Compliance May 25, 2012

Company Uses ‘Holistic’ Approach to Improve 401(k) Participation

 

Increasing 401(k) plan participation rates is high on many companies’ priority lists, but what are the most effective tactics?

 

Reported by

For Leviton, a privately held manufacturer of electrical wiring equipment, the answer is holistic education, as well as auto and advice features. The company, which has 2,400 U.S. employees, boasts an 84% participation rate in its 401(k) plan.

Fran Ruderman, Leviton’s vice president of human resources, told PLANADVISER the company uses automatic enrollment, automatic increase and Advice Access—a tool from Bank of America Merrill Lynch that offers saving and investment advice based on an individual’s personal situation and life stage.

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Leviton adopted auto enrollment in 2007, Advice Access in 2009 and began auto increase at the beginning of this year. The company’s 401(k) match starts at 3% with an automatic increase of 1% per year.

“The fact that auto enrollment and auto increase was available was great,” Ruderman said. “We’re a big proponent [of] employee education, information and accountability.”

According to Bank of America Merrill Lynch’s 401(k) Contribution Activities Scorecard, plan sponsors using auto enrollment, auto increase and Advice Access had a 76% participation rate on average in March 2012 and March 2011. Plans that did not use these services showed a 48% participation rate in March 2011 and a 50% rate the following year.

Kevin Crain, head of institutional retirement and benefit services for Bank of America Merrill Lynch, said he foresees an increase in plan sponsors implementing auto and advice tools together—generally with auto enrollment first, followed by auto increase and advice tools. “So I think that’s kind of the order we normally see … and then you’ve really got a complete picture,” he said. 
 

 

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Leviton’s Advice Access numbers continue to climb, going from 53 employees enrolled as of January 2010, to 480 enrolled as of March 2012, Ruderman said.

The company started a health care wellness program in 2007, but Ruderman said company officials wanted to take things a step further by adding a retirement wellness component in 2008. They partnered with Bank of America Merrill Lynch for an education program that emphasized the importance of continuing 401(k) contributions during a period of economic uncertainty.

“We just continued on that campaign since then,” Ruderman said. “We’re just continuing on the whole aspect of driving holistic wellness.”

The company strives to give employees a healthier lifestyle by organizing weight loss contests, Zumba classes and even adding a tranquility room. The facility has also been measured so employees can track the distance they walk during their lunch break.  

In addition, Leviton has a program that allows employees to save on health premiums by exhibiting healthy behavior.

As for the future, Ruderman said the company is always happy to explore new retirement features. “I’d be happy to be a guinea pig,” she said. “Anything we can do to help an individual become a smarter saver and take accountability for their retirement future. We just want to keep educating.”

 

Data & Research May 25, 2012

Buying an Annuity from Social Security ‘Best Deal in Town’

One way workers can increase retirement income is to delay claiming Social Security to increase their monthly benefit.
Reported by

A brief from the Center for Retirement Research at Boston College contends when workers do so, they are, in effect, buying an annuity from Social Security. The savings they use to pay monthly expenses while they wait is the price, and the increase in monthly benefit gained from waiting is the so-called annuity income it buys.  

For example, according to the report, a retiree could claim $12,000 a year at age 65 and $12,860 at age 66—an additional $860 a year. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate—the additional annuity income as a percent of the purchase price—is 6.7% ($860/$12,860).  

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Buying an annuity from Social Security by delaying benefits is generally more attractive than buying a commercial annuity for several reasons, the brief contends. The annuity a retiree purchases from Social Security is the increase in benefits for claiming at an older age. These increases are designed to be actuarially fair—so “no additional cost to the system arises” due to participants claiming at different ages. Commercial annuities, by contrast, cannot be “actuarially fair.” Insurance companies have marketing, management, and risk-bearing costs that must be added to the “actuarial” price—the expected present value of the income the annuity provides.

 

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More important, Social Security benefit adjustments are based on the life expectancy of the average individual. As individuals who purchase commercial annuities tend to have above-average life expectancy, the cost of the yearly income these annuities provide is higher.   

According to the brief, buying an annuity from Social Security is especially attractive when interest rates are low, as they are today. Living on the interest today is essentially impossible, as interest rates on safe assets are currently less than the rate of inflation. Drawing an income from a portfolio invested in stocks and bonds is also less attractive, as bond interest rates are low and any increase would reduce the value of the bonds retirees hold. Commercial annuities funded by bonds also provide much less income than they would in “normal” times. In contrast, the additional income available by claiming Social Security later is not affected by current interest rates.  

The brief can be downloaded here.

 

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