The 20 Rising Stars of Retirement Plan Advisory 2008

SPONSORED ARTICLE automatic contribution increases) allows plan sponsors to adopt retirement plan features that force some employees to save for retirement. It can help create new savings opportunities for younger workers. In fact, according to the research report cited above, most young people welcome having employers take a more active role to encourage employees to contribute to employer-sponsored retirement savings plans. Overall, 85% of respondents think it is a good idea for employers to voluntarily enroll workers automatically in a retirement savings plan and set up automatic contributions from workers’ paychecks. Automatic enrollment can potentially help older workers retire more comfortably when they are ready. In addition, automatic enrollment may also help plan sponsors meet their fiduciary responsibilities. Whatever the reason, an increasing number of plan sponsors are adopting automatic features for their retirement plans. Automatic features are becoming more and more popular regardless of the type of business, company size or employee demographics. Automatic investment selection allows the plan to default employees into Qualified Default Investment Alternatives (QDIAs) with built-in investment selection and ongoing asset allocation management. Some of the most popular investment strategies adopted for automatic investment selection include: Age-based, target-date retirement funds (also known as lifecycle funds): employees are defaulted to these strategic investment options selected by the employer based on age. The funds offer asset allocation, professional management and ongoing rebalancing. Risk-based asset allocation funds (also known as lifestyle funds): employees are defaulted to these strategic investment options selected by the employer based on investment risk. The funds offer asset allocation, professional management and ongoing rebalancing. Although the Department of Labor has ruled that a managed Although it is a step in the right direction, automatic enrollment may not be versatile enough to adequately meet the long-term retirement income needs of a majority of plan participants. Automatic enrollment (also known as automatic deferral or negative election) allows employees to be automatically enrolled in their retirement plan and requires them to ‘opt out’ if they do not wish to participate in the plan. Some plan sponsors require employees to opt out every year if they don’t wish to participate. In addition to automatic enrollment, automatic contribution increases also may be adopted by a plan. The amount employees contribute to the plan is increased up to a predetermined amount. Here are the two major types: Plan-determined increases: increases are determined at the plan level. The plan sponsor determines that everyone’s contribution to the retirement plan is increased by a set amount (usually 1% or 2%) every year. The increase will occur on a set date, such as the first of the year or at merit increase time when one percent won’t have a big impact on take home pay (but can have a positive impact on retirement savings accumulation over time). Participant-determined increases: increases are determined at the participant level. Employees choose the amount of the automatic increase and the timing of that increase. The increase will automatically occur on the date the employee selects. SEPTEMBER 2008 account also may be utilized as a QDIA, there has been very little adoption so far by plan sponsors. Hewitt’s 2007 “Trends and Experience in 401(k) Plans” report found that only 4% of the 302 surveyed plans with automatic enrollment use managed accounts as the default, compared with 50% for target-date funds and 15% for asset allocation funds. Another 13% chose balanced funds and 18% chose money market and stable-value funds. Good, But Not Good Enough At The Standard, we believe the Pension Protection Act of 2006 was a huge step in the right direction. It encourages employers to enroll their employees automatically in an employer-sponsored 401(k) and provides an ERISA exemption from state laws that prohibit payroll deduction without the employee’s written permission (as long as certain conditions are met). Although it is a step in the right direction, automatic enrollment may not be versatile enough to adequately meet the long-term retirement income needs of a majority of plan participants. One of the requirements of an automatic enrollment feature is that it establishes the deferral rate at which an employee is enrolled in the absence of an affirmative election to the contrary. This default rate of deferral also needs to be communicated to the employee. The IRS has not specified a maximum RETIREMENT PLAN ADVISORY RISING STARS 13

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The 20 Rising Stars of Retirement Plan Advisory 2008 Contents Doing Well By Doing Good The Post-PPA Bounce Automatic Enrollment vs. Managed Account Unfair Advantage? You Bet The New World Order 20 Rising Stars of Retirement Plan Advisory Mentors’ Page

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