RETIREMENT VISION 2020FIDELITY’S PRESCRIPTION TO HELP DRIVE BETTER OUTCOMES

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Table of Contents3 Introduction

5 The Boomers and beyond – a perfect financial storm

6 Design for income

9 Account for health care

11 Engage and empower

15 Transition with confidence

17 How Washington can help drive better outcomes

19 Seeking better outcomes for employers through

better outcomes for employees

Better Outcomes Framework

Transition with Confidence

Account for Health Care

Design for Income

Engage and Empower

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Introduction

The last 30 years have brought a massive shift to the retirement system in the United States,

from defined benefit (DB) pension plans to portable, self-directed defined contribution (DC)

plans. Many employees have succeeded with DC plans. Others have struggled, even as

employers and providers have spent millions on participant education.

Millions of Boomers will move into their retirement years between now and 2020. As DB

plans and retiree medical benefits continue to be reduced or eliminated, it has become even

more important for employees to succeed through DC plans. This is both a challenge and an

unprecedented opportunity.

By implementing four interrelated strategies, employers and their provider partners can help

drive better outcomes for their employees in the form of better readiness for retirement

that benefits both the employer and the employee. These strategies are important not

only for the millions who are approaching retirement in the next few years, but also for the

generations that follow in the decades ahead.

The four things employers must do now to help drive better outcomes

1. Design for income. DC plans should be designed with an income replacement goal, and should

consider the potential results of employee and employer contributions over a career1. Employers

should also use plan design to produce an expected retirement age that matches the needs of

the business to help lessen unexpected workforce deficits and surpluses.

2. Account for health care. Employers should help employees to understand the increasing role

of health care in saving for retirement. Through effective plan design and financial incentives,

and through use of savings vehicles such as health savings accounts (HSAs) (combined with

a high deductible health plan (HDHP)), employers may be able to help employees reduce their

current health care spending and increase saving for their health care needs in retirement.

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3. Engage and empower. Employers and their provider partners must drive for broader and deeper

employee engagement in retirement savings vehicles using the latest scientific research and

data mining techniques. These next-generation engagement methods should be available

across Web, mobile, wearable technologies and through phone guidance. For the majority

who won’t engage, appropriate default solutions can help ensure they are on a path appropriate

for a typical employee.

4. Transition with confidence. Employees need personalized help as they near the next phase of their

careers, whether they retire or continue to work in some capacity. Employers, with support from

their provider partners, can help these workers determine how long they need to work, what

resources they will have available to them in retirement, and how to get the most out of those

assets in meeting their retirement needs (including the need for health care spending). Some

employees need specialized attention as early as age 50.

WHAT EmployEES muST Do

If employers take these actions, they may be able to help employees achieve better outcomes through improved

retirement readiness. But to help achieve the best outcomes, more employees should consider an active role in saving

for retirement. They should take better advantage of the resources that employers make available to them, including

DC plans (such as profit sharing, 401(k), and 403(b) plans), HDHPs offering HSAs, employer stock, nonqualified plans

(when appropriate), and DB plans and retiree medical (if available). And they must better understand their own specific

goals and needs, so they can realize the full benefit of the programs available to them.

HoW WASHIngTon CAn HElp

Washington took an important step toward greater retirement security with the employer safe harbors provided

under the Pension Protection Act of 2006 (PPA). These changes dramatically improved participation rates, increased

savings levels, and improved asset allocation. Ironically, though, the available safe harbors have acted as a ceiling on

what employers are willing to do with their plan populations, rather than encouraging them to do more. Employers

have the ability to design plans and contribution schedules specific to the goals of their workforce. They should be

encouraged to engage in this type of outcomes-based benefits design, assembling DC, DB, HDHPs with an HSA

offering, and other benefits in a way that increases the likelihood of a specific result.

Pilot projects could be used to encourage this kind of employer innovation, where employers interested in taking

an outcomes-based approach could work with regulators to show the intent and methodology behind their designs,

which would likely rely heavily on default contribution schedules and age-based asset allocations. But these designs

could be based on specific employer and employee needs. Policymakers should consider new safe harbors to

relieve plan sponsors of various regulatory burdens if they participate in the pilot program.

