It’s about the balance. “Although there’s a lot of focus right now on what to do with people’s 401(k) balances, the biggest issue most people have is the 401(k) balance.” – Stuart Ritter, CFP®, T. Rowe Price Financial Planner

Deferral rates: Too low and holding. % contributed

5.4 5.0 4.8 5.0 5.2 5.1

TRP Auto-Increase

5.3 5.3 5.2 5.2 5.4 5.4 5.4 5.6

5.5

7.4 6.1

4 2 0

19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

Participants face a significant shortfall. Automatic increase can help.

Industry average 6

Participants using automatic-increase have higher deferral rates than the industry average.

Plan sponsors have done much to help participants overcome inertia and start saving for retirement. Automated solutions such as automatic enrollment and automatic investment in target-date funds have more people participating in 401(k) plans and engaged in an age-appropriate, long-term investment strategy. But, research suggests that it’s not enough.

START

2

SAVE

> Financial experts suggest a deferral rate of at least 15% to 20% each year, including employer contributions. But the 2009 industry average deferral rate is just 6.1%. > Studies show that participants are not increasing deferral rates annually. > Unless this behavior is changed, a large number of participants will not accumulate sufficient assets to provide adequate income throughout retirement.

INVEST Source: Industry averages are based on PSCA’s 53rd Annual Survey of Profit Sharing and 401(k) plans (2010), reflecting plan year 2009 . The TRP autoincrease statistic is based on T. Rowe Price defined contribution plan data for opt-out auto-increase plans as of 09/30/2010.

Savings rates determine real retirement age.

Many participants need to save more money. Here is how you can help.

Deferral rate Annual increase Retirement beginning at age 30 in deferrals age



3%

0%

81



3%

2% at age 45

70



3%

2% at age 31

65

Beginning Beginning

This chart assumes a $0 initial balance, a starting salary of $30,000, an 8% annual rate of return, and a 3% salary inflation rate. Participants increasing their deferrals annually will continue to increase their deferrals up to a limit of 20%. When the participant’s balance reaches the point that their initial withdrawal amount replaces 50% of their salary, they can retire. The initial withdrawal amount is 4% at age 65, 5% at age 70, and 7% at age 81. For example, with a 3% deferral rate and no increases, the participant’s balance at age 81 would be $975,000; their salary at that point would be $135,000. Seven percent of $975,000 is $68,000 - half of $135,000.

> Implement automatic increase as an opt-out service to lift participant deferral rates by 2% per year up to a limit of 20%.* Research has shown that setting up automatic increase at more robust levels can have a profound impact on retirement savings. > Offered as an opt out service, participants can choose not to participate. Give participants a choice, but if they do nothing, then start them down the right path. Our research suggests that most participants will stick with the increases. > Use automatic increase in conjunction with automatic enrollment and automatic investment. They work together as part of an inter-related system to help participants increase their account balances.

Not interested in waiting till age 81 to retire? If a participant increases their deferral rate on an annual basis, he or she will have a better chance of retiring at age 65, while one who maintains a static deferral rate might have to work years longer. 3

* If your plan is subject to QACA rules the limit is set by regulation. Source: Defined Contribution Institutional Investment Association Research Report (2010)

The balance drives retirement income. $2,208,045

65% replacement income

$775,752

23% replacement income

Sponsors and participants receive a lot of important information about investment options, asset allocation, diversification, annuities, and more. Although there’s a lot of focus right now on the problem of what to do with people’s 401(k) balances, the biggest issue most people have is the 401(k) balance.

$387,876

11% replacement income

A systematic approach

ASSETS: $2,500,000 $2,250,000

$2,000,000 $1,750,000

$1,500,000 $1,250,000

$1,000,000 $750,000

$500,000 $250,000 0

AGE: Line 3 Line 2 Line 1

4

30

35

40

45

50

55

60

65

Investment at 3% deferral rate Investment at 6% deferral rate Investment at 6% deferral rate, with 2% automatic increases up to 20%

This chart is for illustrative purposes and does not represent a particular investment in your plan. Assumptions: Salary of $50,000 annually adjusted to anticipate a 3% inflation rate. Annual rate of return is 8%. Replacement income represents the percentage of salary that will be replaced if a participant withdraws 4% of their retirement balance at age 65.

When combined with automatic enrollment and age-appropriate asset allocation automatic increase becomes one of the most effective tools for helping participants save more for retirement.

How do participants react?

Studies say they’ll stay. The Stress Test

Many sponsors cite participant resistance as a reason not

1800

to implement automatic increase. Our data reveals that when participants are initially defaulted into the automatic increase service, * stay in.

82%

I S&P 500 and auto increase deferral rates

1600

6.5%

5.8%

5.5%

7%

6%

5% 1400 4% 1200

INITIAL PARTICIPANT USAGE RATE

3% 1000 2%

82%

800

1%

Auto Increase deferral rates 600

0%

20%

40%

60%

80%

100%

*This percentage is based on T. Rowe Price quarterly defined contribution plan data from 2008 to 2010. It represents the average percentage of participants in opt-out plans who were defaulted into automatic increase in each quarter and did not opt-out.

5

S&P 500 Index

0%

10/1/07

1/1/08

4/1/08

7/1/08

10/1/08

1/1/09

4/1/09

7/1/09

10/1/09

1/1/10

4/1/10

7/1/10

8/31/10

Even during recent market declines, participant deferral rates held steady with automatic increase.

Source: moneycentral.com. Past performance cannot guarantee future results.

What happens if your participants do nothing? Your plan should be designed with one end goal in mind: Help employees achieve a successful retirement outcome. Ask yourself about your plan and what the outcome is if your participants never change their deferral rate. Inertia means that they may not make their end goal making the most important decision affecting your participants’ success, ironically, not one they will make, but one that you will make. Have you designed a plan so that your participants are going to be able to retire comfortably around age 65 or 70? Or do you have a plan where they’re not going to be able to retire comfortably until age 81? It’s time to change the system to make better outcomes possible.

Ready to start? Contact your T. Rowe Price representative. It’s that easy. We’ll handle the details. 6

11/10

96555 05169-1740  

w w w . trow e p r i c e . com

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800.638. 4546

I t.

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ba lti mo r e , m d 21289-2410