INAUGURAL METLIFE QUALIFIED RETIREMENT PLAN BAROMETER SHOWS WIDE VARIATION IN PLAN SPONSORS’ ABILITY TO CREATE A RETIREMENT INCOME CULTURE; AVERAGE SCORE OF 59
NEW YORK, NY - January 26, 2011 – Only one-third of plan sponsors at FORTUNE 1000TM companies describe their retirement benefits philosophy as supporting employees’ efforts to “create retirement income for the future.” And while two-thirds of plan sponsors say that retirement income is an important objective of their retirement plans, many are struggling to translate their intention into action. These are key findings from MetLife’s inaugural Qualified Retirement Plan Barometer, released today.
MetLife commissioned this research to assess whether and to what extent a new culture is taking hold in the largest U.S. companies – one which places equal emphasis on retirement savings and retirement income. The inaugural Barometer score across all plan types is 59 out of a possible 100; the higher the value on the Barometer, the stronger the overall culture of retirement income. While individual company scores range from a low of 19 to a high of 89, one segment – companies that offer broad access to defined benefit (DB) and defined contribution (DC) plans – outpace their peers with a Barometer score of 74. These peers are those plan sponsors at companies that only offer a DC plan or incidental access to a DB plan as well as a DC plan.
“Although most of the burden for retirement security has shifted to employees, plan sponsors still play a critical role,” said Robin Lenna, executive vice president, Corporate Benefit Funding, MetLife. “Plan sponsors have more work to do. Most plan sponsors continue to skew their goals, plan design, communications and decision support tools toward savings, which unfortunately favors accumulation over income.”
Retirement Plan Objectives Have Yet to Align with Income Philosophy
While a plurality of plan sponsors (45%) describe their corporate philosophy regarding the provision of retirement benefits based on a desire to “be successful in a competitive workforce environment and focus primarily on providing them in the most cost-efficient manner possible,” 35% of the plan sponsors surveyed describe their retirement benefits philosophy as “to support employees’ efforts to create retirement income for the future when taken together with Social Security and their personal savings.” This is well ahead of the 20% who describe their philosophy as “our business needs are served by proactively creating a program that offers the best financial and other resources to support our employees’ needs to determine and achieve their retirement savings goals.”
Yet, a corporate philosophy focused on retirement income is not translating into action. While nearly all (93%) plan sponsors report that retirement savings is extremely or very important objective of their retirement plans, only two-thirds (65%) say retirement income has a comparable level of importance. Compounding the discrepancy are plan structure and policy. More than eight in ten (82%) plan sponsors do not set income replacement goals for their qualified plans. Of the few that do, the median replacement goal set is 62%, well below the recommendations of most experts. Likewise, fewer than half of plan sponsors have written policy statements that deal with more than just investment issues (44%), and less than one-third of them address retirement income in these statements.
Plan Design Supports Saving Over Income
Retirement plan design, overall, focuses on encouraging savings, rather than creating lifetime income for participants. Almost half (47%) of plan sponsors report that they include all employees in automatic enrollment features, and 52% have implemented a default allocation to a target date fund. Both stable value funds and target date funds are widely-offered investment options, with 87% and 76% of plan sponsors, respectively, including these vehicles in their investment line up for all employees.
Distribution options for DB plans also do not strongly encourage the creation of lifetime income. While 94% of plan sponsors who offer a DB plan say those plans provide standard annuity distributions, today, 54% of plan sponsors offer a full lump sum distribution from a DB plan and 35% allow a partial lump sum distribution. Among all plan sponsors, the most popular distribution options at retirement are installment payments (61%), systematic withdrawal plans (46%) and lifetime annuity payments (24%).
Many plans have eliminated or avoided adding an annuity distribution option in their DC plans for a number of reasons. Chief among them are fiduciary liability concerns and the administrative issues related to offering annuities. With seven out of ten (69%) plan sponsors saying that they are extremely or very knowledgeable about ERISA-based fiduciary standards, it stands to reason that many cite fiduciary concerns as a barrier to more widespread offering of income annuities. For those plan sponsors that do not offer lifetime annuity options from their DC plans, over half (54%) cite fiduciary concerns as a reason.