As of 1990, there were just over 31 million people in the U.S. age 65 and over. In 2025, that number is estimated to be 65 million.*

*2012 National Population Projections of the U.S. Census Bureau

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While the most urgent need for retirement savings may be with pre-retirees, there are challenges across Gen X

and Gen Y as well. Three key factors are driving the current retirement trends:

1. Workers may be underprepared and overconfident. Fidelity’s Retirement Savings Assessment (RSA) survey2,

based on 2,300 working Americans, takes a comprehensive view of each individual’s retirement readiness based

on key aspects, such as income, savings, health, and plans to work in retirement. The 2013 RSA found that only

36% of Baby Boomers, 29% of Gen X, and 33% of Gen Y were truly in an “excellent” or a “very good” position to

retire comfortably. Yet according to a survey by the Employee Benefit Research Institute3 (EBRI), 58% of Baby

Boomers, 56% of Gen X, and 56% of Gen Y reported they were “somewhat” to “very confident” that they

would have enough money to live comfortably in retirement. (See Figure 1.)

The Boomers and beyond – a perfect financial storm

gEn y gEn X BABy BoomErS

EBrI Survey3 Somewhat/very confident

56% 56% 58%

Fidelity rSA2 Excellent/Very Good

33% 29% 36%

Figure 1. underprepared and overconfident?Comparison of retirement confidence and likelihood of comfortable retirement

2. DB plans and retiree medical coverage are declining. Over the last several decades, millions of people have

lost access to a DB plan or retiree medical coverage or both. In 1988, 56.7% of workers considered a DB plan

to be their primary retirement plan. By 2012, that number had fallen to 21.1%4. Similarly, between 1997 and

2011, the percentage of private sector workers offered retiree medical coverage dropped by approximately

40%, from 28.9% to 17.7% for early retirees and from 25.4% to 15.9% for Medicare retirees5.

3. The retirement challenge is also a health care

challenge. Increases in health care spending affect

employees in two ways. First, they are being asked

to spend a greater percentage of their wages every

year on health insurance coverage, which leaves less

money to save for retirement. Second, the amount

needed for health care expenses in retirement is much higher than it once was, which means that the overall

retirement target has grown as well. The average couple retiring in 2014 is estimated to need $220,000 on top

of what Medicare will provide to them.6

*Stanford Center on Longevity estimates based on U.S. Bureau of Labor statistics data, July 2013

By 2020, it is estimated that 35% of men and 28% of women between the ages of 65 and 74 will be in the workforce, compared with 21% and 13%, respectively, in 1990*

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Four ways to help drive better outcomes

With these factors in mind, let’s look at four key strategies that employers and their provider partners can use

to help their employees realize the full potential of their DC and other plans, and help achieve better outcomes

through increased retirement readiness across all generations.

Design for incomeAs retirement plans have shifted, the role of the DC plan has moved from a supplemental savings

vehicle to the primary retirement plan. But DC plan design has not evolved to reflect this new reality.

For too long, employers have viewed their DC plan as a recruiting tool, rather than as a retirement

tool. They have focused on the inputs to the plan—matching rate, investment options, etc., rather

than the outputs of the plan, which is the income that the plan will ultimately replace. Because for

many, the DC plan is now the only employer-provided savings vehicle, the DC plan should be looked at in terms

of income replacement, much like a pension plan.

Fidelity’s research suggests that the vast majority of employers have not designed their plans with an income

replacement target. As more and more workers only have access to DC plans, this must change if American workers

are to retire successfully.

A typical employee may need to replace 85% of net income pay at retirement, with most employees needing to

replace 70% to 100%, depending on income, health, and lifestyle. As a rule of thumb, a reasonable starting point

for many employers may be to aim for 50% replacement of final net income at retirement through the DC plan

(with Social Security and other savings and income sources providing the rest).

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FUTURE INCOME NEEDS

When it comes to planning your future income needs, one of the most important factors to consider is an

employee’s current income. In general, the more money they make, the smaller a percentage of their working

income they may need to replace when they stop working. For example, an employee making less than $50,000

a year might need to replace 95% of his or her preretirement income on average when in retirement, while

someone making more than $120,000 may need only 71% (see chart below). One big reason for that has to

do with taxes. Higher-income households generally see their tax rates fall dramatically in retirement, unlike

lower-income households.

How replacement ratio varies byincome level*

95%Less than $50K

85%$50K–$80K

77%$80K–$120K

71%More than $120K

Preretirement income Estimated replacement ratio

* The percentage of pre-retirement income needed shows an estimate of the percentage of after-tax income from the final year before retirement needed to cover spending needs and is for illustration only. Actual individual circumstances will vary. The income replacement percentages shown are a combination of Fidelity’s guidance regarding replacement rate in retirement and income-based spending patterns from Consumer Expenditure Survey 2012 from Bureau of Labor Statistics. The graphic assumes a starting point of 85%.

