Tag Archives: Kevin Skow

Auto plan features produce uptick in DC plan savings and participation

Defined contribution (DC) plan sponsors can struggle with employee enrollment and participation. This was the case with one safe harbor-designed DC plan offering participants 100% matching contributions up to 4% of pay.

The sponsor eventually set a new goal to help employees save at least 10% of pay while taking advantage of the employer match. Milliman worked with the sponsor to attain its goal by implementing auto plan features to effectively increase participation and retirement savings for individuals. Consultant Kevin Skow explains how in his article “Automatic enrollment with auto increase, re-enrollment, and fee equalization.”

Milliman launches enhanced defined contribution participant website

Milliman today announced the launch of its latest in a series of website enhancements for its defined contribution clients and their plan participants.

New features on MillimanBenefits.com include an interactive “It’s Your Move” dashboard with tools that support successful retirement behaviors, such as saving enough to get the company match, diversifying investments, and utilizing automatic increase and automatic rebalance features—all with a refreshed look and feel. The site enhancements build on Milliman’s robust PlanAhead for Retirement® projection tool, educational Financial Resources Center, and award-winning mobile application.

“Our consultants are excited to offer these new features to our clients. More than ever, our clients understand that it’s important to encourage constructive behavior in this age when too many people are not saving enough for retirement,” says Jeff Budin, Milliman’s global employee benefits practice leader. “From a behavioral finance perspective, it’s helpful to participants to see a list of items they are doing well next to some additional actions they could take to strengthen their account with the simple click of a mouse.”

To learn more about Milliman’s independent, conflict-free approach to recordkeeping in the defined contribution industry, click here.

Evaluating retirement readiness formulas

Retirement plan sponsors should evaluate the assumptions used by providers in their retirement readiness calculator formulas. This can result in more accurate projections that help participants make better long-term savings decisions. A recent PlanSponsor article quoted Milliman consultant Kevin Skow discussing some assumptions that sponsors need to assess to improve retirement readiness projections.

Here is an excerpt from the article:

To calculate these projections, providers have to make numerous assumptions about key variables. Some, such as future inflation rates, do not relate to individuals specifically. But many variables do, and the default assumptions a provider uses may or may not reflect reality for a plan’s participants. “In our mind, the assumptions made are critical,” says Kevin Skow, principal and consultant at Milliman Inc. in Minneapolis.

In order to evaluate readiness formulas, plan sponsors should start by looking at three key areas where assumptions are made:

Salary, retirement date and savings. Understand what salary-increase rate a provider’s model assumes, Skow recommends. “How does that equate to what’s happened historically at your company, or what is anticipated in the future?” he says. And these models assume an average retirement age in doing the calculations, he says, so in evaluating a provider’s model, it helps to know whether that number reasonably lines up with a work force’s actual retirement patterns.

The models also hypothesize about a work force’s retirement-savings rates, going forward. In its retirement readiness calculator for participants, Milliman actually asks each to input any deferral increase he plans. When it does plan-level reports on retirement readiness, the company typically takes a “snapshot” approach and does not assume a deferral-rate increase by participants, Skow says. “But if a plan has automatic increases, a model could assume that everybody who was auto-enrolled at a 5% deferral with a 1% increase, for example, will stay with it,” he says. “Most people who are auto-enrolled stay, and very few tend to opt out….”

Additionally, retirement readiness models have to make assumptions about how long people will live… The suppositions about how long people will live have a big influence on these calculations, Skow says. “In our tools, we tend to project that an individual will need income until age 95 if that person is male, or 97 if that person is female,” he says. “Many models use the normal mortality rate in the U.S. today, which is in the late 80s.” A model assuming a shorter lifespan will improve someone’s monthly retirement-income projection, but also may create false security for some who then end up outliving their savings.

Milliman clients recognized by “Save 10” initiative

Milliman announced this week that a group of its clients will be recognized by the Financial Services Roundtable’s “Save 10” initiative, which is a business-to-business, peer-to-peer effort encouraging responsible employers to help their employees better prepare for retirement by helping them to save 10% of their income.

“One of the best ways to help people save for their financial future is for companies to automatically enroll employees in workplace savings programs,” said former Minnesota Governor Tim Pawlenty, chief executive officer (CEO) of the Financial Services Roundtable. “Save 10 recognizes such companies, and we hope that by highlighting their terrific efforts, more companies will become Save 10 employers.”

The Milliman clients joining the Save 10 effort include Mankato Clinic, Francis Investment Counsel, Fish & Richardson, Tiller Corporation, Southern Minnesota Beet Sugar Cooperative, CliftonLarsonAllen, Felhaber Larson, and Communications Systems, Inc.

“We work with our clients to provide a meaningful retirement benefit,” said Milliman principal Kevin Skow. “Features like auto-enrollment and auto-escalation allow employers to better help their employees save for retirement. Our plan participant tools help to educate employees on how much they need to save and how they can accomplish their retirement goals.”

