retirement annuity accounts (raas)

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Retirement Annuity Accounts (RAAs)Retirement for the Future

March 2016

#Copyright 2016 Deloitte Development LLC. All rights reserved.


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.

#Copyright 2016 Deloitte Development LLC. All rights reserved.


Current Retirement Market

#Copyright 2016 Deloitte Development LLC. All rights reserved.


The shift from defined benefit to defined contribution plans potentially creates a void for retirement security72% of employers feel only some employees will be ready for retirement1Over 85% of Americans believe the nation is facing a retirement crisis2Only 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, Deloitte.2 National Institute on Retirement Security, New report finds 86 percent of Americans believe nation faces retirement crisis, Business Wire, March 5, 20153 TW analysis of 2013Fortune500Market Fluctuations & Low Interest RatesEmployers have faced significant volatility and increased financial burden impacting their ability to be financially stableFreezing & Terminating Defined Benefit PlansAs a response to market conditions, employers have shifted to defined contribution arraignments to reduce risk and liability on the booksEmployerEmployee

Increased Responsibility for RetirementEmployees have had to be more active in saving and planning for retirementIncreased Retirement RisksDefined contribution arrangements cause employees to take on longevity risk, investment risk, and tax risks.Employers expertise is in running their business not DB plansEmployees arent well equipped to take on these risksEmployers are looking for solutions that help manage risk

#Copyright 2016 Deloitte Development LLC. All rights reserved.


Employees may be at risk of being unprepared for their own retirementEmployees are being driven to take an active role in their own retirement planninghowever, most employees are not adequately prepared for retirement49%Nearly half of employees do not have a formal retirement plan143%Dont understand what they need to do to plan for retirement143%Almost half of employees will be unable to cover expenses within 20 years of retirement21 Deloitte Center for Financial Services, Making Retirement Security a Reality; 2 Employee Benefit Research Institute, Short falls: Whos most likely to come up short in retirement, and when?, June 2014Insurance 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%Most people do not feel secure about retirement1

#Copyright 2016 Deloitte Development LLC. All rights reserved.


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 employeesSource: ERISA Industry Committee Survey on Longevity solutions in Defined Contribution Plans 90%Employers are somewhat or very concerned about longevity risk faced by their employees66%DC plans that have no annuity options available in the planBased on Deloitte experience and the survey results, employers want to provide solutions to help employees with the longevity risk.35%Of employers are considering adding features aimed at helping employees with longevity risk over the next 3 years


#Copyright 2016 Deloitte Development LLC. All rights reserved.

Retirement Annuity Accounts (RAAs)

#Copyright 2016 Deloitte Development LLC. All rights reserved.


Retirement Annuity Accounts can provide an income benefit without the investment management responsibilities for employers or employeesAggregated Year Over YearProviding DB type benefit for DC level of risk Employer ContributionConverted 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. It could be directed in stable value or index funds type 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 participants 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:Market interest ratesMortalityParticipants ageEmployers can choose from a number of credit worthy annuity providers. Utilizing 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 a 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

#Copyright 2016 Deloitte Development LLC. All rights reserved.


Why RAAs for Employers

#Copyright 2016 Deloitte Development LLC. All rights reserved.


As risk and money management experts, insurance companies or annuity providers are well-positioned to help solve the retirement crisisRisks employers assume when administering traditional retirement plans are mitigated by RAA benefit provisionsPlan TypeRisks and ChallengesWhy RAAs Are DifferentDefined Benefit PlansEmployers are not in the business of managing individuals money and riskStrict compliance requirements and industry- specific regulations drive assumptions and funding requirementsBenefits are not portableEmployers outsource the risk management to experts while still being able to provide a paternalistic style retirement benefitAnnuities purchased on a set periodic basis and price reflects current market conditions at that timeAnnuities are owned by the employee, not employerDC balances are not converted into annuities until age 45, providing portable benefitsDefined Contribution PlansEmployees retain longevity and investment riskEmployees must actively manageHelp to provide secure, predictable retirement incomeHelp to reduce employees investment and longevity riskHelp to reduce decision on right time to purchase annuity within DC planAnnuity PurchasesSince there is no marketplace, pricing is not competitiveValue of annuity is calculated at a specific point in time and does not provide safeguards for future interest rate fluctuationsCreation of a competitive marketplaceTotal retirement annuity is bought in tranches over a specified period, so that fluctuations in market conditions level out

#Copyright 2016 Deloitte Development LLC. All rights reserved.


A detailed analysis of the pros and cons can help determine the best option to provide employee benefitsPlan TypeProsConsStick to current DB plan approachNo change to current employee benefit so employees are not better or worse offOpportunity for Deloitte to potentially lower cost of providing benefit with higher returnsMay help certain non-discrimination testsEmployer will likely continue to take on longevity, investment and other compliance related risksEmployer will need to manage volatility riskEmployer will likely have administrative costs (ex. PBGC premiums, actuarial valuations etc.)Move to a traditional Defined Contribution plan approachCan provide complete portability of benefits for employeesCan provide for a predictable contribution amount for employersGives employees ability to make investment choicesEmployees will need to manage investment and longevity riskEmployee will need to help ensure retirement savings are sufficient for retirementLess lifetime income options availableIf annuity option is available, there could be potential risk of choosing the right time to purchase annuity within DC planMove to Retirement Annuity AccountsPlan can be designed to provide similar lifetime benefits as current DB planLongevity and investment risk not borne by employer or employeeProvides portability of benefits prior to retirement age 45 and portability starts to decrease after thatAbility to mitigate interest rate riskCan be more costly due to shift of risk from ER/EE to insurance companyDepending on investment choices gain can be lower due to low risk/principal preservation strategiesIn low interest rate environment, the purchase of annuities may be perceived negativelyEmployee has no investment options



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