Investing February 11, 2019

What Baby Boomers Can Do When Market Volatility Hits Near Retirement

Experts weigh in on how to balance a near retirement future with instability in the market.
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Art by Dalbert B. Vilarino

By now, Baby Boomers have likely surpassed all financially-burdening checkpoints: student loan debt, paying down a home mortgage, and polishing off a heightening credit card bill. Yet, one crisis-inducing obstacle still conjures emotional and financial anxiety—market volatility.

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Although Millennial and even Generation X participants can profit off this instability—literally—due to a mash of portfolio aggressiveness and flexible time control, a Boomers’ investments, typically more conservative, may not pay off as well during a market downturn. Factor in that this group will also be the first to largely rely on their defined contribution (DC) plans for retirement income, and enter panic mode.

However, Katherine Roy, chief retirement strategist at J.P. Morgan in New York City, pinpoints strategies plan sponsors, advisers and participants can apply to expand savings, whether it’s accumulating monies or time. The first? Introduce participants to an emergency reserve bucket, focused on funding years in retirement instead of months.

“Be proactive about the type of liquidity or cash you’re going to need to live, not just this year but multiple years out, and make sure you have that buffer against the volatility you might experience,” she says. “Put more of your equity exposure further out into your horizon, so you’re not dependent on your equities for food budget this year, you have a little bit of space and are using time to your advantage.”

Roy emphasizes that while reserving an emergency bucket strategy is critical across all generations, it’s importance weighs heavier for individuals nearing retirement, especially as personal spending rises during those post-work years. For example, she says, a retiree’s utilities bill will rise as they transition into retirement, as these former employees tend to stay home more and utilize and buy additional household products. Blending this form of spending volatility to unpredictability in the market is dangerous, therefore Boomers must sustain a larger budget to suit their needs.

“You’re going into a completely new life stage, shifting from a work lifestyle to a leisure lifestyle, and so our bucket recommendation is not just this one to three-year income gap, but continuing to maintain a cushion so that as you transition and opportunities present themselves, you’ll be able to adjust and account for those types of unexpected increases in expenses,” Roy says.

Tina Wilson, head of investment solutions at MassMutual in Enfield, Connecticut, stresses the importance for plan sponsors of having a refined financial wellness strategy beginning 10 to 15 years before retirement.  She explains how financial wellness features, such as pre-retirement seminars and sessions, can help Boomers understand and personalize their financial situation, whether it’s how their assets are invested, creating sustainable nonguaranteed income streams or managing market volatility.  

“Baby Boomers need to understand their overall financial wellness, and as they approach retirement, how do they best look at things like maximizing Social Security, creating a sustainable income stream, and what are the strategies they need to deploy?” she says.

Wilson credits the Great Recession, when many Baby Boomers looking to retire were greatly impacted by investment risk, with providing lessons for plan sponsors and advisers about how to shape the intricacies of retirement planning.

“That really was a pivotal moment in the industry to allow us and everyone to focus on making sure that we’re having those conversations ahead of time, making sure we’re talking about and factoring things like the impact of Social Security into financial wellness, because your outcome has a number of components in it—it’s how much you’re going to get from your DC plan, how much you’re going to get from Social Security, the assets that you have outside of your plan, how you invest—all of those things need to be looked at in conjunction with one another,” she says.

Additionally, implementing a tailored retirement readiness score can show Baby Boomers any gaps they have in retirement income and help them create a personalized action plan. “You actually have to show that all in conjunction and in a way that helps that individual drive a better outcome based on their own personal circumstances and family circumstances,” Wilson says.

According to Roy, Baby Boomers also need to consider a strategy for required minimum distributions (RMDs). When they reach age 70 ½, they are required to withdraw from their DC plans, whether they need the payments or not. Roy says DC plan participants should map out when to take RMD disbursements, and to avoid holding it off for the end of the year, offering a reminder that the recent wave of market volatility occurred during the last days of 2018.

DC plan participants want to be proactive and look for market situations or market opportunities to make sure they are getting the most from their RMDs, she adds.

Additionally, stable value funds have seen extreme popularity over the years with Gen Xers and Boomers, as they deliver higher returns with lower risk. “That’s certainly one investing mechanism that’s been incredibly powerful, and has really demonstrated that it does protect on the downside while allowing people to participate when the market is rising,” says Wilson.

As participants progress through life stages, they will be affected by market volatility, but education, awareness and the right action can influence the impact. In 2008, when the Great Recession hit, for example, those who remained in their investments now hold portfolios worth 50% more than those who pulled their money out immediately. Additionally, a recent MassMutual Retirement Savings Risk study reported that while 80% of pre-retirees believe their cost of living will lower in retirement, only 50% of retirees found that to be the case. Anxiety about the market and retirement will occur, but it’s up to plan sponsors and advisers to diminish the apprehension.
Investing February 8, 2019

How and When to Encourage Use of Managed Accounts

While some defined contribution (DC) plan participants may choose to invest in a managed account, there may be others who don’t choose to do so that would benefit from investing in one.
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Art by Wesley Allsbrook
Art by Wesley Allsbrook
Art by Wesley Allsbrook

Many defined contribution (DC) retirement plans default participants into a target-date fund (TDF), but also offer managed accounts—financial planning solutions based on a participant’s personal financial situation utilizing an investment management approach.

