2019 Retirement Outlook and Investment Insights

A newly Democrat-controlled House, a volatile stock market and uncertainty about interest rates means plan sponsors are starting 2019 in a very different place than in 2018. The return of market volatility in particular will play a critical role in how they make allocation decisions. For many plan sponsors and participants, a decade of relative calm means this will be the first full year in a while for grappling with this issue. All of the above, coupled with significant movement in some of the industry’s longer-term trends, could make the next 12 months pivotal.

In the piece that follows, we look ahead to some key trends retirement plan sponsors may expect to see this year, as well as issues they may face and our thoughts on how to address them.

Uncertainty and lower-for-longer returns

As the longest bull market on record enters its 10th year, market observers are questioning how long the cycle can last. Overall economic fundamentals are solid, yet there are several issues to give investors pause, including ongoing trade tension with China, uncertainty around the outcome of Brexit and increasing public and individual debt burden.

In our recently released “MFS Long Term Capital Market Expectations” commentary we estimated that returns for the next 10 years will be relatively low by historical standards. For example, a hypothetical portfolio of 60% global equity and 40% global bonds is estimated to have a 10-year annualized return of approximately 4.3%.

The potential for these low returns and uncertain outcomes may warrant a thorough review of strategic asset allocation. Defined contribution (DC) sponsors should reinforce messaging about saving levels, as lower returns may necessitate saving more; they should also revisit tools and other resources to better educate participants—especially those nearing retirement—about asset allocation and diversification.

Interest rates

The Federal Reserve has indicated a positive outlook for the U.S. economy; however, global trade tensions combined with signs of potentially peaking growth have elicited more dovish comments from the Fed, which could make fewer rate hikes this year than previously expected. While we anticipate a modest increase in short-term rates, we see head winds that could hamper higher rates at the longer end of the curve, and we also anticipate credit market volatility will persist.

For defined benefit (DB) plans, this could result in a modest decrease in plan liabilities, assuming stable long-term Treasury yields and potentially wider credit spreads. This decrease could be offset by corresponding fixed-income performance for sponsors that have hedged some or all of their interest rate exposure. The new year is a good time for sponsors to revisit their fixed-income portfolio and make sure it still aligns with plan liabilities, which may have changed during the previous year due to demographic movements.

For DC plans, short-term interest rate movements should not affect asset allocation, but participants should review their portfolio to determine if their risk profile is right for them.

Continued expansion of the pension risk transfer marketplace

Last year saw significant activity in the risk transfer space for DB plans. Annuity buyouts were $16 billion through the third quarter and should have ended the year at well over $20 billion; 2019 promises more of the same activity.

Plan sponsors considering a cash-out, partial annuity buyout or plan termination should align asset allocation with a risk transfer strategy. Careful consideration should be given to which assets will be liquidated and what the allocation will look like post-transfer. Sponsors considering asset-in-kind transfers for an annuity buyout should work with their portfolio manager and insurer to determine any adjustments to be made to the portfolio prior to the transfer.

DC plan sponsors should ensure that participants have clear guidance on the pros and cons of lump sums and should also review their 401(k) fund lineup to determine if any changes are warranted given the potential inflow of assets.

Increased focus on longevity and retirement income solutions

While DB sponsors have long focused on longevity planning, DC sponsors and financial advisers are beginning to see the need. With roughly 10,000 Baby Boomers retiring each day, there is immense demand for products and services that can help participants receive a predictable source of income.

We expect 2019 will see significant progress on longevity solutions, based on a framework that might include Social Security, income generating investments, annuity products and spending strategies. Fintech, too, will play a major role here, offering new, innovative and customized solutions for individual retirees.

Limited movement on retirement reform from the new Congress

In January, Democrats took control of the House of Representative while Republicans maintained a hold on the Senate. Although we don’t anticipate any major policy changes on the retirement front, we expect to see activity concerning the following:

• Multiple employer defined contribution plans (MEPs). This type of plan, which has received much discussion of late, would allow for unrelated small companies to participate in the same plan, potentially making it easier for them to provide retirement benefits to their employees.
• Support for multiemployer defined benefit plans in critical health. There are proposals to help shore up the Pension Benefit Guaranty Corporation (PBGC) insurance program for multiemployer plans, which projections say could be insolvent by the end of fiscal year 2025.
• Flexibility for plan sponsors left with small participant balances. Auto portability is being debated to allow for employers to automatically transfer a terminating worker’s small account to the plan of his new company. This is a small but important step that will help with the issue of “disrupted journeys,” which has become increasingly prevalent with more Americans working multiple jobs over their career.

With so many varied issues to consider, there are sure to be surprises, so we hope this piece can help plan sponsors prepare for what will likely be an eventful year.

Jonathan Barry, FSA, CFA, is a senior retirement strategist at MFS Investment Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.