The target replacement ratio reflects income-based spending patterns from Consumer Expenditure Survey 2012 from the Bureau of Labor Statistics. The data in those statistics was divided into four bands based on income level and that was used to inform the estimated replacement ratio. In general, lower-income households will require higher-income replacement percentages. The level and composition of expenses in retirement is observed to change less than those expenses for higher-income cohorts. Please note that the income amount used here is the pre-retirement after-tax income, not current income. For example, if you are a 25 year-old earning $40,000 annually after taxes, and planning to retire at age 67, your pre-retirement income would be close to $73,650 based on a real wage growth rate of 1.5% per annum. The four income bands are less than $50,000, $50,000–$80,000, $80,000–$120,000, or more than $120,000.

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Employers may also consider asset allocation in their plan designs. While some employees may feel capable

of making investment choices on their own, many employees lack the interest, skill, or time to manage their

retirement portfolios. Because of this, employers often consider a target date fund (TDF) or a managed account

service as part of their plan design.

Social Security Workplace savings

34%

34%

20%

52%

THE GOAL: Replace 85% of pre-retirement income,including 50% from workplace savings

Auto-enrolled at 3%with no increase

Auto-enrolled at 6%with a 1% annual

increase, up to 15%

AIP participantscan replace agreater percentageof their incomein retirement1

For some employees, a TDF can be a good default

option. However, an in-plan managed account is an

important complementary investment service for Plan

Sponsors to consider and may be appropriate as the

default option for some DC plans. A managed account

service can be a good choice for those who:

•   Need or want more guidance (such as those nearing 

retirement)

•   Want a service that can adjust to their changing 

financial circumstances

•   Have significant assets outside of their DC plan 

(IRAs, pensions, spousal accounts, etc.)

•   Have a different financial or emotional risk tolerance 

than reflected in a typical TDF

Both TDFs and managed accounts can be good options

for employees who would prefer not to actively manage

their own retirement portfolios.

TARgET DATE FUNDS AND MANAgED ACCOUNTS

Consequently, a typical employee with a DC-only retirement plan starting his/her career at age 25 may be able to

replace 52% of final net income. This scenario assumes that this typical employee is retiring at age 67, contributing

and investing throughout that time period, investing in age-based asset allocations with automatic enrollment of

6% utilizing the Annual Increase Program (AIP), and increasing his/her contribution rate 1% annually to 15% of pay

(in addition to employer contributions)2. This contrasts with an employee auto-enrolled at 3% with no increase

who may be able to replace only 20% of final net income at retirement. (See figure below.)

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Account for health careWith rising health care premiums and out-of-pocket expenses, the challenge of paying for

current health care expenses is impeding the ability of many employees to save adequately for

retirement today. As a result, employees are getting squeezed from both ends.

Fidelity’s 2014 Retiree Health Care Cost Estimate

shows the average 65-year-old couple needs $220,0006 to pay for

health care expenses in retirement. This figure underscores the need

for employers to help employees think differently about how they

value, use, and save for health care—now and into the future.

In an important sense, the retirement savings challenge in the U.S. is actually a health care challenge as well. And

employers can help employees identify the right balance of each of the following solutions in addressing their

current and future health care needs:

Employees can select lower-cost HDHps, which are often coupled with an HSA. Whether offered through an

employer or through a provider that offers a private exchange, HDHPs can save employees money on premiums.

Employees can allocate these savings for other priorities, including saving them in an HSA (see sidebar on page 11),

where they can be spent on current, routine qualified medical expenses. Any unspent funds can be invested to

pay for qualified medical expenses incurred in retirement. HSA-eligible health plans can also help lower employer

cost and may help delay the effect of the “Cadillac” tax on high-value benefit plans beginning in 2018.

VARyINg INCOME REplACEMENT gOAlS

Of course, different employers have different workforces and different business needs. The income replacement

goal, as well as the ideal retirement age, will vary. Data and extensive analytics will become a critical tool for

employers seeking to make informed decisions about benefit plan designs that can help improve the financial

security of employees. It will be extremely important to look beyond the averages and begin to “slice and dice”

employee groups into finer views to understand behavior differences by age, income, gender, division, job code,

or geography.

Being able to model various plan design alternatives and estimate the level of income employees may expect

in retirement will be critical inputs to designing an effective benefits design that employees value and that helps

accomplish employer talent management goals. Further, benchmarking progress against stated company goals

or industry peers will create a clear understanding of the steps needed to help improve outcomes for employers

and employees.

The retirement savings challenge in the U.S. is actually a health care challenge as well.

