One Size Does Not Fit All DC Sponsors Addressing Needs Around Auto-Features, Investment Menus and Retirement Advice Offerings October 2016



Table of Contents Introduction........................................................................................................................... 1 Key Findings......................................................................................................................2–8

Who Owns Responsibility for Participant Retirement Readiness? The Jury Is Still Out.



Auto-Feature Usage Is Declining



Current Usage of Plan Features Related to Retirement Readiness



Likely Adoption of Auto-Features in Next 12 Months



Greater Interest in Managed Accounts on 401(k) Menus



Investment Advice Offerings Expanding in 401(k) Plans

Strategic Implications.............................................................................................................8 Methodology.......................................................................................................................10

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Introduction By most accounts, Americans are not saving enough for retirement and the probability of millions of future retirees running out of money is high. Plan participant reliance on employersponsored retirement plans as a top source of retirement savings has never been greater. This presents a significant pressure point that 401(k) plan providers face in an industry that has become highly scrutinized from a legal and regulatory standpoint. Additionally, plan sponsors have high expectations of their plan providers to offer outstanding service quality and competitive fees without sacrificing strong investment option performance. Alternatively, plan sponsors feel the pressure as internal company directives demand offering a successful 401(k) plan with greater participant engagement using fewer resources and smaller budgets. As such, plan sponsors are focused on cost reduction more than ever and cite plan administration fees as the top reason for switching record keepers. However, despite the demand for cost containment, significantly more plan sponsors indicate that adequately preparing participants for retirement is a top three area of focus for 2016 This research paper investigates the role plan sponsors play in participant retirement readiness, and the features and services plan sponsors currently provide and anticipate adding in the near future to ensure that their participants are adequately prepared for retirement. We begin with reviewing what plan sponsors perceive as the roles that they play along with plan providers, plan participants and intermediaries regarding participant retirement readiness, and then examine current plan features available to participants along with the automatic plan features that are likely to be adopted in the next 12 months. Next, we focus on investment menu offerings and anticipated changes as they relate to retirement preparedness. We conclude with a review of the various types of advice delivery models being offered and most likely to be adopted to assist plan participants in their retirement strategy.

Plan size segments by assets Micro: Less than $5 million Small: $5 million to less than $20 million Mid-sized: $20 million to less than $100 million Large: $100 million to less than $500 million Mega: $500 million or more

SOURCE: RETIREMENT PLANSCAPE®. MAY 2016.  1

Key Findings Who Owns Responsibility for Participant Retirement Readiness? The Jury Is Still Out. While adequately preparing participants for retirement is rising in importance, there is little consensus on who among plan sponsors, plan providers, plan participants and intermediaries ultimately owns the responsibility of retirement readiness for employees. While nowhere near a majority, the largest portions of Micro and Small plan sponsors lean toward the participant being primarily responsible while Mid-sized plans are about tied between the company and the participant owning the burden of retirement readiness. Among Large and Mega plans, the greatest proportions of plan sponsors cite that the company is ultimately responsible. Across all plan size segments, about one-quarter of plan sponsors point to their respective plan providers to ensure participants are adequately prepared for retirement. EXHIBIT 1

Auto-Feature Usage Is Declining Current Usage of Plan Features Related to Retirement Readiness

In addition, we see a significant decrease in the reported plan sponsor usage of auto-increase of deferral rates and automatic rebalancing compared with 2014. Currently, one in five (19%) plans offer automatic rebalancing, which is down from 26% two years ago. Moreover, use of auto-increase of participant deferral rate features has fallen to 13% from 17% since 2014. Declines in usage for both auto-features are driven primarily by decreases in the Micro and Large plan segments. Finally, and perhaps most striking and concerning, employer-matching contributions are offered by fewer plans in 2016, representing a decline to 50% overall, down from 57% in 2015. In fact, significant decreases occur across all plan size segments in offering contributions commensurate with at least a portion of the amount of money being deferred by the participant to the plan. Decreasing use of these features can be related back to the most commonly cited primary focus of plan sponsors need to cut fees, as noted earlier. In a cost-constrained environment, plan sponsors may be less likely to offer auto-features if they result in a higher total plan cost of administration and may “opt out of auto” upon changing record keepers in efforts to maintain or lower costs. EXHIBIT 2

