A bank offered a retirement program to its 140 employees. The program included both a defined benefit (DB) pension plan and a defined contribution (DC) 401(k) plan. The DB plan was frozen to new participants in 2009. At the same time, the bank’s ongoing 401(k) plan offered a safe harbor match totaling 4% plus a profit-sharing contribution (typically 5% to 6%) to anyone hired after 2009. After years of harsh market headwinds in the face of the DB plan, the bank’s leadership sought more predictable and sustainable costs in the retirement program and implemented a hard freeze of the DB plan. This meant participants would keep the benefits earned to date, but there would be no future increases to the DB pension benefit for anyone. Additionally, the bank’s leadership wanted employees to take more responsibility for their retirement savings within the 401(k) plan.
A Milliman study of the bank’s retirement program indicated employees would lose approximately 11.5% in annual retirement benefits (measured as a percentage of compensation) due to the DB plan freeze. The bank’s budget allowed it to expand the eligibility of the 401(k) profit-sharing contribution to all employees regardless of hire date. Further, the bank believed an “auto-enrollment with auto-increase” plan design was a great way to a) nudge non-savers into the plan, b) formally shift the focus from the DB plan to the 401(k) plan, and c) expand the reach of the current 401(k) match contributions. This approach created a solid foundation for the future of the retirement program, but two concerns lingered:
1. The expanded employer contributions to the 401(k) plan helped employees build retirement savings, but the bank’s finances would not allow for a complete replacement of the 11.5% in lost future DB accruals. Would employees make up some of this gap by taking charge of their savings within the 401(k) plan as hoped?
2. Many employees are on tight budgets. A high default savings rate within the auto-enrollment process could scare away current non-savers. Where should the line be drawn when trying to help participants replace their lost future DB accruals while trying to be sensitive to everyone’s individual budgets?
The Milliman solution
Milliman provided the client with a benchmarking analysis regarding employer contribution levels, participation rates, and average savings rates of similarly sized plans in the banking industry. This served as a useful “reasonableness test” when the client was deciding on the details of its future retirement program. Scenario-based cost estimates were also provided to help the client understand the potential financial impact of the new benefit arrangement. The client ultimately decided on an updated plan design as follows:
1. Eligibility for the existing profit-sharing contribution was expanded to all qualifying employees regardless of hire date.
2. Automatic enrollment and automatic increase were implemented for new participants and existing participants not currently saving in the plan. Unless a participant opted out, the participant enrolled at a default savings rate of 2% and then increased 1% each January up to a maximum of 10% (i.e., 2% in year 1, 3% in year 2, 4% in year 3… 10% in year 9 and beyond).
Separate from providing guidance and strategy on plan design, Milliman helped the client roll out a secret weapon: Milliman’s voluntary automatic savings increase tool. To be clear, the plan design changes mandated a 1% annual increase up to 10% for any participant who is automatically enrolled. The voluntary automatic savings increase tool is a feature of Milliman’s website that allows participants to elect their own automatic increase schedule. It is a convenient mechanism to help participants update or confirm their current savings rate and choose an annual increase date, the annual incremental increase, and the maximum savings rate. For example, a participant may elect to save at 5% with an annual 1% increase every September 1 until the savings rate reaches 12%. Participants can provide their email address in order to receive a reminder a few weeks before the scheduled annual increase.
The voluntary automatic savings increase tool was not expected to have a major impact. Instead, it was considered something useful to help chip away at the lost 11.5% of annual DB benefits. It was also considered a means for those participants on a tight budget who were not automatically enrolled to increase their savings rates at their own pace.
Two years after implementing the plan design changes, the 401(k) plan has achieved higher participation and greater savings rates. The statistics were highly anticipated given the known positive effects of automatic enrollment.
|One year before the change||Right before the change||One year later||Two years later|
|Average savings rate||4.4%||4.2%||4.8%||5.5%|
The most surprising statistics were regarding the quiet impact of the voluntary automatic savings increase tool. After two years, over a quarter of the bank’s participants have used this feature and voluntarily elected an increase schedule.
As seen in the table below, the average expected total increase in the savings rate for the 35 participants who elected auto-increase is 5.9%, which will roughly double the current average savings rate for this group. This increase, combined with the expanded profit-sharing contribution, is projected to close the 11.5% gap for many employees.
|Summary of Scheduled Increases in Savings Rates||Auto-Enrolled||Not Auto-Enrolled (or Auto Enroll opt-outs)|
|Mandatory Auto-Increase of 1% up to 10%||Voluntary Auto-Increase Elected||Voluntary Auto-Increase Not Elected|
|Percentage of Eligible Actives||10.8%||25.2%||64.0%|
|Current Avg Savings Rate||3.3%||5.6%||5.4%|
|Ultimate Avg Savings Rate||10.0%||11.5%||5.4%|
|Increase in Avg Savings Rate||6.7%||5.9%*||0.0%|
* This is the impact of the voluntary auto-increase tool.
Scheduled auto-increases for the voluntary auto-increase group vary from participant to participant, ranging from a 1% total increase to a 15% total increase. Roughly three-quarters of those making this election are scheduled to increase to an eventual rate of at least 10%. This group includes those with relatively lower wages who are presumed to be on a tighter budget. The average compensation of this group is 20% less than the average compensation for all employees.
|Voluntary Auto-Increase Group|
|Ultimate Savings Rate||Count||Percentage of Group|
|Less than 10%||8||22.9%|
|More than 10%||10||28.6%|
Employees are recognizing the need to save more and have used the automatic savings increase tool to take charge of their savings. Time will tell if the bank’s participants who have elected to voluntarily auto-increase their savings rates will maintain their elections or ultimately change them. Milliman’s voluntary automatic savings increase tool helped address the bank’s lingering concerns with their plan design changes. Employees who have used the tool continue to use it to take charge of their savings in the 401(k) plan in the wake of the DB plan freeze. And those on a tight budget who were not auto-enrolled have an easy tool to increase their savings rates gradually at their own pace.