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When employees are exposed to the actual costs of individual health care services, they may be motivated

to spend those dollars more effectively. Employees may need tools and guidance to help them make better

savings decisions, and also to make better spending decisions when they need care. This can include not only

savings calculators (how does an employee allocate savings across DC and HSA, for example?), but also

information on the effectiveness of doctors and hospitals and the cost of procedures and prescription drugs.

Employees can save even more with wellness incentives. Another way to help employees plan for higher

health care costs is to sponsor wellness programs that provide monetary rewards while promoting healthy

lifestyles. In 2013, the average incentive offered to employees increased by nearly 15% to $594 and the median

incentive for spouses/domestic partners increased from $375 to $400, according to a recent Fidelity/NBGH study7.

Employers can encourage employees to deposit these earned incentive dollars into HSAs for health care

expenses now or in retirement.

From spending on health care now to saving for health care later. Employees are being offered more choices

in both retirement and health care and need help to optimize both their current spending and future savings.

Identifying the most tax-efficient way to address both—at an employee level—is a critical piece to saving more

and saving smarter.

Figure 2: The “average HSA account” can grow over time*

*Hypothetical examples of HSA account balances are based on an annual employer/employee HSA contribution of $3,200 with a fixed 5.5% rate of return over a 10-year period. Assumes contributions, earnings, and distributions are tax free. Investing in this manner does not ensure a profit or guarantee against loss in a declining market. Starting average HSA account balances derived from average annual employer/employee HSA contributions of $3,200 which is based on data from 121,000 Fidelity HSA account holders as of 12/31/2012.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Saves 10% Saves 50% Saves 90%

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

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Engage and empowerEmployers and their benefits providers are able to provide guidance to participants that is more

relevant and timely than ever before. Yet, too few participants take advantage of the guidance that

is available. Employers and their benefits providers must strive for broader and deeper employee

engagement while providing expansive default solutions for those who won’t take action.

While most employers no longer offer DB plans to new employees, there are a number of options that can help

enhance retirement security. 401(k), 403(b), HDHP/HSA, employer stock, nonqualified plans, IRAs, and 529 plans

can all play a role in successful saving, and each has specific

advantages. Yet, employees often do not understand the

advantages of each of these options and when to use one

over another or how they may work together.

Employee engagement remains an essential piece of the

puzzle for both employers and employees. With big data and

new personalization and segmentation technologies, there is no doubt that we will build on today’s guidance

platforms to engage more people, at a deeper level, than ever before. Yet, with history as a guide, it still seems

likely that most employees will not fully engage until late in their careers. For the great majority who do not

engage, it is critical to make sure that they are on a path to a reasonable retirement.

For the great majority who do not engage, it is critical to make sure that they are on a path to a reasonable retirement.

HOw HSAs CAN HElp EMplOyEES

lower health insurance premiums. HSA-eligible health plans generally have lower premiums than traditional

health plans. With lower premiums, employees may be able to save more, whether through a 401(k) plan8

or an HSA.

Create a fund for out-of-pocket health care expenses. One of the reasons that HSA-eligible health plans are

less expensive is because they require more cost sharing on the part of employees. An HSA can be an important

way to save for out-of-pocket qualified medical expenses and also help pay for unexpected qualified medical

emergencies, if needed.

provide a long-term savings vehicle for health care expenses in retirement. As previously stated, the average

couple who retires in 2014 will need $220,0006 for health care expenses during retirement—in addition to what

Medicare provides. Health care expenses are one of the most significant financial needs of retirees, and with

substantial decreases in the availability of retiree medical benefits, the HSA can be an important vehicle to enhance

a critical part of retirement security. In a sense, HSAs have the potential to be “the new retiree medical account.”

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participant engagement of the future: getting it right

RightTime

RightMessage

RightRewards

RightChannel

Engage via regular, tailored interactions based on their own decision timetables.

Show relavent content about assets and goals. Let them

see how they are doing (vs. peers) as well as

where they are going.

Keep it simple. Offer easy access via

smartphones, tablets, and next-generation devices.

Offer a clear path to action, an emotional connection, and immediate rewards for engaging.

Engaging more employees more than ever. Most employees who engage today do so every few years at best.

Yet every financial decision an employee makes could have a potential impact on retirement. We are rapidly moving

toward a world in which it will be possible to see the daily impact that these decisions make on an individual’s

potential retirement readiness. Next-generation engagement techniques are developing on several fronts

simultaneously.

First, behavioral science is being used to improve engagement by modifying the way savings options are presented.

For example, behavioral economists have found that plan participants make significantly different income deferral

decisions based on how choices are presented to them, through principles such as anchoring.

Second, predictive models and employee segmentation (based on characteristics such as age, savings rate, and

asset allocation) can help refine communication and education campaigns. By testing campaigns through continuous

feedback loops, actual participant behavior can be integrated into more and more refined models.

