Total Plan Assets/Participants: Approximately $3.5 billion/18,957
Participation Rate: 93%
Average Deferral Rate: 8%
Average participant income-replacement ratio: Not available
Default deferral rate: 9%
Default investment: T. Rowe Price Target-Date Trusts
RETIREMENT plan participant inertia is commonly viewed by plan sponsors as a top challenge. Credit Suisse sees things somewhat differently.
For years, employee engagement was a primary goal of the retirement plan strategy, says Joseph Huber, managing director and chairman of Credit Suisse’s pension investment committee. Over time, though, the company came to recognize it is difficult to engage workers—especially young ones—even when the plan committee invests serious time and energy.
In the past, this engagement problem was less critical: Credit Suisse had a primary defined benefit (DB) pension plan, and the 401(k) plan served more as a supplemental retirement savings vehicle for employees who wanted to stash additional income. In a familiar story, economic circumstances drove executives to close the defined benefit plan to new entrants at the end of 1999, and the plan was fully frozen in 2003 to all but roughly 1,000 employees.
These changes made the 401(k) plan the primary retirement savings vehicle for nearly 9,000 Credit Suisse employees, Huber says, and forced plan officials to confront a general lack of engagement with the defined contribution (DC) side of the firm’s retirement benefits.
“As the company made this transition, we realized our average employee is only about 35 or 36 years old,” Huber says. Not only did Credit Suisse have a fairly young work force, he says, but “whenever we had information meetings about taking advantage of the 401(k) option, hardly anyone under 40 showed up.”
Huber and the rest of the pension committee debated what strategies could increase the retirement plan engagement of its under-40 employees. “This went on for some time until one day it was like a light switch going on,” Huber says. “We realized that this inertia we were constantly fighting against could actually be a tremendous asset in improving the retirement outlook for our workers.”
Elizabeth Donnelly, chair of the Credit Suisse benefits committee, explains: The company implemented automatic enrollment and started defaulting employees at a 6% deferral rate, allowing them to optionally increase or decrease their contributions as desired. Donnelly says the average deferral rate climbed to a somewhat impressive 8% of salary—a testament to many Credit Suisse employees—yet nearly 40% of participants still were at 6% or less.
Huber credits Donnelly with stepping back and asking whether this was a successful path forward for the plan’s participants, now that the defined contribution plan was becoming more important as an overall benefit. In short, Credit Suisse still believed the answer was “no”; a quick calculation showed that even those employees saving 8% of salary per year might be off-track to retire on time if they expected to generate a lifelong income through the DC plan. This led to discussions with the plan’s administrator, Fidelity, about setting a new goal.
A New Goal
Credit Suisse was introduced to Fidelity’s framework for evaluating and improving retirement plan outcomes: the recently launched Retirement Vision 2020 program. “One thing we found shocking is that 96% of plan sponsors have no idea what [outcome] their plan is designed to deliver,” Huber says, referring to a statistic Fidelity had shared.
Huber and the rest of the pension committee debated what strategies could increase the retirement plan engagement of its under-40 employees.
Credit Suisse is targeting an income replacement rate of 50% of average base salary for its defined contribution plan participants at age 60, Huber says. This revisits the pension plan structure, which pursued a lifetime benefit of 50% of final average earnings, he says, noting, “higher is better, but in our modeling this looks like an acceptable outcome that can actually be reached by most people.”
Donnelly and Huber worked with Fidelity to determine how the plan’s automatic features would have to be adjusted to pursue this new goal. In addition to the support they received from Fidelity, some of the plan’s investment managers, including Vanguard, T. Rowe Price and BlackRock, helped as well. “Our providers consistently made themselves available throughout the process, to [give] their views on things,” Huber says.
In the conversations with Fidelity and others, plan officials found that, to pursue a target above 50% income replacement, participants would have to put away more than 15% of their salary every year. “We felt like that would be asking too much for a lot of people,” Donnelly continues, “so 15% became the number.”
Thinking of its new definition of success, yet wanting the goal to seem within reach, Credit Suisse decided new employees should be automatically enrolled at a 9% deferral rate. Alongside the company’s fixed $3,000 to $10,000 per participant contribution—which is distributed to participant accounts on a pro-rata basis across 24 pay periods and set according to salary level so that lower-paid employees get fewer dollars but a greater percentage of income—this would be enough to get most participants moving toward a 50% income replacement.
Additionally, the company resolved to start re-enrolling eligible employees on an annual basis. The plan also now automatically increases employee deferrals by 1% per year, up to 15%. Huber notes that when re-enrolled employees were told 15% of salary was the optimal savings amount, more than one-tenth chose a deferral above 9% of salary. Further, new entrants into the plan are now defaulted into an age-appropriate targeted retirement trust solution from T. Rowe Price.
These changes have pushed Credit Suisse’s defined contribution plan participation up to 93%, and Donnelly predicts that 95% to 99% participation is not far off, given the aggressive re-enrollment program. The average deferral is at 8% today and continues to climb toward 15%, he and Huber agree. Still, Credit Suisse is aware that high participation by itself does not mean much if participants are deferring too little.
This is one reason the company is working with Fidelity to have the plan automatically enroll employees in catch-up contributions when they reach age 50, Donnelly says. “They don’t have the capability to make this an auto-enrollment situation right now, but we are pushing for it, and it’s an example of how sponsors can drive their providers to bring even better service to the table.”
Huber says this is a key point: It is usually up to the plan sponsors and benefit committees to take ownership of these changes and combat what he calls the plan’s own inertia. “Nobody was asking us to make these changes—either the plan participants or the executive leadership of the company,” he says. “Many sponsors don’t take the extra step of asking: ‘What is this plan going to do for our employees in terms of true retirement readiness? Does it get them into a position where they actually can retire by age 60 or 65, or will the company be stuck with a work force that doesn’t want to be there anymore but can’t afford to retire?’”
Also contributing to its success, Credit Suisse held a number of educational sessions, reaching hundreds of employees, to explain the plan redesign. There have been meetings focused on saving enough and investing properly, and the company plans to hold sessions about the correct approach for taking withdrawals, to encourage employees to start thinking about how to draw down money in retirement.
“We made these changes because it is the right thing to do,” Huber concludes. “We told employees, ‘We are going to put you on the path to success. You can get off that path, but we hope you won’t.’”
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