Products June 17, 2015

State Street Publishes DC Plan Resource for Multi-Nationals

The paper provides insights to help multi-national companies with defined contribution plans (DC) in different countries.
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State Street Global Advisors (SSGA), the asset management business of State Street Corporation, released “Ten Best Practices for Global DC Plans.”

The paper provides insights to help multi-national companies with defined contribution plans (DC) in different countries approach them strategically to attract and retain talent and produce better retirement outcomes for employees.

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The “Ten Best Practices for Global DC Plans” fall into four categories:

  • Define a global vision and related goals and align benefits to support those goals;
  • Build efficient governance structures to minimize risk and ensure that plans in different countries support the overall goals;
  • Weigh the pros and cons of centralizing investment and other functions to achieve operational and cost efficiencies; and
  • Improve plans’ effectiveness for employees.

“In our discussions, we recognized that many clients find themselves with a patchwork collection of DC plans around the world, an accidental DC structure that developed as companies have grown globally over time,” says Nigel Aston, managing director, head of European Defined Contribution for SSGA. “The relatively simple step of articulating an overarching strategy can improve efficiencies between departments and divisions around the world, such as human resources, finance and legal that influence employee rewards. Our hope is that these principles will help improve the efficacy of DC plans and benefits packages as a whole.”

NEXT: Recommendations from the paper.

SSGA conducted dedicated listening campaigns with multi-national clients in the U.S., UK, continental Europe and Asia Pacific and China. This outreach included the first of a series of global forums to encourage dialogue and better understand, articulate and refine DC practices. SSGA also engaged consultants, academics and other practitioners to incorporate their views and gather strategic insights.

SSGA’s “Ten Best Practices for Global DC Plans” include the following recommendations:

  • Articulate total rewards goals globally, ensuring that they reflect the company’s core brand, culture and values. Those goals should be used to craft a strategic blueprint for the company’s retirement plan. Other goals, such as replacement ratios or other metrics needed to affirm the value of an overarching strategy, should also be included.
  • Seek ever-closer interaction between benefit functions globally. Recognize that DC plans fit into a wider network of benefits that may differ from country to country but must be considered in aggregate. Make sure to align the individual benefits in each country’s DC plan as closely as possible to the overall strategic vision.
  • Improve the plans’ ability to achieve plan objectives for employees globally. Work systematically to understand employee needs and priorities through research, employee data analysis, surveys and engagement. Use that data to drive higher savings rates, improved investment options and higher employee engagement globally.
  • Create a strong communications program that drives greater employee engagement with the retirement plan, improves retirement outcomes and builds employees’ confidence in their ability to retire.

The full paper is available to view here.

Data & Research June 17, 2015

Overcoming Plan Sponsor Inertia

It’s not only plan participants that are prone to inertia. Plan sponsors, too, can find it a challenge to step up their retirement plan designs.
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“How many people actually know what they’re saving in their 401(k)s?” asked Anne Ackerley, head of the defined contribution group in the U.S. and Canada at BlackRock.

At a roundtable to discuss retirement at BlackRock in New York, Ackerley said that an informal poll of her own friends and family showed perhaps 40% knew much about their own investments, and very few had real confidence that they are saving enough. The results are common enough, but Ackerley pointed out that 401(k)s are the primary savings vehicle that most people will depend on to fund their retirement. 

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The industry is facing several headwinds, including participant inertia and lack of understanding, increasing longevity and low interest rates that continue to create challenges for investors in attaining rates of return.

Ackerley said the primary job of the industry is to educate participants as well as plan sponsors. “What is the influence and control employers have over that ultimate retirement outcome?” she asked, noting that the goal of any DC plan is to get more people to save; to get them to save earlier and more; and then get people invested in the right vehicles, such as target-date funds (TDFs).

“Change is hard and slow, but there is a new reality,” Ackerley told PLANADVISER. “People have to save more, and I think plan sponsors are really beginning to understand that.”

All the tools plan sponsors need to get people saving already exist, Ackerley said, and even fairly simple actions—raising defaults, the use of auto features—can quantify and illustrate for plan sponsors how plan outcomes can be affected. “We find they are pretty responsive,” she said, “and they’re starting to embrace some of these changes.”

NEXT: The difference eight years can make.

Getting participants enrolled as early as possible in their working careers is key, Ackerley said, illustrating her point with two theoretical 22-year-olds beginning their working lives on the same day. Both earn $50,000 a year. One is auto-enrolled in a TDF at 6% at day one; the other does not beginning making contributions to a DC plan until age 30. “At age 65, [the first] one would have $300,000 more in retirement,” she said.

According to Chip Castille, chief retirement strategist at BlackRock, the conversation is less focused on the accumulated pool of retirement assets, since it’s more productive to consider what those assets can supply in retirement.

In the case of Ackerley’s examples, it’s the difference between 65% and 55% of income replacement in retirement. The two 22-year-olds underscore the substantial difference those first eight years can make to an individual’s retirement, she said.

But plan sponsors themselves must be willing to adopt the appropriate plan design features. “The real trick is to getting people to save more is to raise the default,” Castille told PLANADVISER. Plan participants sometimes look at the features of a plan, sifting for clues, Ackerley said. “If a plan sponsor’s default ratio is 3%, are you saying that’s OK? We all know it’s not.”

Retirement plans, the country and even the planet will have to face the looming challenge of increasing longevity, according to Michael Hodin, executive director of the Global Coalition on Aging.

Longevity is causing profound transformation throughout the world, according to Hodin. There are simply more old people than ever before, he said, and growing old is now the norm. “In country after country, no matter how rich or poor, modern or urbanized, replacement rates of the population are dropping,” he said. The percentage of old citizens to young is also transforming and the impact on fiscal sustain and economic growth, either national or community level, is substantial.

People are simply living unprecedented long lives, he said, which affects income replacement rates in populations all over the globe, and will force countries to address the economic needs and stresses longevity creates. “Longevity changes everything,” Hodin said.

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