Retirement Investing: Time to Make It Personal

From left: Joe Ready, Executive Vice President and Director of Wells Fargo Institutional Retirement; Brock Johnson, Head of Global Retirement and Workplace Solutions for Morningstar.
Ready photographed by Bruce DeBoer;Johnson photographed by Todd Winters

The world of automatic plan design solutions and investment options has done wonders to help Americans save in their employer-sponsored defined contribution plans. Although those in the industry have embraced such elements and are generally in agreement about what the right goals for most people are, there can be some discomfort in making decisions for people about how their retirement contributions should be allocated. This has led to an increasing number of discussions and a variety of plan options about how to better personalize plans and investment solutions.

PLANSPONSOR recently sat down with Joe Ready, executive vice president and director of Wells Fargo Institutional Retirement and Trust, and Brock Johnson, head of global retirement and workplace solutions for Morningstar, to talk about how to better personalize participant investment solutions through Wells Fargo’s new managed account solution called Target My RetirementSM, powered by Morningstar Investment Management. This new solution combines the investment simplicity of a target-date fund with the more personalized approach of a traditional managed account.

PS: What’s the landscape of national retirement policy today?

Joe Ready: We’ve moved from where everything was done for you, in a defined benefit [DB] environment, to a defined contribution [DC] environment where you largely own your own outcome as a participant. People now have to engage more in order to succeed. Along with that, the DC space is projected to grow to almost $7 trillion in assets by 2020, leading to heightened sponsor focus and regulatory scrutiny. At the same time, we’ve also seen tremendous innovation, to give participants the tools and plan design to drive better results.

Brock Johnson: I agree, I think engagement in DC plans is a major issue that we have to address. The 401(k), for example, can be a great way to save for retirement, but it has created millions of accidental investors—people with limited interest, experience or time to prepare financially for retirement. As an industry, we need to keep innovating, developing solutions that will help people make informed decisions.

The landscape needs to be about saving more and spending less. As a nation, we simply aren’t saving enough—only about 5% of our disposable income, according to the Federal Reserve Bank of St. Louis. Additionally, we are accumulating too much debt. People are often spending more than they earn. This pattern is our biggest obstacle to getting people to meet their retirement goals.

Ready: There has been much negative discussion about whether or not 401(k) plans work. We know they work if people get into them early on and develop savings habits that get them to a savings rate of around 10%. The next biggest driver of success is how they allocate and invest. Leveraging the latest in technology, personalization, advice and tools can really help participants maximize their savings and ultimately the quality of life they can enjoy in retirement.

PS: As an industry, how far have we come in the 10 years since the Pension Protection Act [PPA] was introduced?

Johnson: We’ve come a long way. One of the success stories has been the introduction of target-date funds [TDFs] and the improvement they’ve provided to investment diversification in DC plans. But we now need to embrace solutions that offer a more complete, holistic approach—ones that address not only diversification, but also provide recommendations on savings rates and retirement age, and give participants an idea of how on-target they are to achieving their retirement goals. That is what a managed account offers.

At one point, the technology solutions and cost structure of managed-type products weren’t there. But technology has advanced to where providers can deliver such solutions in a much more scalable, efficient and cost-effective way.

Ready: The PPA has affected the DC industry more than anything in its history, especially as it pertains to auto-features. Success depends on getting people into the retirement plan, which plan sponsors now can do thanks to auto-enrollment; on getting them to save, which is the auto-deferral component; and on getting them invested appropriately—the auto-invest feature, which commonly defaults into target date funds as a qualified default investment alternative [QDIA].

Those steps have accelerated the level of saving and driven better outcomes for employees in workplace plans. However, evolution is ready to leap to more personalized and tailored solutions. “Auto” provisions have done a great job helping younger participants, but for those later in life, they’re looking for help beyond the auto solutions.

PS: Historically, how have participants obtained help?

Ready: We once thought we should educate everybody so they can make their own decisions. But not everyone has the desire or aptitude to learn about investing. With Millennials and Generation X, it’s more about starting them off with a basic understanding of the plan and the importance of retirement and then showing them what steps to consider next.

Our obligation and goal—whether through advice, guidance, a conversation or a meeting—is to show them that simple next best step, make it easy to execute, and then convey it’s not just a “one-and-done” approach.

