The 20 Rising Stars of Retirement Plan Advisory 2008

SPONSORED ARTICLE limit on the automatic reduction percentage. The employer need only establish a reasonable but meaningful rate given their organization’s demographics. However, according to the latest Profit Sharing Council of America (PSCA) Survey on Plan Experience, only 23.6% of all plans have adopted automatic enrollment (although that number is expected to rise significantly in the next few years). About 18.5% of these plans have selected either 1% or 2% as the default percentage. The majority of these plans (58.5%) have selected 3% as the automatic deferral percentage. Only 23% of plans have chosen a default percentage greater than 3%. At such rather low default rates, how do we know that automatic enrollment in its current form is going to be enough to meet the retirement income needs of participants in retirement – especially if automatic enrollment is added without a companion automatic contribution increase feature? And it’s not just daily living expenses in retirement that participants need to think about funding. They also need to think about the strong likelihood of increased medical costs and health insurance as they grow older. The average nursing home stay, for instance, now costs more than $74,000 per year and could rise to more than $150,000 per year by 2030, assuming an annual inflation rate of 3% (as cited in Yahoo Finance’s matic deferrals, while 22.8% chose risk-based asset allocation funds and another 14.6% chose balanced funds. How do we know that these popular default investment options are going to be adequate to meet the long-term retirement income needs of the participant in retirement? Both age-based and risk-based funds are limited, in that they address only limited individual circumstances. For example, target-date funds are based on the anticipated retirement age of an individual and do not factor in other variables that are important and unique to an individual (such as tolerance for risk and other financial goals). Risk-based funds factor in risk tolerance only, but not years to retirement or other financial goals. And neither ageor risk-based funds factor in other circumstances, such as outside assets and spouse or partner assets, or have any built-in flexibility to address whether or not an individual’s situation might change dramatically over the course of several years. Target-age and target-risk investment vehicles are still very new. Few if any tools exist for benchmarking the performance of these types of investments. Each has a unique allocation approach and investment components. Standard & Poor’s reportedly is working on a target-date fund index, as is investment consulting firm Callan Associates. Mercer also is developing customized benchmarks that evaluate both asset allocation and performance for A managed account solution is a superior solution and is best-suited to meet the long-term retirement income goals of each individual participant, based on personal goals, tolerance for risk and timeline to retirement. online guide entitled “How Much Do You Need to Retire?”). In the case of a plan sponsor who has a Qualified Automatic Contribution Arrangement (QACA) - in effect, a safe harbor automatic enrollment arrangement to avoid nondiscrimination testing - the initial automatic enrollment amount must be a least 3% (but not more than 10%) of pay. The amount must increase to at least 4% in year two, 5% in year three and 6% in year four and beyond. The employer must also fund a ‘safe harbor’ match or non-elective contribution, which must be 100% vested after two years of service. Certain other conditions apply as well. It is too early to tell whether there will be widespread adoption of QACAs, but one thing is sure: adopting a QACA presumably places a significant amount of cost as well as additional administrative burden on the plan sponsor, which ultimately may discourage them from adopting it in the first place. The Drawbacks of a One Size Fits All Approach The PSCA survey notes that 30.6% of plans chose age-based target-date funds as the default investment option for auto14 RETIREMENT PLAN ADVISORY RISING STARS each target-date age range. In the meantime, some advisory and consulting firms already are developing their own target-date benchmarking analysis tools. National Retirement Partners (NRP), for example, currently has a system that rates target-date funds with one of four rankings - superior, favorable, neutral or unfavorable. However, until an accepted industry standard emerges, it will be difficult to judge the adequacy of these targetage and risk-based funds. A More Versatile Solution Because of the limited versatility of automatic enrollment arrangements, The Standard recommends that sponsors consider a stand-alone, professionally managed account solution to their participants as part of their overall plan design. We believe that a managed account solution is a superior solution and is best-suited to meet the long-term retirement income goals of each individual participant, based on personal goals, tolerance for risk and timeline to retirement. As of early 2008, we currently administer approximately 350 plans offering Mainspring Managed (our managed account option), with about 12,000 participants who are enrolled in the Mainspring Managed option. We have seen an adoption SEPTEMBER 2008

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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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