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Published byLilian Jackson Modified over 7 years ago
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Issues on Plan Sponsors’ Minds How the Lockton Advantage Can Help
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Lockton Retirement: Who We Are
Retirement Opportunity in the Northeast 11,075 DC plans in sweet spot with $611B in assets 2,777 DB plans in sweet spot with $142B in assets Retirement Support in the Northeast Deana Calvelli – Producer KC Executive Benefits Team Retirement National Team Account Executive - TBH $32.7M IN REVENUE BY SERIES CLIENTS BY INDUSTRY $37 BILLION In Assets Under Advisement $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ g\ops\popp pam\2015\chairmans advisory group june 15.pptx\#8633
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Lockton Retirement: What We Do
Retention/succession Benefit completion Cash flow optimization Non-qualified deferred compensation plans Executive Benefits Fees Fund line-up Fiduciary process Retirement outcomes Defined Contribution Investment Plan Design Administration Communication Selection and Monitoring Fiduciary Process Portfolio management LDI strategies Pension risk transfer Cost containment Defined Benefit CFO and/or VPHR buy protection for the business, security for the employee Lockton value proposition is comprehensive advice, high service, outcome focus
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Expanding the Conversation: Major Risks on Sponsors’ Minds
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#1: Defined Benefit Plan Risks
Balance Sheet Increased Expense and Volatility Interest Rate 1Bureau of Labor Statistics, National Compensation Survey, 2014, private industry workers only 2Rates subject to indexing for inflation and could be higher 4Transamerica Retirement Solutions 3Lockton Retirement Plan Services
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How Lockton Helps: Pension De-Risking
Lower Effort Cost to Implement Risk Reduction Higher Effort Cost to Implement Risk Reduction ASSET ALLOCATION LIABILITY-DRIVEN INVESTING (LDI) PLAN DESIGN RISK TRANSFER Glide-path approach Objective monitoring DB-centric investments Assets and liabilities move in tandem Trade higher returns for funded status certainty Reduced benefit accruals Soft or hard freeze Cash-balance transition Lump-sum window Buy-in Partial buyout Plan termination *Arranged from simplest to most complex implementation effort. FOUR RISK TRANSFER STRATEGIES SAMPLE PENSION DE-RISKING TIMELINE 1. LUMP-SUM WINDOW One-time option for terminated employees to leave the plan. Avoids requiring a lump sum as a plan feature. Can save money if done before IRS mortality basis changes. 2. BUY-IN Added annuity asset matches retiree liability. Covered-population funding levels become relatively fixed. 3. PARTIAL BUYOUT Shifts specific participant (usually retiree) liabilities to an insurance carrier. Remaining plan’s funding levels change based on investment results. 4. PLAN TERMINATION Ends the DB plan through the purchase of an annuity or payments of lump sum for all participants. Data Gathering Formulate Solution Implement Solution Plan Monitoring 0-60 Days 60-90 Days Days Ongoing Approve solution and communicate to stakeholders/employees
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Creating Client Value Through Pension De-Risking
A global supplier of manufacturing technology and services LIABILITY-DRIVEN INVESTING THE OBJECTIVE Create predictability of funding to their defined benefit plan. THE LOCKTON SOLUTION An analysis and approach to fund the plan 100% within seven years and a glide‑path strategy to avoid locking in losses from the equity markets. THE RESULT Improved the likelihood that the plan’s investment returns would offset changes to liabilities. Made future funding requirements significantly more predictable. A publicly traded real estate company with a portfolio of income investments across the US PLAN TERMINATION THE OBJECTIVE Manage rising Pension Benefit Guaranty Corporation and administrative costs and prepare for anticipated changes to mortality table rules. THE LOCKTON SOLUTION A plan to terminate the defined benefit (DB) plan, which included: Project management, ERISA counsel, vendor management via reverse auction, transition management, and employee education. THE RESULT Eliminated liability associated with the DB plan. Eliminated administrative expense of the DB plan. Maintained employee engagement. Negotiated 8% discount on vendor fees.
