Administration January 6, 2017

Fidelity Predicts Retirement Industry Trends for 2017

An increased focus on education and wellness and plan designs focusing on retirement income are among trends Fidelity sees as gaining more traction this year.
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Fidelity has predictions for retirement plan trends this year, and it expects more focus on education and wellness.

The company notes that employees don’t leave their financial problems at home, which leads to distractions and lower productivity at work. That’s why more employers are offering tools to help with budgeting, debt management, prioritizing savings goals and managing life events such as a wedding or buying a new home. One example of the strong need by employees: Fidelity’s online financial wellness experience has received more than one-million visits since April by those needing information.

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Fidelity also expects more online and on-demand benefits education. Attendance at Fidelity’s live web education sessions is up 52% and use of on-demand seminars is up 62% since 2012. In addition, the “take action” rates for on-demand seminars are consistently higher than both virtual web sessions and in-person seminars. Employees of all ages are gravitating to the sessions, which range from the basics such as impact of increasing savings, to the complex, such as Social Security claiming strategies.

But it’s not all about financial wellness. Benefits programs are evolving into total well-being platforms. Employers are educating workers about the value of health savings accounts (HSAs) and offering financial incentives for participation in wellness programs (weight loss, smoking cessations, etc.). They are also focused on helping employees transitioning into retirement ensure their retirement savings isn’t depleted by health care costs. 

NEXT: Focus on retirement income and stricter guidelines for loans

Fidelity notes that employers are concerned that many employees aren’t saving enough and won’t be financially ready to retire. Workplace savings plans haven’t typically been designed with an income replacement goal in mind, but more employers are using auto solutions and higher default deferral rates to put employees on the right track. As of today, nearly one-in-five employers design their plan with a target specific income replacement rate, compared to only 4% of employers in 2013.

The company also predicts stricter guidelines around defined contribution (DC) plan loans. Most people who take loans do so for needs such as home repairs, medical bills and unplanned expenses, Fidelity research shows, but half of those loan-takers get another loan (or more). Employers are putting stricter rules around loans and are using data to determine where proactive education may be needed to help avoid the cycle of repeat borrowing.

Fidelity expects a rise in the use of target-date funds (TDFs) and managed accounts. More than 45% of 401(k) participants have all their plan assets in a target-date fund, up from 20% in 2010. For younger participants, 65% have all their assets in a target-date fund. In terms of managed accounts, the number of employees utilizing this option has nearly tripled over the last two years.

Finally, the company is looking at changes in Washington. The Department of Labor (DOL) fiduciary rule is expected to transform the retirement plan industry, particularly with the role and compensation for financial advisers. Today, advisers’ fees vary based on a plan’s investment options—different funds paid at different rates. But Fidelity is seeing advisers move to a flat payment approach where their compensation and fees are the same regardless of the investments.

Investing January 6, 2017

Can Adding Private Equity to TDFs Boost Performance?

Including private equity into the asset class mix of a DC plan participant’s TDF could generate additional savings of $484,168, according to a new study.

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Adding private equity to a custom target-date fund (TDF) could improve expected returns without incurring significant risk, according to a study by Pantheon, a private equity and real assets investor.

The firm found that a defined contribution (DC) plan participant could potentially increase savings distributable by about 8.7% at the funds maturity in year 45 by adding private equity, generating a potential return with an additional $172,794—assuming an annual investment of $6,424 through the fund’s lifespan.

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The study suggests that annual savings of $12,000 could generate additional savings of $322,779; and annual savings of $18,000 could lead to additional savings of $484,168.

Furthermore, the firm found that higher allocations to private equity during the first 30 years could enhance the fund’s performance even further. Pantheon defined the optimal allocation as 7.1% during the first 30 years of the TDF, followed by an allocation of 6.98%, 6% and 5.28% in years 30, 35 and 40 respectively. Of course, past performance is no guarantee of future returns.

As reference data, Pantheon turned to the assumed forward returns of the JP Morgan Asset Management 2016 Long-Term Capital Market Assumptions. This annual publication outlines expectations of how risk, return, and correlations across asset classes may develop through coming decades. Pantheon took this approach “because it is more conservative than using historical returns as the J.P. Morgan forecasts factors in declining excess private equity returns.”

The research team drew TDF glide path data from Fidelity Investments. The firm notes “The TDFs we sourced from Fidelity had maturity dates between 2020 and 2060. Since the maturity dates of the sourced TDFs lie in the future, the glide path data represents Fidelity’s current expectations of future asset allocations.” The team then added Private Equity into the TDF asset class mix to examine whether its inclusion could significantly increase expected returns without changing the TDFs risk profile.

The full study can be found at Pantheon.com

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