Finally, “gamification” principles (generally speaking, the use of friends, feedback, and fun) can drive dramatically

increased levels of user engagement and even enjoyment. This is true for all participants, whether they are in the

“gamer” generation or not.

Whether they use Web, mobile, wearable technology, or other channels, future engagement programs will need

to incorporate the principles illustrated in the figure below.

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Saving more later may not Be EnoughFidelity estimates that the average participant will need at least eight times their final compensation saved

at retirement9. Those who are within 10 to 15 years of retirement may need to take more aggressive action,

but still may only make limited progress toward their retirement goals. Even if participants increase their

savings by 6% for the last 10 or 15 years of work (see Example 1 and Example 2 below), they are only likely

to increase their savings just a bit more than one times their final compensation.

Increase account

balance by

$75,800at retirement

Example 1 – Save more during final 10 years*:

•   Participant increases deferral rate by 6% for the  final 10 years of savings before retirement

•   $2,660 per year of additional pretax income 

•   Account balance at retirement increases  by $48,400

•   Participant contributes an extra $41,400 over  10 years

Example 2 – Save more during final 15 years*:

•   Participant increases deferral rate by 6% for the  final 15 years of savings before retirement

•   $4,170 per year of additional pretax income 

•   Account balance at retirement increases  by $75,800

•   Participant contributes an extra $59,800 over  15 years

*Saving from age 25 until age 67, starting salary of $40,000, annual real salary growth of 1.5%, ending salary of $73,600, an effective annual rate of return of 5.7% (3.2% real + 2.5% inflation); and no loans or withdrawals taken throughout the time period. Participants may earn more or less than these hypothetical examples and taxes will be due upon withdrawal.

Increase account

balance by

$48,400at retirement

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These techniques may seem overwhelming or even unachievable to many employers. Leading-edge providers,

however, are incorporating all of them into their engagement strategies at little to no additional cost. And while

these strategies will benefit those who are close to retirement, they will pay even greater dividends for the X and Y

generations, who should benefit from the longer-term growth in their investments as well.

Automatically contributing more, earlier. Many employers auto-enroll their employees at 3% of pay into their

401(k) plan, invested in a TDF. This is a dramatic improvement over doing nothing, but for employees who do

nothing else, it is likely not enough. As discussed, a typical employee with a DC-only retirement plan starting his/her

career at age 25, retiring at age 67, and investing in age-based asset allocations, will have a 90% or better likelihood

of being able to replace 50% of final net income with initial contributions of 6%, increasing as quickly as possible to

15% of pay (including employer contributions).1

Most employees are not contributing close to this level on their own. If employers want those who do not engage

to be on a path similar to the path appropriate for a typical employee, they will need to use auto-enrollment and

automatic increases, at levels they determine will help employees reach the income replacement retirement age

goals that the employer has set through its plan design.

Auto-enrollment and automatic increases can dramatically improve participant retirement readiness while, if desired,

adding little cost for employers. Increased default percentages result in very few participants opting out.

Automating asset allocation solutions. Defaulting employees to an appropriate level of contribution is only part

of the retirement savings story. The right investment strategies are also critical, and many employees lack the

interest, skill, or time to manage their retirement portfolios.

Discouraging leakage. While contributing and investing in optimal ways are important, it is also critical that

employees minimize loans, hardship distributions, and distributions when changing jobs. A recent Fidelity study10

shows that one out of three job changers cash out some or all of their workplace savings, potentially impacting their

retirement security. Of those aged 20–29, 44% cashed out. To help reduce the number of participants who cash out,

Plan Sponsors may directly roll small balances to an IRA rather than distributing them. Additionally, Plan Sponsors

may wish to consider extra education efforts on the value of keeping assets invested for retirement (either by

keeping money in the plan or by rolling it over to an IRA or another employer plan) rather than cashing them out.

Hypothetically, a participant at age 30 who cashes out a $16,000 balance today

could lose up to $47111 per month in retirement income cash flow (assuming he

or she retires at 67 and lives through 93).

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Transition with confidenceEmployees want to feel confident that they can safely and securely transition into retirement

(or an encore career) before making the decision to leave the workplace—and they will only

do so if they feel they are ready. Employees should begin to think about retirement seriously

as early as 50 and will need specific answers to many questions. Employees need to know that they are not going

to outlive their assets and that they can cover all of their expenses, especially the ever-growing cost of health care.