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#2: Plan Sponsor Fiduciary Risk
Regulator Penalties & Litigation Settlements RISKS Penalties Litigation Reputation Regulatory Action by the Numbers Fee Settlements Are Especially Costly3 $823.2 million1 The amount reimbursed to benefit plans and participants based on DOL investigations in 2014 3,9281 The number of civil investigations the DOL closed in 2014 65%1 The percentage of those investigations resulting in monetary compensation or other corrective action 37%2 Of retirement committee members identify their roles as non-fiduciaries $140 Median Settlement: $15M Sources: 1www.plansponsor.com/dol-explains-drop-in-2014-collections-number/, Allicance Bernstein, Stuck in the Mud or Road to Success? DC Plans and Fee Lawsuits, Callan, 2015
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Investment Outsourcing
How Lockton Helps: Benchmarking, Outsourced Fiduciary Support and Consulting Oversight 3(38) 3(21) Investment Outsourcing Compares plan design, fees and results with similarly-sized plans in the same industry Proposes alternatives that may reduce cost and/or improve results Establish an Investment Policy Evaluates documents, oversight, and compliance Highlights potential compliance risk and suggests mitigation options Monitor Using Defined Institutional Processes Analysis Quality Data Document Committee Decisions
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Creating Client Value: Through Outsourcing
Results: Over a 5-year period, of LockSMART recommendations remain above median (vs. industry average of 23%1) 70% Lockton-advised plans were audited nearly times per year over the last 5 years2 30 findings 1 ”Industry average” defined as above median managers in 2010 who remained so in 2015 2 Fiduciary Review process established in 2010
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#3: Executive Benefits Risks: Retirement Income Shortfall
Limits prevent Social Security, qualified plans and personal savings from fully providing executive retirement income. Attracting & Retaining Executive Talent Succession Planning Cash Flow Liquidity RISKS
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Executive Benefits Risks: Benefits Completion
Attracting & Retaining Executive Talent Succession Planning Benefit Completion RISKS Long-Term Disability Life Insurance Bonus Standard Group Coverage: 60% of Salary ONLY1 Bonus Standard Group Coverage: 2X Salary ONLY $500K)1 Gap Gap Covered Covered Salary Salary Covered Covered Salary Salary Most Employees Executives Most Employees Executives
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How Lockton Helps: Executive Benefits Strategy
NonQualified Retirement Plans Supplemental Executive Benefit Programs Funding Corporate Owned Life Insurance (COLI) Bank Owned Life Insurance (BOLI) Mutual Fund Strategies Coverage Supplemental or Carve-Out Life and Disability Insurance Keyman Policies Individual Life Insurance Individual Disability Insurance
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Creating Client Value Through Executive Benefits Strategy
An international developer of fire prevention products EXECUTIVE BENEFITS & KEY MAN COVERAGE THE OBJECTIVE Create C-Suite protection to provide competitive benefits package, create executive disability coverage and protection for the business against the loss of key executives. THE LOCKTON SOLUTION Re-bid existing insurance contracts and structured non-qualified and SERP plans along with Key Man life insurance coverage. THE RESULT Improved executive disability coverage from $6k / month to $21k / month without increasing cost. Improved overall executive benefit replacement coverage to 60%-- equivalent to non-executive benefits– a difficult package for competitors to match. Protected the company and families when the CEO and Chief Legal Counsel unexpectedly died, generating $2M in tax free death benefits. A processor, packager and international distributor of poultry products NON QUALIFIED PLAN RE-STRUCTURING THE OBJECTIVE Evaluate Union and Non-union qualified plan design as part of an acquisition, enhance plan to allow HCE participation and address a $5M deficit in the non-qualified plan. THE LOCKTON SOLUTION Consolidated qualified administration from three providers down to a single one. Changed qualified plan design. Mirrored non-qualified assets with liabilities and created endorsements between the life insurance provider and the participant plan document. THE RESULT $5M deficit resolved. $200k in administrative fee savings. Participant payment and taxation risks mitigated.
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#4: Compensation Risks: Bidding Government Contracts
Attracting & Retaining Talent Competitive Bidding Regulatory Compliance RISKS Regulators stipulate minimum pay for contractors: Base Wage & Cash Benefits subject to: FICA FUTA / SUTA General Liability Workers’ Comp BASE WAGE + FRINGE BENEFITS __________ TOTAL WAGE Cash (easiest) Can be Vacation / Holidays $ “Bona Fide” plan Increases payroll burden 11-60% Drives labor cost
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Creating Client Value Through Compensation Strategy
Pay Fringe in Paycheck Base Wage $ Fringe $10.33 Total Wage $44.85 Payroll Burden $ (25%) Bid Cost $56.06 Pay Fringe to “Bona Fide” Plan Base Wage $34.52 Total Wage $34.52 Payroll Burden $ (25%) “Bona Fide” Plan $10.33 Bid Cost $53.48 $2.58/hr savings per person
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The Human Factor
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#5: Aging Workforce Risk: What if Employees Can’t or Won’t Retire?
Trends in Workers’ Expected Retirement Age1 RISKS Increased Employee Benefit Cost Productivity Loss Increased Workers’ Compensation Claims Increased turnover expense as younger workers seek other opportunities 1Employee Benefit Research Institute and Greenwald & Associates, Inc, Retirement Confidence Surveys
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Behavioral Finance: Choice Paralysis1
#6: Complexity Risk: HSAs, 401(k)s, Debt Employees Struggle with Options RISKS Inappropriate Employer Trade-off Between Health & Wealth Inappropriate Employee Trade-off Between Health & Wealth Behavioral Finance: Choice Paralysis1 More options (investments, plan types, savings options) increase interest, but reduce action. 6 Options 24 Options Considered 40% 60% Acted 30% 3% 1Iyengar and Lepper (2000)
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Creating Client Value Through Employee Engagement
An international financial services advisory firm. EMPLOYEE ENGAGEMENT THE OBJECTIVE Improve Retirement Readiness, particularly for pre-2014 hires who did not benefit from automatic enrollment. THE LOCKTON SOLUTION Positioned financially healthy behavior by partnering with a wellness service to provide 500 points against healthcare premiums for attending one-on-one meetings. Launched associate twitter campaign on health and financial wellness topics Re-structured the plan design to increase automatic enrollment defaults to 6% from 3% and added automatic savings escalation to 10%. THE RESULT 40% of employees attended on-on-ones: 29% adopted voluntary automatic increase in 401(k). 50% increased deferrals. 87% elected beneficiaries. All stated goals exceeded. “We want to provide tools to empower our Associates. Wellness isn’t just about being physically healthy. It’s also about being financially secure and understanding how to achieve your goals in life.” —Theresa Schnelle, Vice President, Human Resources Operations Manager Goals Results 90% of meeting attendees act 90.22% took action Increase salary deferrals to 7.02% Increased to 7.66% Increase participation to 92.99% Increased to 94.21% Increase beneficiary designations to 40% Increased to 60.24%
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