O3 PRIME: The Retirement Program of the Future for Your Workforce of the Future
We have a retirement crisis in the U.S. It’s affecting the majority of employees and most employers as well. We think the data bears this out.
According to recent surveys done by other firms, 81% of American workers view financial independence in retirement, defined loosely as having enough guaranteed lifetime income to not worry about outliving their means, as important or critically important. At the same time, a different survey indicated that 47% of American workers are on track to retire. Or, said differently, 53% of American workers are not on track to retire.
We might view that as an employee issue, but this crisis affects employers at least as much. Nearly every survey we have seen over the last 18 months shows that the three top priorities for HR executives are attracting and retaining employees, workforce management and DEI initiatives. In a survey that we took roughly three years ago, 76% of highly compensated employees said they would be more productive at work if they believed they were on track to retire. Among women and racial and ethnic minorities, and particularly those who are not highly compensated, the problem is even more severe.
What Employees Want and What Employers Want
The retirement program of tomorrow for the workforce of tomorrow must have a solution to these problems. It must solve the problems, not just for employees, but for employers as well. That’s why we’ve launched O3 PRIME. For employers, it’s Personalized Retirement Income for My Employees. For employees, it’s Personalized Retirement Income for ME.
O3 PRIME is built to provide great outcomes for employers and for their employees. For employers, O3 PRIME:
- Delivers predictable and affordable costs,
- Facilitates workforce management and
- Enhances attraction and aids in retention of a diverse workforce in ways that provide for highly equitable outcomes.
For employees, O3 PRIME:
- Provides opportunities for guaranteed lifetime income on a fair and equitable basis,
- Is affordable for all employees and
- Is designed to allow each employee to customize it to their own personal needs.
Before we dive into what O3 PRIME is, let’s consider what the typical retirement program is today. It will give us a point of comparison. It will show us where those typical programs fall short and why they do. It was our analysis of those shortcomings that led us to build a better way.
The Current Model is Not Working
The current employer/employee model provides opportunities for employees to save. In fact, it falls down when an employee chooses not to save or simply does not have the financial wherewithal to do so. It falls short when an employee stops saving (whether that is temporary or permanent), when that employee is forced to invest those savings but lacks the financial acumen to do it, or when that cessation in savings is due to a financial hardship and they have to access some of those savings.
So much is based on those savings. In 2023, employees are being told to save money in their 401(k) or other savings plan, save money in their health savings account (HSA) in order to pay medical expenses and save money in their 529 plan so that their children can get a post-secondary education without going deeply into debt.
That’s a lot of savings. Most Americans can’t do it. Survey data shows that of those currently saving as much as they need to in those various plans, 41% of Gen Z and millennials say that they are financing those savings by maxing out new credit cards taken out for the purpose of financing savings.
Nearly two-thirds of American workers say their financial independence is in jeopardy. About three-quarters say inflation has changed the way they think about retirement, on average pushing back their planned retirement by about three years.
It affects people. It affects their work as well as those non-work hours. 48% of American workers feel anxious about the future. 30% of workers, but nearly 40% of Gen Z workers, can’t fall asleep because they are worried about their finances. 25% of workers, (30% of Millennial workers) say their family and social relationships are strained because of their personal financial situations. 22% of American workers, (30% for Gen Z, admit that their financial situations cause them to be distracted at work.
That is not sustainable. It’s not affordable.
That’s why we need O3 PRIME.
Fixing the Problem
O3 PRIME is simply a group of accounts that run side by side, financed differently and with different purposes. But, as parallel accounts, they work together at retirement. And because they work together, they become flexible, personal and customizable for each employee. They fit the needs of a diverse workforce.
Let’s start with security. Security means something different to each of us. That’s why every employee in an O3 PRIME program will have Security Accounts that are personalized to them.
The Security Accounts are paid for by employers. Once eligible, employees get them as a condition of continued employment.
When an employee gets ready to begin receiving their benefit, they will have options. They can choose how they will take their benefits – as a monthly amount payable for their life, as a monthly benefit that covers both their life and the life of their beneficiary, as a single lump-sum payment or some other way – and get those benefits at a fair price. Unlike what we see in 401(k) plans, the conversion of the account to guaranteed lifetime income is done at an actuarially fair price. This will help to solve many of the truly significant concerns we noted earlier.
The Security Accounts benefit employers as well. Employers can design these programs to facilitate workforce management. They can provide financial incentives within the Security Accounts for employees to exit the workforce at particular ages knowing that those employees do, in fact, have the security built up to head into retirement.
Each employee is different. Every employer has its own set of goals, objectives and needs from its employees. That’s why each Security Account is designed on a customized basis for each of them.
Security is really only a basic minimum. An employee’s Security Account is designed to give them enough to retire on. But there’s no way to anticipate each employee’s individual circumstances. That’s why O3 PRIME also has Personal Accounts.
As employees, your Personal Accounts are intended to start with your desire and your ability to save. Employees will save according to their own means and their own desire to save. For employees that do choose to save, employers might choose to supplement those savings. Because each employee is unique, these Personal Accounts may be invested in default funds, or the employees may choose to invest them according to their own needs. In either case, they are free to make their own decisions according to their needs, their expectations, their risk tolerance and their financial acumen.
The Account Details
Let’s dig a bit deeper. How do these accounts actually work and how do they work together?
We’ll start with the Personal Account because it’s simple and something employees and employers are used to. Employees save their own money in the account and they do so on some tax-favored basis. Employers may then choose to supplement the employee money. Employees will be free to invest the money as they choose, but for those employees with a fear of investing, employers will be able to direct the employees’ accounts for them into default investments.
The Security Account is a somewhat newer concept. It’s paid for entirely by the employer and the money in it is invested by the employer. Here’s how it works.
