Retirement Annuity Accounts (RAAs)Retirement for the Future

March 2016

As employers move from providing defined benefit plans to defined contribution plans, there is a void for employees’ retirement security.

As employers and employees strive to balance risk and long-term fiscal goals, an opportunity to leverage the expertise of insurance companies and other annuity providers has emerged.

Current Retirement Market

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The shift from defined benefit to defined contribution plans potentially creates a void for retirement security

72% of employers feel only some employees will be ready for retirement1

Over 85% of Americans believe the nation is facing a retirement crisis2

Only 24% of Fortune 500 companies offered a defined benefit plan to new hires at the end of 2013, down from 60% just 15 years earlier3

1 2014 US Annual Defined Contribution Benchmarking Survey, Deloitte2 National Institute on Retirement Security, “New report finds 86 percent of Americans believe nation faces retirement crisis,” Business Wire, March 5, 20153 Towers Watson analysis of 2013 Fortune 500

Market Fluctuations & Low Interest RatesEmployers have faced significant volatility and

increased financial burden impacting their ability to be financially stable

Freezing & Terminating Defined Benefit Plans

As a response to market conditions, employers have shifted to defined contribution arraignments to reduce

risk and liability on the books

Empl

oyer

Empl

oyee Increased Responsibility for Retirement

Employees have had to be more active in saving and planning for retirement

Increased Retirement RisksDefined contribution arrangements cause employees to

take on longevity risk, investment risk, and tax risk

Employers’ expertise is in running their business, not DB plans

Employees aren’t well-equipped to take on these risks

Employers are looking for solutions that help manage risk

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Employees may be at risk of being unprepared for their own retirement

Employees are being driven to take an active role in their own retirement planning…

…however, most employees are not adequately prepared for retirement

49%

Nearly half of employees do not

have a formal retirement plan1

43%

More than 4 in 10 don’t understand

what they need to do to plan for retirement1

43%

Many employees will be unable to cover expenses

within 20 years of retirement2

1 Deloitte Center for Financial Services, “Making Retirement Security a Reality” 2 Employee Benefit Research Institute, “’Short ‘Falls: Who’s most likely to come up short in retirement, and when?,” June 2014

Insurance companies or annuity providers already provide expertise in managing riskfor every other benefit, including property, health, disability, and death, making them

well-positioned to manage retirement risk as well

46%

Many people do not feel secure about

retirement1

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Longevity risk faced by employees is a big concern for employersAccording to the ERISA Industry Committee Survey on Longevity solutions in Defined Contribution Plans, employers are concerned about longevity risk faced by their employees

Source: ERISA Industry Committee Survey on Longevity solutions in Defined Contribution Plans

90%

Most employers are somewhat or very concerned about

longevity risk faced by their employees

66%

Two-thirds of DC plans have no annuity options

available in the plan

Based on Deloitte experience and the survey results, employers want to provide solutions to help employees with the longevity risk

35%

More than one-third of employers are

considering adding features aimed at

helping employees with longevity risk over the

next 3 years

Retirement Annuity Accounts (RAAs)

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Retirement Annuity Accounts can provide an income benefit without the investment management responsibilities for employers or employees

Aggregated Year Over Year

Providing DB type benefit for DC level of

risk

Employer Contribution

Converted to Annuity Beginning at Age 45*

Each year, employers provide a pre-tax contribution on behalf of the participant to an employer controlled investment account.

Contributions made prior to age 45* will accumulate each year, similar to a defined contribution plan, based on investment directed by the employer. They could be directed in a stable value or other investment.

Balances are tracked by employee.

Beginning when a participant reaches age 45, employers automatically convert a portion of remaining balance to an annuity. The minimum value converted is the account balance times one over the remaining years until the participant’s Normal Retirement Age.

Annual contributions made after age 45 will immediately convert into annuities.

Annuities are payable at Normal Retirement Date and priced based on:• Current market interest rates• Mortality• Participant’s age

Employers can choose from a number of credit- worthy annuity providers. Utilizing US Department of Labor Interpretive Bulletin 95-1 rules on annuity selection is recommended.

Annuities can be added up year over year and tracked by the employee or employer.

Employees would maintain relationships with annuity providers in a similar manner as they currently do with retirement providers.

Employers can assist employees in having a sufficient source of secure and predictable income at retirement while managing administrative, compliance, and investment risk burden and cost volatility for a more portable workforce.

For employees under 45, they will have their assets in an account balance that can be rolled over.

Potentially reducing the burden on employees of managing investment, longevity, and tax risk.

* Based on the pricing from insurance company actuaries and the length of time to average interest rates (20 years), age 45 would be the optimal age for annuity pricing and managing interest rate risk.

Retirement Annuity Accounts provide defined benefit-type features without the investment risk and compliance requirements of a defined benefit plan

Why RAAs for Employers

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As risk and money management experts, insurance companies or annuity providers are well-positioned to help solve the retirement crisis

Risks employers assume when administering traditional retirement plans are mitigated by RAA benefit provisions

Plan Type Risks and Challenges Why RAAs Are Different

Defined Benefit Plans

• Employers are not in the business of managing individuals’ money and risk

• Strict compliance requirements and industry- specific regulations drive assumptions and funding requirements

• Benefits are not portable

• Employers outsource the risk management to experts while still being able to provide a paternalistic-style retirement benefit

• Annuities are purchased on a set periodic basis, and price reflects current market conditions at that time

• Annuities are owned by the employee, not employer• DC balances are not converted into annuities until age 45,

providing portable benefits

Defined Contribution

Plans

• Employees retain longevity and investment risk• Employees must actively manage

• Help to provide secure, predictable retirement income• Help to reduce employees’ investment and longevity risk• Help to reduce decision on “right time” to purchase annuity within

DC plan

Annuity Purchases

• Since there is no marketplace, pricing is not competitive

• Value of annuity is calculated at a specific point in time and does not provide safeguards for future interest rate fluctuations

• Avoid anti-selection because the conversion to annuity is not voluntary

• Creation of a competitive marketplace• Total retirement annuity is bought in tranches over a specified

period, so that fluctuations in market conditions level out

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A detailed analysis of the pros and cons can help determine the best option to provide employee benefits

Plan Type Pros Cons

Stick to current DB plan

approach

• No change to current employee benefit so employees are not better or worse off

• Opportunity for Deloitte to potentially lower cost of providing benefit with higher returns

• May help certain non-discrimination tests

• Employer will likely continue to take on longevity, investment, and other compliance related risks

• Employer will need to manage volatility risk• Employer will likely have administrative costs (for example,

PBGC premiums, actuarial valuations, etc.)

Move to a traditional

Defined Contribution

plan approach

• Can provide complete portability of benefits for employees

• Can provide for a predictable contribution amount for employers

• Gives employees ability to make investment choices

• Employees will need to manage investment and longevity risk• Employees will need to help ensure retirement savings are

sufficient for retirement• Less lifetime income options available• If annuity option is available, there could be potential risk of

choosing the “right time” to purchase annuity within DC plan

Move to Retirement

Annuity Accounts

• Plan can be designed to provide similar lifetime benefits as current DB plan

• Longevity and investment risk not borne by employer or employee

• Provides portability of benefits prior to retirement age 45 and portability starts to decrease after that

• Ability to mitigate interest rate risk

• Can be more costly due to shift of risk from ER/EE to insurance company

• Depending on investment choices, gain can be lower due to low risk/principal preservation strategies

• In a low interest rate environment, the purchase of annuities may be perceived negatively

• Employee may have limited investment options

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

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