Fidelity’s research12 suggests that there are optimal ways of building an annuity stream with a DC plan, and that

employees can often increase their Social Security benefit significantly if they better understand their election

options. By providing employees with help to answer these questions, employers and their provider partners can

help assure employees that they are ready and give them the confidence needed to retire. They can also help

those employees who end up having to retire sooner than expected (due to disability, for example, or to take care

of an ailing spouse or parent) make the most of the resources available to them.

One thing is clear—working works. Working longer and working in retirement are two of the most effective ways

that workers can increase their retirement readiness. (See Figure 3.) Fidelity data show that more and more

employees are working past the age of 65.

•   What assets do I have and how long will  they last?

•   What is the best strategy for me to elect and  take Social Security?

•   What is the best strategy for me not to outlive  my assets?

•   When do I need to think about annuities and  how much guaranteed income do I need?

•   Do I have a diversified income plan that’s  appropriate for me?

•   When can I stop working full time?

•   What other activities am I interested in?

– Part time or volunteer work?

– A second career?

– Travel and leisure?

•   What other budget needs do I have? 

•   How much money do I need for health care  and where will I get it?

•   What about the potential for other needs,  such as disability or long-term care?

TO RETIRE CONFIDENTly, EMplOyEES MUST HAVE THE ANSwERS TO THE FOllOwINg qUESTIONS:

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Note: Figures in chart are RSA scores, not ages of retirement plan participants.

The Retirement Savings Assessment (RSA) is Fidelity’s assessment of Americans’ preparedness to pay for

retirement goal expenses based on a survey of 2,200+ working households. The RSA reports retirement readiness

for all Americans and also segments the results by age and income. Readiness is indicated by a score which

measures the ability of a household to achieve its income replacement goal in a down market (90% confidence

level) and corresponding evaluation from excellent to poor as follows:

•  Excellent: 110+

•  Very Good: 95 to 110

•  Good: 80 to 95

•  Fair: 65 to 80

•  Poor: <65

In the last five years, the percentage of Fidelity

participants who are actively working after

age 65 has increased by 25%14 (32% in 2008

compared with 40% in 2013). Clearly, the shift

predicted by the Bureau of Labor Standards is

already happening.

Figure 3. Key levers That Can Help Improve retirement Saving According to the Fidelity retirement Savings Assessment Scores13

gEn y gEn X BABy BoomErS All

Baseline retirement readiness 63 71 81 74

Delaying retirement Two years 68 77 87 80

Working in retirement 67 76 86 79

Both Delaying of Two years and Working in retirement

75 86 94 88

By 2030, the number of people aged 65 years or older in the United States is projected to double to 72 million adults representing 20% of the total U.S. population.*

2014

36million adults over age 65

2030

72million adultsover age 65

*National Center for Chronic Disease Prevention and Health Promotion, Issue Brief No. 1, July 2012

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How Washington can help drive better outcomes

Solving retirement readiness for working Americans is a partnership between the private and public sectors. Not only

must employers and employees take action, the government and policymakers must do so, too. The government

already provides significant financial support through Social Security, Medicare, Medicaid, and tax incentives for

savings and health care. However, many U.S. retirement and benefits laws are 40 years old, and the system that they

were designed to regulate continues to change

dramatically. The challenges facing America’s

workforce are different today, and its rules

and regulations haven’t kept pace with the

changes in demographics, technology, and

benefit design and delivery.

As employers move toward designing their

DC plans and health savings programs with an eye toward a specific target level of income delivered at retirement,

Washington can help facilitate that move by taking an outcomes-based view of regulation. By doing so, the

government can play a key role in driving retirement readiness by rewarding outcomes-based plan design.

unleashing employer innovationToday, employers spend a great deal of time complying with myriad overlapping laws designed to prevent abuse

of the system. While these laws are all well intentioned, their complexity can limit innovation by Plan Sponsors

and their benefits partners that is intended to provide greater retirement security for plan participants.

For example, Washington took an important step toward greater retirement security with the employer safe harbors

provided under the PPA of 2006. But the unintended consequence of safe harbors is that they serve as a ceiling

on what employers feel safe doing, especially when it comes to deferral rates, even when their employees need more.

So while more people are contributing to their plans through auto-enrollment, and investing more appropriately,

many are not contributing at levels sufficient to fund retirement security.

Employers have the ability to design plans specific to the goals of their population, even down to the individual

person if they have access to sufficient data. Provided that there are appropriate consents and protections for

employees, employers should be encouraged to engage in this type of outcomes-based benefits design.

An employer may assemble DC, DB, HDHP/HSA, and other benefits in any number of ways to help maximize the

likelihood of a specific result. Employees, on the other hand, may each have differing needs. To allow that process

to be data-driven and automated could make a significant difference in retirement security, particularly for those

of average salary and below.