Johnson: In the past, people relied heavily on friends, family, even co-workers, to make their investment decisions in their retirement accounts. Or they based decisions on past performance or the latest investment trends. Doing that often led to making bad decisions when the markets became volatile. Even today, we still see a lot of participants selling out of their portfolios when there is a downturn and then jumping back in when the markets turn around and prices are high.

People need professional management advice that’s based on their unique situation. That personalization can add significant value for the individuals we’re trying to help.

PS: Tell me about how this customized investment product works.

Ready: Expectations for more personalization are higher than ever in today’s technology- and data-driven environment. Wells Fargo’s Target My Retirement product goes beyond just the traditional “age and time horizon to retirement date”; it offers greater personalization and customization and, quite frankly, a recognition of the broader complexities people encounter in their financial planning.

This personalized investment solution incorporates gender, which is important because that affects life expectancy. It looks at participants’ current savings rates, at how much they’ve currently saved against their goal. It considers outside assets if they provide that information and integrates their Social Security trajectory. So, it leverages much more of what we already know about people, letting that inform their decision-making process even at the most basic default level, without creating extra work for the participant.

Johnson: We’ve talked about features that can add value, such as auto-enrollment, but it’s really how plan sponsors deliver those features that get people to take action and change their behavior. Plans should consider looking to auto-enroll into something that provides a personalized solution that evolves as participants’ needs change and become more complex.

Managed account-like solutions do that—they have benefits beyond just the investment piece. Our investment group found that our managed account users tend to increase their savings by approximately 2% on average over people not in that offering. Their diversification also improves: 48% have fewer than three funds in their portfolio before entering into a managed account or advice offering, afterward they have six or more.¹ We’ve also seen that managed account users tend to maintain their equity allocations and discipline in both up and down markets.

The Target My Retirement product not only offers these characteristics but does it in a way that’s easy to implement and, we think, will bring better outcomes for its users.

Ready: We discussed how target-date funds have been a great solution for our industry. But they have lagged behind when it comes to personalization. I think people want and expect more than just an asset allocation based on a five-year increment time horizon. In this global economy, market volatility is challenging and as an industry we can do a better job of helping people manage their investments.

We can leverage what we’ve learned from the simplicities of target-date funds and why they’ve resonated with people, while bringing the sophistication of a managed account. For a 55-year-old, a target date fund drives him or her toward retirement at age 65, which in theory looks no different than half a million others who may be in that series. There’s room for more customization. Our product addresses that. It considers all the attributes we talked about but with the easy interaction of a target-date fund. Participants only need to validate the year they want to retire, just like a target-date fund, but that kicks off a sequence of optional personalization questions. That is the power in the product.

It’s also multi-managed. We use best-in-class institutional money managers where they can add value in our recommended fund arrays, with proof of performance over time at an extremely attractive price point. Participants get the best of both worlds, which should improve their outcomes.

Johnson: As Joe mentioned, the main objective of this solution is to help participants achieve better outcomes. That has been our mission since we began offering managed retirement accounts almost 20 years ago as an independent and objective advice provider. I believe strongly that to improve the U.S. retirement system, we need to focus both on increasing savings rates and on providing participants with personalized portfolios that account for their unique characteristics and attributes. The move toward more customized and holistic solutions is the direction our industry is heading. There is so much room for innovation in this industry, and I am excited to work with providers like Wells Fargo that are willing to embrace it. This is an exciting time to be in the retirement space.

 ¹A total of 58,444 participants that used Morningstar Investment Management LLC’s managed accounts or advice service between 1/2006 and 2/2014 were included in this study. For important information regarding these research statistics and to download the full study, go to http://corporate.morningstar.com/US/documents/ResearchPapers/Expert_Guidance.pdf.

This information is for marketing and promotional purposes only. It does not constitute fiduciary advice or a recommendation with respect to an independent plan fiduciary’s decision to utilize the Target My Retirement investment solution. Recordkeeping, investment management, trustee, and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A.

Wells Fargo has retained Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc., as an independent financial expert to create investment strategies for the Target My Retirement solution. Morningstar Investment Management is not acting in the capacity of adviser to individual investors. Morningstar Investment Management LLC is not affiliated with Wells Fargo. The Morningstar name and logo are registered marks of Morningstar, Inc.

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