Despite growing concern from retirement industry leaders and key influencers about participants being inadequately prepared for retirement and ongoing messaging that automatic plan features boost participant savings rates, we see no change in 2016 in automatic enrollment adoption. While auto-enrollment remains the most popular auto-feature offered in 401(k) plans today, just three in ten (29%) plans take advantage of this option. However, usage does increase with plan size, with the Large plan segment (51%) representing the highest proportion of plan sponsors with auto-enrollment as a plan feature.

Insights shared in this white paper are derived from our Retirement Planscape® report. This annual assessment of the plan sponsor market pinpoints competitive strengths and weaknesses in brand, loyalty and key plan sponsor experience metrics. It drills into the key aspects leading plan sponsors to consider switching providers and the most important criteria for choosing a new provider.

2  ONE SIZE DOES NOT FIT ALL DC SPONSORS

Retirement Planscape® Measuring the Impact of Brand and Loyalty in the DC Retirement Plan Sponsor Marketplace

May 2016

EXHIBIT 2

PRIMARY RESPONSIBILITY OWNERSHIP: ENSURING PARTICIPANTS ARE ADEQUATELY PREPARED FOR RETIRE EXHIBIT 1 PRIMARY RESPONSIBILITY OWNERSHIP: ENSURING PARTICIPANTS ARE ADEQUATELY PREPARED FOR RETIREMENT* Our plan provider

My company

Plan participants Intermediary

Micro

30% ▲‘15‘14

25%

38% ▼‘15

7%

Small

30% ▲‘15‘14

24%

39% ▼‘14

6%

Mid

33%

24%

31%

12% ▲‘15’14

Large

37%

23%

22% ▼‘15‘14

18% ▲‘15‘14

Mega

41% ▲‘14

24%

30%

5%

Low Key

High ≤ 12%

13%

to

19%

20%

Base: Plan sponsors using intermediaries /= Significant change from stated year /= Significant change observed in 2015 sustained in 2016 * Wording changed from “Ensuring participants are on track for retirement” Source: Market Strategies International. Cogent Reports™. Retirement Planscape®. May 2016.

EXHIBIT 3

to

27%

28%

to

34%

≥35%

Q100B. Overall, who do you feel has the PRIMARY responsibility for …?

Base: Plan Sponsors Using Intermediaries EXHIBIT 2 PLAN FEATURES OFFERED: AUTO AND EMPLOYER MATCH ▲/▼ = Significant change from statedFEATURES year PLAN FEATURES / OFFERED: AUTO-FEATURES AND EMPLOYER = Significant change observed in 2015 sustained in 2016 MATCH *Wording changed from “Ensuring participants are on track for retirement”

Total Automatic enrollment Automatic rebalancing Auto-increase of participant deferral rate Employer match

Micro 29%

19% ‘14 13% ▼‘14 50%▼‘15‘14

Small

27% 18% ‘14 12% ▼‘14

Mid 39%

Large

Mega 51%

45%

42%

25%

29%

27%▼‘14

31%

22%

26%

26%‘14

29%

49%▼‘14

59%▼‘14

50%▼‘15‘14

42%▼‘15 ‘14

41%‘14

Base: All plan sponsors p/q = Significant change from stated year / Significant change observed in 2015 2016 Q61.=Which – if any – of these features doessustained your planinoffer? Base: All PlanStrategies Sponsors International. Cogent Reports™. Retirement Planscape®. May 2016. Source: Market ▲/▼ = Significant change from stated year / = Significant change observed in 2015 sustained in 2016