Nearly 82% of employees save for retirement when their employers offer an auto-save program compared with just 64% when employers do not. Save 10 aims to fundamentally change these facts.

To be considered for recognition as a Save 10 employer, companies must certify that they engage in certain activities that qualify them as Save 10 certified. This includes offering a retirement plan, providing employees opportunities to save 10% of their income, contributing to employee retirement accounts, ensuring employees can “keep 10” by providing access to disability and life insurance plans, and other criteria.

Other companies that have joined the Save 10 effort include Allstate, Assurant, AXA, EZE Castle Integration, First Horizon, Franklin Resources, IBM, LPL Financial, Mastercard, Nationwide, Northern Trust, Popular Community Bank, Principal, Prudential, Putnam Investments, Quicken Loans, State Farm, SunTrust, TransAmerica, Toyota Financial Services, United Technologies, and UNUM.

Read more about the Save 10 initiative and qualifying criteria at www.Save10.org. For more on Milliman’s retirement planning tools, click here.

ERISA fee litigation: Is my plan at risk?

Skow-KevinSome plan sponsors may have wondered, upon reading about the recent $140 million settlement in the Haddock v. Nationwide case and the $1.3 billion settlement in the Lockheed Martin case, if their plans could be susceptible to an ERISA case over excessive fees. Here are a few things to consider in light of these recent settlement announcements:

Vendor transparency. Understanding fees should not be difficult—as long as you have a vendor or advisor that is transparent in the total revenue it expects to receive and as long as you know the expense of the investment products you have available for participants to invest in.

Service provider expenses. Think of anyone who may do work for you—an attorney, a contractor, a cleaning person. They bill you at an hourly rate. That comes to an annual amount. The same idea should be true within your retirement plan: You want to know who is working for you and what you are paying them, and you especially want to know whether it is a flat annual fee, a per-head fee, or a percentage of your plan’s assets. After all, you wouldn’t agree to hire attorneys and then give them access to your bank account to pay what they saw fit. And sometimes, with a better view of total revenue, it becomes evident that a “cheaper” provider may not mean a better provider when you are then able to evaluate the services and level of service you are receiving.

Investment expenses. Investment expenses must be included in your understanding of plan fees. Your investment products within the plan have fees that are required to be disclosed. For example: Fund A charges 76 bps and shares back 25 bps (or 0.76% with a 0.25% paid back to the plan). Do the math and apply their fee to the assets you have in their product—this is their projected revenue for the year—less any revenue sharing if they pay this.

Example Investment Expense Calculation:

Sample Investment Expense - Skow blog

Note, this fee is not deducted from your account balance—it is taken out of what would otherwise be your return. And if you lose money, you still pay this on top of it and so do all of your participants.

Revenue sharing. Revenue sharing should be easy to understand. It should be disclosed to you and should be going back to your plan in the form of an ERISA budget and used for the benefit of plan participants. We help our clients understand this by calculating the expenses for them and forecasting the fees and shared revenue, which may move the client to consider another share class that does not pay revenue sharing (or keeping a class that does because the net effect of the shared amount is financially advantageous). If revenue sharing exists, as it does in most plans to some extent, the discussion should then be about what to do with it. Should you allocate back to those participants in the plan that generated the revenue in the first place—or use it to pay hard-dollar expenses that are allowed under the plan? See my colleague’s recent series of articles with his insight on this issue.

Year-end balances. A note to the wise: Having expensive funds that generate large sums of revenue sharing to pay for these expenses in a given plan year—but that leave a balance carryover to the next plan year—is an issue that will come up in an audit (if it hasn’t already).

Total cost. After understanding the fees, plan sponsors should address how costs may be affected by participation, plan design, usage, or fund allocation.

Answers. Perhaps most importantly, if someone were to call you and ask what exactly he is paying for when participating in this plan, you would have an answer that could help him make an important decision when it becomes time to retire.

For example: In the chart above, this $30 million plan has a weighted expense ratio of 54 bps. Let’s assume the total administration expense (all service providers: recordkeeper, trust company, advisor, auditor) is $80,000 (or ~27 bps) and those fees are paid for on a pro rata basis by all plan participants.

This plan’s total annual expense would be estimated as follows:

Investment expense: .54%
+ Vendor expenses: .27%
(-) Revenue sharing: (.22%)
_____________________
Total: .59%

The size of the recent settlements lends perspective on how big of an issue fees can become for a plan sponsor. Sponsors that attend to the principles outlined in this blog—and work with their vendors to build transparency around these issues—can avoid becoming a statistic.

Top Milliman blog posts in 2014

Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.

20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.

19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?

18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.

17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.

16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.

15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.

14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.

13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.

12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.

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