PSNC 2017: Retirement Security at an Inflection Point
“We are at a unique inflection point in history, with a number of forces converging simultaneously that are forever changing how we approach retirement,” argued Joe Ready, of Wells Fargo Institutional Retirement and Trust.
Aging populations and work forces are placing an increased strain on the federal, public and private retirement systems, warned Joe Ready, executive vice president and director of Wells Fargo Institutional Retirement and Trust, addressing the 2017 PLANSPONSOR National Conference, in Washington, D.C.
“We all have been living for some time in a world of consumer direction, but this is finally having an impact in the retirement space,” he said.
“Now that the retirement world has shifted from a defined benefit [DB] approach to defined contribution [DC], we all have more responsibility than ever before to provide for our own retirement. It is an enormous responsibility that we have foisted onto individuals who really have little preparedness,” he said. “Anyone who is responsible for building and running plans must be tuned into the rapid pace of change, which has only increased and will only increase.”
Ready noted that, today, still only 23% of retired people draw a major portion of their income from DC plans. He shared research data suggesting that this figure will increase dramatically in the next 10 years as other sources of income fade.
“By the year 2020, it is projected that total retirement plan assets saved by individuals will be $24 trillion,” he observed. “If you dig into that, $18 trillion will be wholly self-directed assets. That’s what I am talking about when I mention ‘consumer-directed retirement.’ It is particularly informative to compare this number with the $2.8 trillion in the Social Security Trust Fund today. People are going to be mostly responsible on their own for funding their retirement.”
Ready posited that a confluence of legislation, social forces, regulation and technological development are fundamentally changing the character of the retirement planning market, adding that “the plan sponsors, advisers and providers in the room today can have a big influence on all of this, making sure change is positive rather than negative.
“Anything that improves access to workplace retirement savings plans and influences people to save more for their future—we must support this,” he urged PSNC attendees. “On the flip side, we need to protect our industry from negative aspects of tax reform. We need to continue to use our collective voice to stand up for what is right for our industry and our participants.”
Ready concluded, many of today’s retirement planning challenges can be “addressed and even solved through what I call ‘technology with a purpose.’ We need to be creating and implementing highly targeted and efficient communications and solutions that are very aggressive in helping participants get on the right track. We need to make retirement planning simpler, more targeted, timelier and more relevant for all workers.”
Speaking at the 2017 PLANSPONSOR National Conference in Washington, D.C., two industry experts weighed in on top trends affecting retirement plan administration. Daniel Bruns, head of large defined contribution (DC) plan strategy and solutions for Morningstar Investment Management Inc., and Drew Carrington, head of institutional defined contribution – U.S. at Franklin Templeton Institutional LLC, discussed topics ranging from a new take on retirement income solutions, to the sizable impact that data analysis is having on plan customization—and the rest of those below—all reflecting current industry trends. The executives’ insights derive from their work with retirement plans and the sponsors who run them.
-Rethinking Retirement Income: The Inherent Appeal of a Distinct Retirement Income Tier.When discussing the role of retirement income in today’s plans, Carrington said, “I want to step back from retirement income having a single solution. The problem is, that’s a unicorn that just does not exist.”
Instead, Carrington noted, the concept of retirement income is broader than a single investment option. “It’s a tool kit made available to participants that includes friendly plan design, targeted communication about over-age-50 catch-up contributions and a Social Security optimizer, to name just a few.”
-Making Income the Outcome – Trends in Developing Retirement Income Solutions. Bruns noted an acceleration in developing income solutions over the past year. “As an industry, we’ve given participants the chance to create great assets. Now they need help on the second half—how to invest these assets and how to take distributions.”
He pointed to three distribution solutions: a “through,” versus a “to,” target-date fund (TDF); a managed payout fund, which has a set distribution schedule of usually 4% but can be expensive; or a managed account, which also can be expensive.
