The Demographic Effect BEFORE
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The document discusses a model being developed to project DC plan cash flows based on evolving generational demographics. It analyzes how contributions and distributions may be impacted out to 2045. Several scenarios are explored to test how incremental savings increases from Millennials and Gen Xers could offset expected distributions from retiring Baby Boomers. Key insights include that contributions may not outweigh distributions until the late 2020s or early 2030s without changes to savings rates among younger cohorts. Plan design features and targeted campaigns may be needed to increase savings 1-2% from Millennials and Gen Xers to accelerate the timeline.
The Demographic Effect BEFORE
- 1. MODEL DEVELOPMENT June 29th, 2015 – RPS Team Meeting USIS Client Market Insights Macro Trends Impacting DC Contributions & Distributions
- 2. 2 Project Overview Hypothesis – While the RPS Segment and the markets it participates in will remain under pressure due to growth in distributions taken by Boomers entering retirement there are distinct strategies that can offset this macro trend if executed effectively. Objective of this project – Develop a model that will help RPS leadership better understand the evolving generational demographic effect on DC Plan cash flows by projecting into the future and testing when, if ever, contributions might outpace distributions from an industry perspective. Complex and interdependent set of variables – Industry experts such as EBRI, Cerulli, the Federal Reserve, the Department of Labor and academic sources we researched have not generated research on this issue beyond a five to seven year window.
- 3. 3 Inputs & Challenges Model Inputs Modeling Challenges Minor variations in employment populations, savings rates, and market performance can paint completely different outcomes relative to contributions and distributions Product innovation, particularly the impact of income solutions, along with regulatory and/or legislative actions would have significant impact on our analysis Our current model utilizes population trends and employment participation rates as primary variables Broadly, the number of variables and their interrelations increase model complexity driving our decision to focus on a narrower set of variables EBRI - Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2010 DOL – Bureau of Labor Statistics Cerulli – Retirements Guide 2013 2010 U.S. Census Population Projections JP Morgan Sell Side Analyst Report on Asset Managers 3/29/2015
- 4. 4 Catalogue of Macro-environment Attributes Impacting Contributions Retirement Decumulation Rates Cash-out Rates Transition to IRA Job Change Retire Leave Job Market RMD’s Hardship Withdrawals Employee Demographics/#’s Employer/Sponsor Participation Employee Participation Auto Enroll Auto Escalation Catch-up Contributions U.S. GDP Consumer Confidence Legislative/Regulatory Change Impacting Distributions Contribution Rates Wages Stay in Plan Rates Market/Investment Performance Company Match Roll-ins Income Solutions
- 5. 5 Agenda 1. Demographic Affects on DC Net Flows (Recap) 2. Sensitivity Analysis of incremental contributions by Millennial Cohort to offset Boomer Distributions 3. Demographics of the RPS Book & Comparison to Record Keeping industry 4. Demographic Analysis of Top 10 RPS Clients 5. Distribution Behavior of Generational cohorts 6. Demographics of TDF Industry & at TRP 7. Plan Design Features & Age Segmentation Programs to increase savings from Millennial Cohort
- 6. 6 Demographic Affect on DC Net Flows Flows pressured net negative by boomer exit for next 20 years (2014-2035) If Millennials exhibit similar behavior as Boomers, DC Flows will turn positive Implications: As Boomers exit there is a shrinking pool of DC Cash Flow & Greater Competition to capture flows Sources: Cerulli/JPM ( 2003-2036), TRP CMI (2036-2045) DC Flows have been positive for last 10-20 years
- 7. 7 What’s driving Flows: ‘Retirement Sprint’ Years 2010 Boomers 2014 Population Facts: Millennial Population: 91M (1980 – 2000) are 14-34 years old Baby Boomer: 75M (1946-1964) are 50-68 years old Gen X – 61M: (1965-1979) are 35-49 years old (20% less than Boomers) Gen Z – 57M: (2001-2020?) are 0-13 years old ---> From projections this cohort will be on par with Millennials if not exceed There are 50% more Millennials than Gen Xer’s & 21% more Millennials than Baby Boomers 2045 Millennials 2025-2030 Gen X
- 8. 8 What’s driving Flows: Work Force Demographics Sources: BLS ( 1992-2014), TRP CMI (2014-2060)
- 9. 9 What’s driving Flows: ‘Age Wave Gap’ - Gap in DC Saving 2014 Population Facts: There are 50% more Millennials than Gen Xer’s & 21% more Millennials than Baby Boomers Millennial Population Count – 91M Baby Boomer – 75M Gen X – 61M ( 20% less than Boomers) Gen Z – 57M but expected to rise As the large Boomer population ages we observe work force dips from Boomers leaving and not enough Gen Xer’s replacing them. This begins to change in 2028+ as the Millennials age.