SOURCE: RETIREMENT PLANSCAPE®. MAY 2016.  3

Likely Adoption of Auto-Features in Next 12 Months On a positive note, looking forward, we observe significant increases in the likelihood of plan sponsors adopting auto-enrollment, automatic rebalancing and auto-increase of deferral rates. Overall, 17% of plan sponsors report a top 3-box score for likelihood to initiate offering auto-enrollment for their respective 401(k) plans. This is up significantly from 6% in 2015 and perhaps a result of industry leaders and influencers touting the benefits of offering auto-enrollment. With regard to auto-rebalancing, almost as many plan sponsors overall (17%) intend to add this feature as there are plan sponsors who already offer it (19%). This change in direction is being driven by Large (29%) and Mega (27%) plans. Finally, there appears to be a renewed interest in auto-increase of deferral rates, as 18% overall report high likelihood of adopting the feature.

We observe significant increases in the likelihood of plan sponsors adopting auto-enrollment, automatic rebalancing and auto-increase of deferral rates.

These significant increases may reflect continued attention from the industry as well as ever-growing concern over retirement readiness levels among employers and cautious optimism that cost constraints will at least somewhat subside. EXHIBITS 3, 4 & 5

EXHIBIT 4

EXHIBIT 3 AUTOMATIC ENROLLMENT: LIKELY ADOPTION (NEXT 12 MONTHS) AUTOMATIC ENROLLMENT: LIKELY ADOPTION (NEXT 12 MONTHS) 25%

26%

▼‘15‘14

▼‘15‘14

29%

30%

25% 13%

17%

17%

▲‘15‘14

Total % Likely/doing

23%

16% 22% 17%

8%

6%

23%

27%

18%

25%

Likely

39%

45%

51%

42%

29%

27%

Total

Micro

Small

Mid

Large

Mega

46%

44%

52%

62%

69%

67%

Q61A. Oversponsors the next 12 months, what is the likelihood your organization will consider adding each of these plan features…? Base: All plan Base: All Plan Sponsors p/q = Significant change from stated year ▲/▼ = Significant change from stated yearsustained in 2016 / = Significant change observed in 2015 / = Significant change observed in 2015 sustained 2016 Source: Market Strategies International. Cogent Reports™.inRetirement Planscape®. May 2016.

4  ONE SIZE DOES NOT FIT ALL DC SPONSORS

Neutral

▲‘14

▲‘15

▲‘15‘14

Not likely

Already doing

EXHIBIT 5

AUTOMATIC REBALANCING: LIKELY ADOPTION (NEXT 12 MONTHS)

EXHIBIT 4 AUTOMATIC REBALANCING: LIKELY ADOPTION (NEXT 12 MONTHS) 25%

▼‘15‘14

26% ▼‘15

27%

17% 28%

39%

‘14

'14

17%

17%

19%

18%

▲‘15 ‘14

Total % Likely/doing

39%

▲‘15

11%

11%

34%

32%

▼‘15‘14

Neutral

34% 25%

13%

▲‘15‘14

25%

29%

27%

29%

▲‘14

Likely

27%

31%

Already doing

▲‘15‘14

▲‘14

‘14

▼‘14

Total

Micro

Small

Mid

Large

Mega

36%

35%

38%

54%

55%

58%

▲‘15

▲‘15

Not likely

Base: All plan Q61A. Oversponsors the next 12 months, what is the likelihood your organization will consider adding each of these plan features…? p/q = Significant change from stated year Base: All Plan Sponsors / == Significant change observed in 2015 ▲/▼ Significant change from stated yearsustained in 2016 / =Market Significant change observed in 2015 sustained 2016 Source: Strategies International. Cogent Reports™.inRetirement Planscape®. May 2016.

