,000 is preserved

$1,000 (1-0.01) (1+0.04) $952/* =

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SIP Example 2

▪ The next year, the adjustment is applied to the underlying benefit of $952

▪ The plan’s return is 16%, which would result in a basic VAP increase of 11.5%, to $1,062

▪ But, the SIP has a cap, so benefit increases are limited to 10%

▪ The monthly benefit amount changes to $1,047

▪ The excess above 10% builds the stabilization reserve to “shore-up” benefits for future downturns

▪ New high water mark of $1,047 to be protected

Harvesting the upside

(1+0.16) (1+0.04) 1 11.5%/ =-

$952 1.10 $1,047=*

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Benefit illustration

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SIP: The best of both

▪ DB plans are hard for employers to manage

▪ DC plans are hard for participants to manage

▪ A SIP provides a balance

▪ For employers

▪ Stable contribution requirements

▪ Stable balance sheet

▪ Plan stays fully funded

▪ Maximum benefit per $1 of contribution

▪ For participants

▪ Lifelong benefits

▪ Inflation protection

▪ Maximum benefit per $1 of contribution

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Funding side by sideTraditional DB plan

Funded Percentage

150%

100%

50%

0%

Liability Assets

71

Funding side by sideSIP

Liability AssetsFunded Percentage

150%

100%

50%

0%

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Benefits side by side

▪ How do benefits compare for DC vs DB vs SIP?

▪ Based on accumulated benefits in DB and SIP

▪ Based on accumulated account balance in DC

▪ We have assumed:

▪ The same accumulated value for each plan at age 65

▪ Assets earn 6.6% in all years

▪ Retirement income increases 2.5% per year for inflation in DC and SIP

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Which path do you want to be on?

-

20

40

60

80

100

120

140

160

180

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

An

nu

al

Ben

efi

t (0

00s)

Retiree Age

DBDC - Runs out after 75 DC - Runs out after 85 DC - Runs out after 95 DB SIP

SIP

DB

DC DC DC

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A SIP provides

▪ Stable contributions

▪ Lifelong benefits

▪ Inflation protection

Summary

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The changing workforce

▪ Employee benefits have significant impact on attraction and retention

▪ The workforce is getting older

▪ Employees desire a wide variety of benefits

▪ Everything is a trade off

▪ Health savings accounts & parental leave are much more common

▪ Auto-enrollment helps, but is not sufficient for retirement adequacy in 401(k) plans

▪ Defined benefit plans maximize benefits per dollar contributed

▪ Sustainable Income Plan sits in a place where HR and Finance can co-exist

Arthur Rains-McNally, FSA, EA, MAAA

Thank you

Arthur.Rains-McNally@milliman.com