Benefits June 9, 2016

Equity Compensation Can Help with Overall Financial Plans

Whether it is to fill in the retirement savings gap or part of an overall financial strategy, equity compensation plans are attractive to employees.
Reported by

More than half of equity compensation plan participants plan to use their stock plans for retirement savings, according to ETRADE’s 2016 Corporate Services Annual Participant Survey.

Marc McDonough, vice president of Schwab Stock Plan Services in Denver, Colorado, explains that while defined contribution (DC) plans are the most popular way for employees to save for retirement, savings in those plans is severely limited for executives. Due to statutory limits on DC plan deferrals, “an executive making $250,000 can only put about 7% of compensation in a DC plan,” he says. He notes that Schwab is seeing equity compensation plans being used to save for retirement as well as for philanthropy purposes.

Get more!  Sign up for PLANSPONSOR newsletters.

However, equity compensation plans can also be part of an overall financial plan. Two out of five respondents to the ETRADE survey intend on using executive compensation plans for emergency or rainy-day funds.

Emily Schlosser, SVP, Corporate Services at ETRADE Financial Corporation in New York City, tells PLANSPONSOR communications vary by employer, but ETRADE is seeing a trend in employers encouraging employees to use stock plans for diversification and retirement savings. “We are also being asked to help educate employees about overall financial well-being and we talk about equity compensation plans as a part of employees’ overall financial plan which helps with security in retirement,” she says.

McDonough tells PLANSPONSOR Schwab has teams that meet with executives as well as lower-paid employees who receive equity compensation to help them decide the right strategy for using the plans. Employees can use executive compensation plans to pay for children’s college education or a home—getting that off their plate can help them save for retirement. “You don’t pay for all four years of college at once, so we can help employees make plans for each year mapping out a strategy for cash flow,” he says.

Schlosser notes that the tax structure is very different for equity compensation than for a DC retirement plan. With equity compensation, at the time shares are vested, they are taxed, and when an employee sells shares, they pay a capital gains tax. McDonough says capital gains tax can be very expensive for employees who have held company stock for many years. This is why some choose to use the plans for philanthropic reasons rather than retirement and donate the stock to charities.

NEXT: Participant understanding lacking

Schlosser says ETRADE conducts its survey on an annual basis, so it sees some of the same results over time, but it is always surprising how many respondents lack a general understanding of how equity compensation plans work.

The survey of 40,035 ETRADE stock plan participants conducted in March found two out of five don’t understand vesting, two out of three don’t understand tax implications and just more than half understand how restricted stock works.

“Plan sponsors need to educate and communicate to help employees understand,” Schlosser says. “We have clients that span industries, and plans are very customized and differ by client. Some offer the stock plans only to executives; some offer them to a broad base of employees. There are employees that have very little sense of what they are being given. Plan sponsors should think about education as they are developing and designing their plans, to address the understanding of the participant base.”

McDonough adds, “A lot of plans we work with are looking for education about how equity comp works. Our team works one-on-one with participants to provide education and actionable advice. We explain how pricing works, and what stock movement does to the price. We make sure they have a comprehensive understanding of what they own today, and talk about taxes and cash flow needs.”

Corporations use equity compensation plans to attract and retain the best talent. Whether it is to fill in the retirement savings gap or offer opportunities for overall financial well-being, equity compensation plans are a big driver for attracting executives, McDonough says.

Schlosser says employers need to consider what value they are getting by offering the plans if participants don’t understand them.
Data and Research June 9, 2016

Simple Strategies Can Improve Retirement Plan Participant Behaviors

A few simple tactics improved employee engagement with DC plans, Bank of America Merrill Lynch finds.
Reported by

Employee engagement with workplace defined contribution (DC) retirement plans grew in 2015 by every metric Bank of America Merrill Lynch measures.

According to its Plan Wellness Scorecard for the period ending December 31, 2015, total contributions increased 14% from the year before, while the number of employees with balances grew 16% during the same period.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

During the year, most employees (84%) who changed their contribution rates increased them. The number of employees who started contributing or increased their contributions to their savings grew 82% from 2012 to 2015, indicating that employees are taking advantage of savings opportunities within their plans as they look to save more and prepare for retirement.

“We continue to see strategies we can employ with plan sponsors that positively impact behavior of employees. Simply changing information delivered to participants can impact behavior,” Gary DeMaio, head of defined contribution product for Bank of America Merrill Lynch in Hopewell, New Jersey, tells PLANSPONSOR. “If you simplify their experience and make it easier for employees to engage and understand, they will almost always make a positive change.”

As an example, DeMaio explained that with Bank of America Merrill Lynch’s Express Enrollment, employers select three contribution rates from which employees can choose. Employers can also determine the order in which the rates are displayed. The order can have a major impact on employees’ decisions, which in turn may affect their retirement outcomes. More employees (43%) choose the first rate displayed than the second or third rate, even if the first rate is highest. “There are little things plan sponsors can do to help participants make the right decisions,” DeMaio notes.

The survey also found automatic enrollment plans with higher default contribution rates are seeing higher rates of participation as well. The average participation rate for plans with a 3% default contribution rate was 78%, compared to 83% and 88% for plans with 6% and 10% default contribution rates, respectively.

“We were really pleased by this finding. Employers should understand that if they increase the default [contribution rate], it doesn’t have a meaningful impact on opt-out rates,” DeMaio says. “The finding validates that plans are defaulting too low and participants recognize the need to save more.”

NEXT: Growth in Roth and managed account use

According to the Scorecard, growth in contributions and participation is taking place in both pre-tax and Roth accounts.

In 2015, Advice Access, an investment advisory service, added the Roth 401(k) to its suite of personalized, unbiased recommendations. This enhancement helped drive the growth in Roth usage during the year. The number of contributors to Roth accounts increased 38%, and total contributions increased 32%. More than half (52%) of Roth contributors also made pre-tax contributions.

Advice Access offers savings recommendations and investment advice, including a managed account feature and asset allocation with either one-time or periodic rebalancing. The number of employees using the Advice Access service increased 14% in 2015. In addition, 19% of employees using Advice Access are taking it one step further—providing additional information about their finances that allows them to receive even more customized recommendations.

“There are a few contributing factors to growth in managed account use,” according to DeMaio. “First, plan sponsors continue to recognize the value of providing advice and guidance to employees; it’s a great way to get employees on the right track.”

But, he points again to a change in strategy that contributed to the growth in managed account use. “We changed participants’ online experience to bring each employee’s retirement income projection to the home page to make it easy for them to see their retirement readiness and take action. Since then, we have seen a 106% increase in the number of participants enrolling in managed accounts.”

The Scorecard also found enrollment in health savings accounts (HSAs) continues to grow year over year. In 2015, the number of HSA accounts increased 47%, with total assets under management increasing 47% and average cash balances increasing 42%.

“We have begun to address HSA growth in light of the role it can have to help employees save for retirement, as well as existing health care costs,” DeMaio says. “As high-deductible health plans become more common, HSAs are becoming more common. It’s a unique solution for participants to save for retirement health care costs, and we try to give guidance to participants about how to best utilize HSAs’ advantages.”

He concludes that the key takeaway from the Scorecard results for plan sponsors is that through a combination of strategies, they can really change outcomes and impact participant behavior in a positive manner. “It’s a combination of plan design, such as auto features; education and communication, both targeted and face-to-face meetings where sponsors can answer employee questions; and tools employees can use to help them make the right choices.”

The Scorecard can be found here.

«