As employers move toward designing their DC plans and health savings programs with an eye toward a specific target level of income delivered at retirement, washington can help facilitate that move by taking an outcomes-based view of regulation.

18

pilot projects could lead the wayWholesale statutory changes are not necessary to begin this process, and may not be realistic in today’s Washington

environment. But members of both major political parties are looking for solutions to enhance retirement security for

the middle class in a way that is not overly burdensome to business, and legislators could easily team to establish

a pilot program to explore innovative ideas. Similar pilots have been used in other areas, such as those measuring

accountable care organizations in the Affordable Care Act. Employers that are interested in taking an outcomes-based

approach could work with regulators to show the intent and methodology behind their designs, and be given some

kind of stamp of approval while the impact of

those designs is studied. As interest expands,

more employers could show their designs, or

adopt one that had already been approved if

appropriate for their goals.

In all likelihood, most of these designs would rely heavily on default contribution schedules and age-appropriate asset

allocations. But these designs could be based on specific employer and employee needs, freeing employers and

employees from generic and restrictive safe harbors. Employers going through such a process could receive similar

exemptions from nondiscrimination testing and fiduciary liability—a significant incentive for employer innovation.

Similar incentives could be offered for innovation in participant engagement, with the government learning from

and then adopting more effective ways of helping individuals to understand their needs and identify a path

appropriate to meeting those needs. Fidelity believes that employers should have the ability to design plans and

engagement methodologies that could be finely tuned to each individual’s identified needs.

Engaging in a longer-term discussionOf course, pilot projects are only a starting point. Longer term, the conversation

in Washington must change to fit the needs of future retirees, much as ERISA was

designed to fit the needs of the workforce of the late 20th century. The starting point

is agreement on the respective roles of employers, employees, and the government

in getting as many Americans as possible to a reasonable level of retirement security,

such as a target of replacing 85% of net pay in retirement through DC plans,

HDHPs/HSAs, Social Security, and other savings options. From there, stakeholders and policymakers can help

determine the best path to an outcomes-based retirement policy and regulatory structure that can encourage

employer innovation and employee engagement.

Now is the time to reward employers that help their employees achieve a higher level of retirement security,

through more effective plan design and participant engagement and education. Without new solutions, retirement

security challenges—and their implications for government-sponsored safety net programs—are likely to get

worse, not better. Everyone can win if government can encourage this kind of innovation.

we believe that employers should have the ability to design plans and engagement methodologies that could be finely tuned to each individual’s identified needs.

85%

19

The first major test of the DC retirement system is

coming, and while many employees are on track to a

successful retirement, many other employees expecting

to retire in the next 10 to 15 years will not have enough

money saved to realize that goal. Employers need to

assess the impact of a significant increase in older workers

on their business and workforce strategies.

But the impact goes beyond the Baby Boom. Employers

must be prepared to erect guardrails and offer guidance

for all generations in the workplace. Many employees

are underprepared and overconfident. They need to

understand the opportunities within their employer plan

and the path to realizing its potential. Next-generation

engagement strategies and technologies can help them

understand and automate their savings path.

Employees also need help at retirement. They have

to make many more decisions today than they have

in the past—decisions about when to stop working, how

to take their benefits, what to annuitize, and how to get

health care—in addition to determining how much they

might need to work in retirement. Employers who

provide this assistance can help ensure that employees

can retire with confidence. Finally, Washington can take

an outcomes-based approach to regulation in an effort

to help Plan Sponsors to be more innovative and

participants to be more engaged.

Whether addressing the needs of the upcoming Boomer

retirees or Generations X and Y, Fidelity is committed to

helping employers and employees reach all of these

goals together.

SUMMARy: SEEkINg BETTER OUTCOMES FOR EMplOyERS THROUgH BETTER OUTCOMES FOR EMplOyEES

Employers who provide assistance

can help ensure that employees can

retire with confidence.

TAkINg ACTION NOw

1. Design for Income. As a rule of thumb, Plan Sponsors should consider designing their DC plans

to target replacing 50% of net pay at a retirement age that makes sense for their business needs.

2. Account for Health Care. Add an HDHP and HSA to help employees save money on health care now

and for health care expenses incurred in retirement.

3. Engage and Empower. Use targeted guidance, segmentation, gamification, and behavioral principles

to engage more participants when they are most in need of help. Use aggressive default contribution

and asset allocation strategies for the majority who will not engage.

4. Transition with Confidence. Provide personalized help to employees who are moving toward retire-

ment or a second career, addressing all the complex questions they have at this time in their career.