- 10. 10 Key Assumptions for Sensitivity Model Employment Population Projections Held 2014 US Employment Participation Rates by age constant and applied census projections to get future workforce totals & share Plan Population Projections: Held 2014 U.S. DC Plan Participation & Employment Participation rates by age cohort as a constant rolling forward (JPM & BLS Data) Applied 2010 U.S. Census population projections to the rates above to get future DC plan participation total & share by age cohort Contribution Projections: Held 2014 Avg Income of Full Time employed by age cohort as a constant and applied a 2% annual income growth rate for projections (BLS) Applied 2014 Avg Deferral Rate by Age Cohort as a constant (Vanguard) Net Flow Projections: Used JPM’s Reported Net Flows for 2008-2036; For 2036-2045 assumed Millennial’s, as they age, will exhibit similar retirement savings behaviors as Boomers and that historic net flows would repeat as Millennials reach ‘Retirement Savings Sprint’ in 2045 Distribution Projections: Distributions are the difference between Contributions & Net Flows Held the share of Distributions by each Age Cohort in 2014 as a constant and applied it to projected Distributions
- 11. 11 Sensitivity Analysis To Offset Boomer Distributions Scenario 1 In 13 to 15 years - 2028 Increase net savings (employee + match) of: • 18-24 year olds: by 0.5% from 7.5% to 8% (mill) • 24-34 year olds: by 0.5% from 8.6% to 9.1% (mill) • 35-44 year olds: by 0.5% from 9.4% to 10.1% (gen x) By 2028 start to see net positive flows. 3 years earlier than 2031 projections 2014 Deferral Rates & Income Stats: Sources: JPM (2008-2013), TRP CMI (2014-2045) Sources: Vanguard, JPM, BLS
- 12. 12 Sensitivity Analysis To Offset Boomer Distributions Scenario 2 In 10 years - 2025 Increase net savings (employee + match) of: • 18-24 year olds: by 1% from 7.5% to 8.5% (mill) • 24-34 year olds: by 1% from 8.6% to 9.6% (mill) • 35-44 year olds: by 1% from 9.4% to 10.4% (gen x) By 2025 start to see net positive flows. 6 years earlier than 2031 projections Sources: JPM (2008-2013), TRP CMI (2014-2045)
- 13. 13 Sensitivity Analysis To Offset Boomer Distributions Scenario 3 In 5-6 years – 2021 Increase net savings (employee + match) of: • 18-24 year olds: by 1% from 7.5% to 8.5% (mill) • 24-34 year olds: by 2% from 8.6% to 10.6% (mill) • 35-44 year olds: by 2% from 9.4% to 11.4% (gen x) By 2021 start to see net positive flows. 10 years earlier than 2031 projections Sources: JPM (2008-2013), TRP CMI (2014-2045)
- 14. 14 Demographics of RPS Book of Business
- 15. 15 Demographics Comparison: TRP RPS & the Competitive DC RK Landscape EBRI Data: DC Universe vs TRP RPS - Share of Assets by Age group EBRI Data: DC Universe vs TRP RPS - Share of Participants by Age group TRP has a higher share of participants in the 20 year old cohort TRP has a lower share in the 30-50 year old buckets than industry Assets by age group are similar to the industry except RPS skews a little younger
- 16. 16 Demographic Analysis of RPS Top 10 Clients As of 2014 Top 10 Clients represent 30% of Total Assets & 20% of Total Participants OMNI Total Assets: $140B OMNI Total Ptc (Term + Active): 1.8M Top 10 Clients Demographic Resemble overall book of business Boomers hold 60% Assets & 30% of Participants of Top 10 But variations exist by client – Costco Youngest & Kodak Oldest Top 5 ‘Younger’ Clients by Participant (Millennial & Gen X’ers) of Top 10: Top 5 ‘Older’ Clients by Participant (Boomer & Silent) of Top 10:
- 17. 17 Distribution Behavior Termed Participant Assets 1 Year of Termination After 3 Years After 5 Years 60% of Termed Assets & 30% of Termed Ptc are Boomers 50% of Plan Assets leave within 1st year of termination across all cohorts After 5 years Boomers preserve 86% of their assets, Xer’s 80%, Millennials 64% for retirement Cash out rates 2-3x that of boomers for younger generations
- 18. 18 Demographics of TRP Target Date Funds Take Away: 1) 62% of TDF Assets Held with Boomers ($88.1B) 2) 27% with Gen X ($38B) 3) 5% with Millennial ($7B) 4) About 1/3 of TDF Assets ($46B) will be winding down over the next 5 years (2000-2020 Funds) As of 2014 TRP at $141B has a 18% market share
- 19. 19 Plan & Product Design: Improve Millennial Savings Our book resembles Industry so the 1-2% increase in Millennials & Gen X savings rates should be an appropriate target Influence increases in Auto Enroll default deferral 43% of RPS Plans elect a 3% Deferral Rate 23% of RPS Plans elect a 6% Deferral Rate Influence Auto Increase Opt Out Plan Design 38% of Plans use Opt-Out Method has an 66% participant adoption rate 62% of Plans use Opt-In Method has an 11% participant adoption rate Implement Specific Age Relevant Campaigns or Plan Design features to modify savings behavior by age or salary Influence Plan Sponsors to increase match incentives (stretch match) Educate Plan Sponsors & Participants of the immediate importance of increased savings behavior less focus on outcomes Increase efforts to get Boomers & X’ers to save 1-2% more Incentivize Sales Staff to influence Plan Design Changes Solutions to keep money in plan
- 20. 20 Key Insights & Facts U.S. workforce is currently at an inflection point across generational cohorts impacting DC Cash Flows “Retirement Sprint”; age 45 - 64 years are peak for savings and account balances Next 15 - 20 years (2015 – 2035) shows a dip in the “Retirement Sprint ” employment rate as the smaller Gen X population enters the sprint T Rowe Price 60% of assets & 40% of participants are held with Boomer generation Need to increase savings of younger generations by 1-2% to offset Boomer outflows Need to influence better plan & product design adoption to increase overall savings & keep more money in plan Decreasing Plan Size has implications for Fees & Pricing
- 21. APPENDIX
- 22. 22 Detail: Demographic Analysis of TRP Top 10 Clients
- 23. The Wealth Business impacted by Boomer Redemptions As our investor base ages, net new flows will be pressured by increased redemptions among retiring baby boomers 2 Source: Retail Metrics+ *among customers who were age 55-69 from 2014 to 2022 $16 $44 $62 $104 $140 $189 $210 $274 2015 2016 2017 2018 2019 2020 2021 2022 Estimated Increase in Annual Redemptions Attributable to Aging Investor Base* (millions)