EXHIBIT 6

EXHIBIT 5 AUTO-INCREASE OF DEFERRAL RATE: LIKELY ADOPTION (NEXT 12 MONTHS) AUTO-INCREASE OF DEFERRAL RATE: LIKELY ADOPTION (NEXT 12 MONTHS)

32%

▼‘15‘14

33%

▼‘15‘14

31%

20% 26%

37%

18%

▲‘15‘14

18%

▲‘15‘14

30%

11%

Neutral

▼‘15‘14

▲‘15‘14

35%

29%

22%

26%

26%

29%

Mid

Large

Mega

61%

59%

14%

12%

Total

Micro

Small

31%

29%

37%

▲‘15‘14

▼‘14

54%

▲‘15‘14

Not likely

31%

28%

13% ▼‘14

Total % Likely/doing

38%

32%

10%

▼‘15‘14

‘14

▲‘15

Likely Already doing

Base: All Over plan sponsors Q61A. the next 12 months, what is the likelihood your organization will consider adding each of these plan features…? p/q = Significant change from stated year Base: All Plan Sponsors / change observed in 2015 ▲/▼= =Significant Significant change from stated yearsustained in 2016 Source: Strategies International. Reports™.inRetirement Planscape®. May 2016. / =Market Significant change observed inCogent 2015 sustained 2016

SOURCE: RETIREMENT PLANSCAPE®. MAY 2016.  5

Greater Interest in Managed Accounts on 401(k) Menus Next, we review plan investment menus and options offered. Despite plan sponsors offering fewer investment options within their 401(k) plans than they have in the past—an average of 13 today compared with upwards of 20 in previous years—there is a widening of the breadth of investment products on plan menus. The vast majority (85%) of 401(k) plan sponsors select a default investment option in which participant contributions are placed if participants are automatically enrolled, have not made, or do not want to make investment choices themselves. The default status often corresponds to an investment option’s popularity among participants, as the fund receives a substantial portion of new plan contributions over time. Target date/lifecycle funds continue their collective reign as the most popular default investment option in all but the Micro plan segment, which carries on its reliance on money market funds. Among Small plan sponsors, the use of managed accounts and target risk/lifestyle funds as default options is increasing. However, Mega plans report the most frequent use of managed accounts as the default, perhaps

contributing to the decline in reliance on target date funds as default options, as this segment tends to be out in front with future shifts in the 401(k) industry. EXHIBIT 6 Plan sponsors were asked to indicate whether they plan to increase or decrease the number of offerings in 15 specific investment product categories. Cogent then calculated the “net expected change” in each category by subtracting the percentage of respondents who intend to decrease the number of options from the percentage who anticipate an increase. Interestingly, the category in which plan sponsors express the most interest is managed accounts (+13 net expected change). Notably, Mega plans, the trendsetting segment of the 401(k) industry, report the most frequent use of managed accounts as the investment default option, reflecting a belief that a more personalized investment strategy is needed. EXHIBIT 7

EXHIBIT 7 EXHIBIT DEFAULT6 INVESTMENT OPTION USED DEFAULT INVESTMENT OPTION USED Category by segment Highest

Lowest

Total Money market fund

Micro

Balanced fund

17%▼‘15‘14

15%▼‘14

16%

16%

Mid

21%

24%

23%

Target date/ lifecycle fund

Small

19%

27%▼‘15‘14

Large

Mega 17%

14%

34%▼‘15

23%▼‘14

38%

15%

14%

16%

16%▲‘14

15%

16%

13%

Stable value fund

11%

11%

12%

Managed account

11% ▲‘14

11%

9% ▲‘14

7%

6%

12%

8%▲‘14

8%

7%

9%

Target risk/lifestyle fund Other Don't have a default investment option Don't know

6% 0%

11% 4%

Base: All plan sponsors p/q = Significant change from stated year

6%

0%

0% 12% 5%

6% 2%

Q264. Which of the following is your plan's default investment option? /All= Plan Significant change observed in 2015 sustained in 2016 Base: Sponsors ® Source: Market Strategies International. ▲/▼ = Significant change from stated yearCogent Reports™. Retirement Planscape . May 2016. / = Significant change observed in 2015 sustained in 2016

6  ONE SIZE DOES NOT FIT ALL DC SPONSORS

0%

0%

4%

2%