Fiduciary concerns will need to be addressed differently than they have been up until now by public policymakers before many plan sponsors will evaluate income annuities as a potential mainstay feature of DC plans. Further, it is clear that while a workable safe harbor is needed, undue fiduciary risk is not the only obstacle to adopting an income component to qualified retirement plan outcomes. Addressing this issue in a straightforward and simple manner may help clear the way for sponsors to focus on other concerns more effectively.
Communication Leaves Value on the Table
Despite the cost of retirement plans, only one-third (34%) of plan sponsors have conducted an employee survey to help gauge how satisfied employees are with the education and support they receive about their retirement plan.
While over three-fourths (77%) of plan sponsors report that their employees are aware of company-provided materials available to them pertaining to the importance of saving for retirement, just 58% think that the materials, tools and/or other support their company provides participants gives them a clear idea of how to generate retirement income from their plans. Even companies offering a DB plan report that they do not communicate about retirement income; just 20% of these companies agree that they provide extensive materials on the pros and cons of taking a lump sum vs. a periodic income distribution from a DB plan.
“While the majority of plan sponsors provide education about the need to save for retirement and the risks of investing, very few concentrate on retirement income-related issues such as longer life spans/longevity risk, how to create retirement income, the pros and cons of taking a lump sum versus periodic payments, and when to begin taking Social Security benefits. Given their current focus, plan sponsors – even those who fund traditional DB plans – appear to be under-communicating with employees about the importance of retirement income,” commented Cynthia Mallett, vice president, Product & Market Strategies for MetLife’s Corporate Benefit Funding group.
Fewer than half (46%) of plan sponsors say that all their employees receive participant statements that show both their balance and what it would convert to as an income stream in retirement, and for those with a DB plan, just 44% receive information on income earned to date in the DB plan.
One silver lining is that companies for which retirement income is a strong objective in their retirement program place greater emphasis on both savings and income in their communications. These companies are more likely than other plan sponsors to agree that their employees are aware of company-provided materials pertaining to the importance of saving (87% vs. 60%). They are also more likely to agree that their company provides materials and support that give their employees a clear roadmap on how to generate retirement income from their plan (62% vs. 47%). This suggests that positioning the DC plan in this way pays dividends to the degree in which employees understand, engage with and appreciate the plan, in addition to an increased likelihood of using it in an effective manner for retirement security.
Retirement Success Measures Emphasize Participation Over Income
While more than eight in 10 (84%) plan sponsors say that their company’s overall participation rate is extremely or very important in gauging the success of their retirement plans, just over half (52%) say the same about the ability to generate retirement income. One notable exception is that plan sponsors that have retirement income as a key focus of their retirement plans are more apt than other plan sponsors to recognize the ability to generate retirement income as a very important measure of plan success (68% vs. 23%).
“In our view, a balance between accumulation and income may be an optimal ‘balanced scorecard’ for qualified retirement programs in the future,” said Mallett. “Accumulation is an important plan objective – and it’s crucial that plan sponsors not lose sight of that – but what we believe needs to emerge is the addition of income-related outcomes to traditional accumulation measures.”
Mathew Greenwald & Associates and Asset International, Inc., publisher of PLANSPONSOR and PLANADVISER magazines, conducted the online survey of Fortune 1000TM companies on behalf of MetLife. To be eligible for the study, participants needed to work for a Fortune 1000 company that offers at least one DC or DB plan (including cash balance/hybrid plans). Participants also had to have at least a moderate amount of influence over decisions regarding their company’s retirement benefits policy and plan design.
Of those surveyed, 81% reported they are very knowledgeable about the retirement plan(s) their company offers. A total of 127 surveys were completed between September 29 and November 8, 2010. The study can be downloaded at www.metlife.com/barometer.
MetLife, Inc. is a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 60 countries. Through its subsidiaries and affiliates, MetLife holds leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. For more information, visit www.metlife.com.