For Plan Sponsor and investment professional use only. Not for use with plan participants.

The information provided on Health Savings Accounts is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS Web site at www.IRS.gov. You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses (including the Health Coverage Tax Credit), online, or you can call the IRS to request a copy of each at 1-800-829-3676.

Investing involves risk, including risk of loss.

Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917 Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917© 2014 FMR LLC. All rights reserved. 681993.2.0

1This hypothetical example is based on the following assumptions: a starting age of 25 and a retirement age of 67; and life expectancy to age 93, starting salary: $35,000; ending salary: $64,443, real salary growth rate of 1.5% annually, employer contribution of 3% per year, annual rate of return: 5.7% (3.2% net of inflation), assumes no loan or withdrawals, a 17.5% effective tax rate before retirement and a 14% effective tax rate after retirement, the plan design assumes a deferral rate of 3% with an Annual Increase of 1% up to 15%. This hypothetical example is based on monthly contributions to a tax-deferred retirement plan. A participant’s account may earn more or less than this example, and income taxes will be due when withdrawals are made from the account. Investing in this manner does not ensure a profit or guarantee against loss in declining markets. Social Security projection based on U.S. Social Security Administration methodology as of 2013.2Data for the Fidelity Investments Retirement Savings Assessment (RSA) was collected through a national online survey of 2,265 working households earning at least $20,000 annually with respondents aged 25–73 from June through October 2013. Data collection was completed by GfK Public Affairs and Corporate Communications using GfK’s KnowledgePanel®, a nationally-representative online panel. Fidelity Investments was not identified as the survey sponsor. GfK Public Affairs and Corporate Communications is an independent research firm not affiliated with Fidelity Investments.3The EBRI Retirement Confidence Survey, March 2014. Sponsored by the Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC), and Mathew Greenwald & Associates (Greenwald), the annual survey is a random, nationally representative survey of 1,000 individuals age 25 and over.4EBRI, SIPP Data, Copeland, 2012, Figure 5.5EBRI Issue Brief, Fronstin, Oct. 2012, Figure 3.6Fidelity Benefits Consulting, 2014. Based on a hypothetical couple retiring at age 65 years or older, with average (82 male, 85 female) life expectan-cies. Estimates are calculated for “average” retirees, but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.7Fidelity Investments/National Business Group on Health study on Health Improvement, February 2014.8Fidelity Points of View article, “HSAs Help ‘Super Savers’ Save Even More – DC Plan Savings Get a Boost,” November 2013. 9Our research shows that many individuals will need to save 10% to 15% or more of their employment income to have a high probability of meeting their income needs through the end of retirement. The rule of thumb was developed with Fidelity’s financial planning engine and based on both “typical participant scenarios” and surveys of American workers. This rule of thumb is intended to be only a starting point in determining the actual savings needs for any individual. Fidelity acknowledges there is a wide variation of savings needs, based on many factors such as desired retirement age, retirement income need, asset allocation, willingness to annuitize assets, employer contributions, potential pension income, expected Social Security income, expected part-time income in retirement, expected length of retirement, and other factors. 85% replacement rate is for a hypothetical average employee and may not factor in all anticipated future living expenses or needs, such as long-term care costs. 10Fidelity Points of View article, “Cashing Out Can Derail Retirement,” February 2014.11This hypothetical example assumes a real return of 4.7% and systematic withdrawal payments from retirement age 67 through death at age 93. All values are expressed in today’s dollars (i.e., inflation is not included). Balance at retirement age 67 would have been $87,500. The ending values do not reflect taxes or fees; if they did, amounts would be lower. Earnings and pretax contributions are subject to taxes when withdrawn. This example is for illustrative purposes only and does not represent the performance of any security. Individuals may earn more or less than this example. Investing on a regular basis does not ensure a profit or guarantee against a loss in a declining market.12Fidelity Investments, “Creating a Defined Benefit from a Defined Contribution Plan: Using Periodic Purchases of Deferred Income Annuities to Create a Defined Benefit Payment”; Investment Insights, March 2014.13About the Fidelity Retirement Savings Assessment: These findings are the culmination of a yearlong research project with Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, which analyzed the overall retirement readiness of American households based on data such as workplace and individual savings accounts, projected Social Security benefits, home equity, and pension benefits. The analysis for working Americans projects the income replacement rate for the average household, compared with pre-retirement income, and modeled the estimated effect of specific steps to help improve readiness based on the anticipated length of retirement.14Fidelity data based on 361,920 active participants 65+ divided by 908,783 total recordkeeping participants 65+ as of 9/30/2013.