Each pay period, a percentage of an employee’s compensation will be credited to their account. That money will grow with a rate of return that will vary based on the asset return of some bucket of investments. It could be the assets in the plan; it could be a mix of stock index funds and bond index funds; it could be investments similar to those available in the Personal Account. It just needs to be some bucket of assets that are well-defined and could be available on the open market. Because of that, we refer to a market rate of return.
Many employees worry about such market investments though. They saw what happened in 2022 when essentially every asset class suffered steep declines in value. So, in the Security Account, every employee will at the very least be guaranteed a return of principal. In other words, if some amount, say $100,000, has gone into their account, they will be guaranteed that their account be worth at least that $100,000 at a benefit commencement date. And if an employer sponsor thinks that a mere return of principal is not sufficient, they can even guarantee some positive return.
Of course, providing that floor on account value has a cost. If a sponsor views that it is important to offset some of that cost, they may also put a ceiling on returns. For example, any returns in excess of 10% per year might be capped at 10%. And at the employer sponsor’s discretion, those excess returns might be saved for the employee to make up for future years when returns are not as high.
How does an employer determine how much money to allocate each year to an employee’s Security Account? This is part of the design process. An employer might choose to allocate the same percentage, say 5% of pay, to everyone. This might be a great attraction device, but it’s not a great retention device. In our experience, it’s far better to reward employees who have been with the company longer. The law allows this within limits.
An allocation formula that serves as a great retention mechanism will have some grading to it; that is, the percentage allocated to a younger, newer employee will be less than the percentage allocated to an older, longer-tenured employee.
Consider this example:
|Age plus years of service||Allocation as percentage of pay|
|Less than 40||3.00%|
|At least 40, but less than 50||4.00%|
|At least 50, but less than 60||5.50%|
|At least 60, but less than 70||7.50%|
|At least 70, but less than 80||10.00%|
|At least 80, but less than 90||13.50%|
|Greater than 90||18.00%|
That looks like a great retention device, but perhaps it’s too expensive. If it is, we scale it back a bit. We can do this because the Security Account is not an off-the-shelf product, but a design developed to meet the needs of each employer separately, taking into account their specific workforce.
When an employee decides to leave the company, as long as they are vested, the Security Account balance belongs to them. They can choose to take it in cash, but they already have their Personal Account for that purpose. In 2023, employees are saying they fear outliving their savings. They are asking for guaranteed lifetime income. And they want guaranteed lifetime income at a fair price from a source they trust. More than anyplace else, they are saying they trust it if it is coming from the employer with whom they earned it.
That’s part of the beauty of the Security Account. Your employees watched their accounts grow while they were working. But when they get to retirement age, they can convert it to guaranteed lifetime income from their employer with no middleman. It’s an actuarially equivalent transaction.
Not every employee wants that guaranteed lifetime income in the same way. Some would prefer to maximize their benefit and take guaranteed income for their life. Others might like to protect their spouse or other beneficiary for their lifetime as well and are willing to take a reduced amount in order to do so.
Bells and Whistles
That’s the basic version of O3 PRIME. It’s the Security Account and the Personal Account – one to provide guaranteed lifetime income and one to provide supplemental savings. But we know that every one of your employees is unique, so each one wants retirement benefits that are customized for their unique situation. At the same time, every employer is unique, and each of you want solutions that are customized for your workforce.
Let’s start with your workforce. Each one is different. Some employers highly value the wisdom of long-tenured older employees. Others seek to manage them out while still treating them fairly.
O3 PRIME addresses this by building in incentives or motivators at the choice of employers. If you’d really like employees to consider retiring at age 62, we build in appropriate incentives during the design phase. They could take several different forms, including providing a subsidized conversion from the Security Account to guaranteed lifetime income for those employees retiring between ages 62 and 65 or by adding a Special Care Account to be used for health-related expenses in retirement. You choose the group whose behaviors you want to motivate and we’ll design the incentives to accomplish that goal.
Some employees really want guaranteed lifetime income, but are also afraid to elect it. While they fear living too long without that guarantee, they also fear not living long enough to have gotten full value of the lifetime income. O3 PRIME contemplates this.
While not every employer will want to offer it, O3 PRIME allows for a special form of guaranteed lifetime income such that if the retired employee dies before receiving amounts equal to their entire account balance, it pays the remainder to their surviving spouse or other beneficiary. From an employee standpoint, they can neither live too long for O3 PRIME nor will they die too soon to have gotten full value from their benefit.
We said that the two (or more) accounts work together, but we haven’t really addressed that yet. For starters, when an employee looks at their accounts, they even have the optics of working together. When an employee looks at their retirement web portal, they’ll see both accounts – the Security Account and the Personal Account – being valued daily and viewed side by side.
To repeat, the Security Account provides guaranteed lifetime income while the Personal Account provides supplemental savings opportunities.
When we design the program, however, it’s with your whole workforce in mind. But we know that each of your employees is different. One might think that the Security Account provides enough lifetime income; another might not. One might fear inflation; another might not.
Your employees have two accounts running in parallel. We don’t want the employees mixing the accounts up before they start taking their benefits. At the same time, the accounts should be theirs to use as they need them.
That’s why O3 PRIME builds in a transfer opportunity. An employee who doesn’t think they have enough guaranteed lifetime income can fix that. They’ll simply transfer money from their Personal Account to their Security Account to buy additional guaranteed lifetime income. For those that have a fear of inflation being too steep for them, they’ll transfer some money from their Personal Account to their Security Account to buy some inflation protection up to a limit.
That’s O3 PRIME.
Personalized Retirement Income for My Employees and Personalized Retirement Income for ME.