Products November 2, 2011

Schwab Reveals Enhancements to Equity Comp Plan System

Charles Schwab has made several key enhancements to its Schwab EquiView recordkeeping system and Equity Award Center Web site.
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Plan sponsors can now auto-assign exercise restrictions in Schwab EquiView. The company said this helps minimize the risk of exercise errors since participants with restrictions against specific transaction types on their awards will not have the option to select those transaction types when placing a trade.   

Restrictions can be set around common transactions such as exercise-and-hold, same-day sale, and sell- to-cover. For example, a business rule may take the form, “If Country equals China, then Same-day Sale only.” For convenience, plan sponsors can also assign an exercise restriction by including the appropriate code on the grant import file.  

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The recordkeeping and reporting functions in the Schwab EquiView system have expanded to include support for restricted stock unit deferral provisions. Enhancements include new data areas in EquiView to store deferral-related data, expanded capabilities to handle the appropriate tax treatment for restricted stock, and the addition of corporate and participant reporting to capture deferral events. 

In addition, Schwab EquiView Modeler helps sponsors more effectively manage their stock plan programs through a duplicate, non-production environment of the EquiView recordkeeping system for testing and trial purposes. Through EquiView Modeler, plan sponsors can test various scenarios with their data, such as grant modeling or checking forfeiture rates and valuation, before actually implementing changes that affect plan administration and financial reporting. Sponsors can also use the modeler to help train new administrators without affecting live plan data and can preview new features in EquiView Modeler before they are introduced in EquiView.  

According to the company, based on growing demand from sponsors to provide participants with additional support, sponsors can now view their participants’ accounts on Equity Award Center, Schwab’s Web site for stock plan participants. This allows the client to see a participant's equity award information as the participant sees it, in real time. Useful for troubleshooting and participant education, this feature also allows sponsors to review messages as they appear in the participant's Equity Award Center account, as well as review online grant agreements.   

To protect participant privacy, sponsors are not able to view select information such as participant trade transactions and personal information updates.
Data & Research November 1, 2011

Start Early, Work Longer

Starting to save early and working longer are more effective means for ensuring a secure retirement than earning a higher return on savings, says a new report from the Center for Retirement Research at Boston College.
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The CRR Brief said this strategy of saving for a longer period of time is especially effective given the greater risk that comes from attempting to earn a higher return. Also, the further along an individual is in his or her career, the more effective it is to work for a few more years.  

The report explains that retiring later is an extremely powerful lever for several reasons. First, because Social Security monthly benefits are actuarially adjusted, they are over 75% higher at age 70 than age 62. As a result, they replace a much larger share of pre-retire­ment earnings at later ages – 29% at 62 and 52% at 70 in CRR’s example – reducing the amount required from savings. Second, by postponing retire­ment, people have additional years to contribute to their 401(k) and allow their balances to grow. Finally, a later retirement age means that people have fewer years to support themselves on their accumulated retirement assets.  

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The research assumes an 80% income replacement rate is needed in retirement and assumes Social Security benefits remain as promised under current law, then calculates the required savings rate for individuals at different earnings levels.

The required saving rates the research found for the medium earner, assuming a rate of return of 4%, show that starting to save at age 25, rather than age 45, cuts the required saving rate by about two-thirds. Second, delaying retirement from age 62 to age 70 also reduces the required saving rate by about two-thirds. As a result, the individual who starts at 25 and retires at 70 needs to save only 7% of earnings to achieve an 80% replacement rate at retirement, roughly one tenth of the rate required of an individual who starts at 45 and retires at 62 (65%). The CRR noted that even the individual who starts at 45 has a plausible 18% required saving rate if he postpones retirement to age 70.   

While higher returns require smaller contribution rates, they also come with increased risk. Even ignor­ing risk, the required saving differentials are less than those associated with dates for starting to save and the age of retirement. An individual can offset the impact of a 2% return instead of a 6% return by retiring at 67 instead of 62.  

According to the report, the results for low earners and maximum earners differ primarily because of Social Security. Under current law, at age 67, Social Security will replace 55% of pre-retirement earnings for low earners and 27% for those earning the taxable maximum. Lower earners have relatively modest required saving rates if they start early and, more importantly, if they postpone their retirement dates (3% for employees that start saving at age 25 and retire at age 70).  

The study showed that individuals earning the taxable maximum over their lifetime require savings that far exceed the typical 401(k) arrangement of a 6% employee contribution with a 3% employee match. Even those who postpone retirement until age 70 will be required to save between 12% and 29% of earnings. But postponing retirement is the most effective way to get required saving rates into the re­alistic realm – particularly for those who begin saving later, the research concluded.  

The Issue Brief is available at http://crr.bc.edu/images/stories/Briefs/IB_11-13.pdf.

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