The closings in general won’t have much impact, according to
Rusty Vanneman, chief investment officer of CLS Investments in Omaha, Nebraska,
because in the defined contribution (DC) world, ETFs have not had a lot of
traction. “Over mutual funds, in aggregate, they have lower costs,” Vanneman
tells PLANSPONSOR, and this notable cost advantage might persist, especially as
new smart or strategic beta ETFs come to market.
“These smart beta ETFs are eating mutual funds for lunch,”
Vanneman says. “They’re taking active management in a rules-based format and
putting them in a portfolio at a very attractive cost.”
One issue that could be preventing greater use of ETFs in DC
plans is their tradability, Vanneman says. It can be complex and challenging to
trade ETFs effectively, he says, adding that Schwab’s launch of a full-service 401(k) program based on ETFs will be interesting. “It could be a game changer, to see
them in the DC world in a much bigger size. I’m enthusiastic about the
possibility of ETFs in DC plans.”
Vanneman calls the BlackRock news disappointing, even though
at only about $300 million the asset flows were very low in the target-date
series. “BlackRock does some cool work, so it’s mildly surprising, but I get
it,” he says.
In Vanneman’s opinion, the big three in the target-date fund (TDF) marketplace
are T. Rowe Price, Vanguard and Fidelity. Because of this expertise, he expects they will eventually have
target-date ETFs. “That said, I think the one who will crack this nut is
Schwab,” he says. “They’re not one of the big three, but they are leading the
charge on figuring out how to put ETFs in DC plans. Just a guess, though.”
Trading in the following iShares ETFs will halt at the end
of business on October 14:
MSCI
Far East Financials (FEFN)
MSCI
Emerging Markets Financials (EMFN)
MSCI
Emerging Markets Materials (EMMT)
Retail
Real Estate Capped (RTL)
Industrial/Office
Real Estate Capped (FNIO)
Global
Nuclear Energy (NUCL)
NYSE
100 (NY)
NYSE
Composite (NYC)
Trading in the following iShares target-date ETFs will also
end at the close of business on October 14:
Some Participants Using RMD as Guide for Draw Down
September 12, 2014 (PLANSPONSOR.com) - Some retirement plan participants think the required minimum distribution (RMD) is a good guide for an appropriate withdrawal rate in retirement, research suggests.
Researchers
at TIAA-CREF set out to determine the effect on participants of the RMD waiver allowed in 2009,
but as they probed the issue, it created more questions, according to David
Richardson, a Charlotte, North Carolina-based senior economist for the TIAA-CREF Institute. According to the survey report, published by the Bureau of Economic
Research, a key motive for the survey was to explore the reasons behind
participants’ decisions to suspend or not suspend their RMDs.
More
than 80% of respondents indicated that “allowing money to continue growing tax
free/save on taxes” was a very important factor in their decision to
suspend their RMDs. Among those that did not suspend, roughly one-third
indicated that they “depend on distributions for daily spending
needs,” and another 27% listed this as a somewhat important factor in their
decision not to suspend. However, 39% of those who did not suspend indicated
that this was not important in their decision-making. This led researchers to further
explore the responses about needing RMD funds to cover spending needs, and ask
whether respondents think RMDs are a guide to an appropriate draw-down rate in
retirement.
Using administrative
records TIAA-CREF holds for retirement plan participants who take RMDs, the
researchers assigned survey respondents to quintiles by assets under management. Those in the lowest quintile have a 37% suspension rate, compared
with 48% for those in the highest quintile. Researchers were surprised to find the
percentage of survey respondents who say they could cover their spending needs without
the RMD declines as the amount of assets at TIAA-CREF rises, from 88% (lowest
quintile) to 79% (highest quintile). The researchers say this raises the
possibility that some of those who are in the lowest quintile may have assets
at other financial services firms that they use to support day-to-day consumption.
The
survey responses also suggest that those with larger asset holdings at
TIAA-CREF are more likely to assign some guidance role to the RMD amounts. The
difference of more than twenty percentage points in the response to this question
between the participants in the lowest (36%) and highest (58%) quintiles also may
indicate that those with larger asset holdings at TIAA-CREF may not have as
much assets elsewhere and rely more on income from assets from TIAA-CREF as a
source of household income. Richardson admits this is a limitation of the survey
and that it would be helpful to know about participants’ assets in other accounts.
A
2012 study found that using the RMD as a retirement savings withdrawal strategy does
almost as well as traditional withdrawal options and outperforms the 4% rule.
But, Richardson tells PLANSPONSOR “under a certain very restrictive set of
assumptions about mortality and return, the RMD can provide a good guide for a
draw down strategy, but we would think almost no one would meet that restrictive
criteria.”
He says there are a number of risks of using the RMD as a guide to spending in retirement. “It is not like longevity insurance;
participants will draw down assets earlier and will have a lower level of
assets generating income in later years than if they annuitized. What if there
was another recession like in 2008? What if the participant has unexpected
expenses? I don’t see RMDs as helping participants be prepared for these
scenarios.”
Richardson adds that people using the RMD as a guide to a good spendable amount in
retirement do not take into account market volatility. “That’s why the
government allowed the suspension in 2009, they didn’t want people to realize
capital losses on RMDs after the economy crashed,” he notes.
Richardson says it is
important to remember that the RMD was designed to meet tax-policy objectives,
not retirement-security objectives—it was established to help the government
get back some of the tax deferral of retirement account contributions. However, he notes that as defined
contribution (DC) plans become the dominant way people receive retirement
income, there is more interest in making sure RMD rules do not damage
participants’ retirement security. “We don’t want a draw-down schedule that
reduces the likelihood of people having financial security later in life.”
Richardson says a good first step in the trade-off between tax-policy objectives and
retirement security objectives was included in the Internal Revenue Service's (IRS) proposed rules about longevity annuities—the
rules would permit retirement account holders to use up to 25% of their account
balance or $125,000, whichever is less, to purchase a qualifying longevity
annuity without concern about noncompliance with RMD requirements.
For
people really concerned about being forced to take assets out of their
retirement accounts too early, Richardson suggests they can convert their assets
to Roth accounts and will not have to worry about taking an RMD.
According
to Richardson, the research shows there is still a lot of work retirement plan sponsors
can do to provide retirement guidance and advice. “Especially as participants approach
retirement, they need to be able to look at strategies for spending in
retirement and making sure their assets are sustainable throughout their
lifetime,” he says.
While behavioral
finance has sparked changes to how plan sponsors get participants to accumulate
assets for retirement—automatic enrollment, automatic investing solutions—the
TIAA-CREF Institute is thinking about how to apply behavioral finance to at-retirement
decisions. “We
want plan sponsors to offer programs for education and advice about retirement
withdrawal strategies, and incent participants to take advantage of those
programs,” Richardson says.
The research report, "Do Required Minimum Distributions Matter? The Effect of the 2009 Holiday on Retirement Plan Distributions," is available for download here.