-The Oversimplification of Overchoice: The Call for Curation—Rather than Elimination—of Choice. Industry experts have spoken for a long time about behaviors and participant decisionmaking, but where is the role of choice in retirement plans today? According to Carrington, “Automation has been great for the most vulnerable population—the young. But overall, the defined contribution (DC) industry tends to equate changes with expertise.
“We think participants don’t have the expertise to make their own choices, but maybe we’ve taken it too far,” he said. “Participants have preferences. As they become more engaged with their plan—when they are older and their assets have become more significant—limiting their choices can become problematic; they may want more differentiated options.”
-Core Menu Design in the Age of Default Investing. Bruns had a different view than many in the industry regarding how many funds should comprise a retirement plan lineup. He concurred with Carrington that core menus need to be expanded. “There has been a lot of movement on this trend,” he observed.
“Let’s re-examine the average person. He is defaulted into an asset allocation that he stays in until he leaves. [Average people] represent 80% of the participant population. But the other 20% want to do it themselves. They’ve been with the plan longer; they have more assets and are savvy investors. Diversification is important and is the only free lunch in the industry.”
NEXT: Working beyond prepackaged TDFs
-Working Beyond Prepackaged TDFs. As is well-known in the industry, target-date funds (TDFs) have gathered huge amounts of assets in the industry. Carrington feels that the funds have been a great tool, offering diversification for new employees. Still, he said, “DC investments have become more customized and defined-benefit [DB]-like but not in a standalone format—these custom funds have now been incorporated into the TDF.”
He continued, “We can go astray. By the time a participant gets to ages 50 and 60, his rate of equity may be too high. Picking one TDF can’t be right for all participants; it should vary according to the context of that person, overall.”
-Balancing Cost and Personalization in Selecting Appropriate QDIAs. Morningstar has plans in a variety of sizes, and, Bruns said, the plan sponsors often find QDIA selection a struggle. “The choice has to be right for the specific plan. When asked if we can help, we start with three primary questions: Does the plan sponsor have something that’s different than an average U.S. plan such as a company stock or a DB plan? Does the plan sponsor value personalization? Is the plan sponsor looking for participant advice?”
Morningstar has developed a process of analyzing demographic information to help make a decision on the right QDIA, Bruns said. “What existed five years ago, in terms of pricing and service, is in no way indicative of the current market.” He suggests re-evaluating QDIA options every two years.
-Targeted Communications and Resources to Aid the Retirement Transition. Carrington noted that, in order for plan sponsors to reach out to participants in the most effective way, they need to look hard at the targeted demographics. For instance, he said, “Currently, job tenures for younger and older participants are about four or five years. With that said, for new employees to be auto[matically] enrolled at 6% when, in their previous job, their deferral had perhaps already increased to 10%, does not make sense. Invite them to save as they were.” This is one example of a targeted group, he said.
Another example would be those turning 50, whom the sponsor could target to consider catch-up contributions, Carrington said. That milestone birthday can become a trigger point to remind them that they have the opportunity to save more for retirement. “This kind of targeted message drives behavior. We may think they are not engaged, but targeted messaging shows otherwise. Do not generalize based on averages,” Carrington said.
-Using “Big Data” to Improve Plan Analysis. The push to use data is coming from service providers, and it has already transformed the industry, according to Bruns. “In the past, industry professionals would struggle to get four data points on a participant. If you fast-forward to today, we can get 12 points, and that allows us to better understand how they are tracking and then how we can help to move the needle,” he said.
He believes that, in the future, providers will begin to share data points about individuals. “Currently, this information is not shared willingly,” he said. However, he thought it was just a matter of time before, just as the health industry shares data, retirement service providers will join the data sharing revolution.
Working With Recordkeeping Partners. Morningstar, which works with 27 recordkeepers, has seen them evolve and become increasingly innovative, adding new products, dynamic QDIAs and mobile applications, all of which bring value to participants, Bruns said. “They are also adding widgets, which help engage younger participants. Recordkeepers are really investing in their space, so we expect to see many new features in the next couple of years.”