 

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While some participants may choose to invest in a managed account, there may be others who don’t choose to do so that would benefit from investing in one.

 

Many in the industry are proposing managed accounts as a qualified default investment alternative (QDIA), says Jodi Epstein, partner with Ivins, Phillips & Barker, Chartered in Washington D.C., “But having a managed account as the QDIA means participants are not actively choosing it and providing more information about themselves, which would tailor the underlying investment selections to their specific circumstances. I have a difficult time seeing how fiduciaries can justify the cost of a managed account compared to, for instance, a target-date fund.”

 

The concept of a hybrid QDIA—one that initially defaults participants into a TDF then moves them to a managed account at a certain point, for example, an age nearing retirement—is gaining attention in the retirement plan industry. But, deciding when and how to move participants automatically from one product to another leaves Epstein with fiduciary concerns.

 

Epstein says, “If I had a committee interested in a hybrid QDIA, I would have them document how flipping a non-engaged 50-year old from a TDF at 15 basis points to a managed account at 45 basis points is prudent. The participant can opt out, but because this is the default option, they are by definition not engaged so they probably won’t opt out, and the managed account is twice as expensive and may or may not give them an advantage.”

 

Managed accounts are the default for 4% of DC plans, according to a 2018 Callan report, and the availability of managed accounts has steadily increased over the last decade, up from 6% of plans in 2005 to 55% of plans in 2017.

 

The data available about participants has increased exponentially from 2007 compared to today. According to a white paper from Morningstar Investment Management LLC, “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” in 2007, most recordkeepers knew a participants age and plan balance—some recordkeepers also knew four other data points which included salary, savings rate, employer match and employer tiered match.

 

By 2017, most recordkeepers knew seven additional data points including salary, savings rate, brokerage account investments, location, loans, employer match and employer tiered match—some recordkeepers also know a participants retirement age, pension, gender and outside assets.  

 

Managed accounts as an opt-in investment

 

“Managed account adoption as an opt-in varies greatly from low single digits to 40%”, says David Blanchett, head of Retirement Research at Morningstar Investment Management, LLC. “The difference is based on plan sponsor support and how the managed account is integrated into promotion materials and on recordkeeper platforms.”

 

According to Mike Volo, senior partner, Cammack Retirement Group in Wellesley, Massachusetts, “The price of managed accounts has been driven down. They are typically 30 to 40 basis points on average which compared to, for example, a retail managed account at 1% of assets, on a relative basis is quite appealing.”

 

Managed accounts have been around for 40 years but they were slow to pick up momentum until the QDIA rules changed and they became a potential default. Volo says, “I’m still seeing the vast majority of plans using managed accounts as an opt-in solution. Adoption is usually in the single digits because participants are often not aware that the managed accounts are available.”

 

Encouraging managed account use

 

The big question is how and when to educate and encourage DC plan participants to engage with a managed account. “It all comes down to targeted communications,” Volo says. “The adviser working with the plan sponsor and the recordkeeper can outline a communication strategy to target the participants for which a managed account may be a good solution. Whether it’s based upon age, account balance or likely a combination of both, participants can receive targeted communications making them aware of the offering, explaining what it is, and that may increase adoption.”

 

Lorianne Pannozzo, senior VP, workplace planning and advice in Fidelity’s Boston office agrees that targeted communications have the most impact. “It’s a matter of who you send the value proposition to and let them actively opt-in to it.”

 

There is a very clear value proposition for a managed account—it’s personalized and suits those with more complex financial needs, Pannozzo says. “At Fidelity we have support tools to help a person decide whether or not they can invest their assets themselves or if they are a target-date fund or managed account type of investor. But in most instances, you are sending targeted communications and allowing the participant to decide for themselves what is right for them.”

 

From a plan sponsor fiduciary perspective, Epstein says it is much less risky telling participants a managed account is available rather than defaulting them into one. She would suggest to clients that they use verbiage such as “you may want to consider” or “you may want to learn more about this option and here’s how to do that.”

 

“If it’s available as an option, you certainly want people to know it’s there. And it’s fine to explain who it may be appropriate for—at what age or level of assets in the plan and out of the plan,” Epstein says.

 

Nathan Voris, managing director, strategy, at Schwab retirement services in Richfield, Ohio says, “It’s easy to talk about the pre-retiree and managed accounts because it’s more tangible. But if you look at the math there’s a lot of value for younger folks as well.”

 

He says there are advantages for the average Millennial to enroll in a managed account—the personalization, the savings effects that comes along with a managed solution plus participants tend to be stickier through periods of volatility.

 

Volo says, “It’s all about creating awareness—highlighting the benefits and features of a managed account. I do think for participants who have more complex needs, larger balances and outside assets, the features and benefits of managed accounts will encourage them to seriously consider one as an option.”

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