Investing February 1, 2019

Gen Xers Need a New Focus for Saving and Investing Amid Market Volatility

How the middle generation can protect retirement assets, even with the consequences of market volatility.
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While Millennials and Baby Boomers face the hurdles behind student loan debt and looming retirement, respectively, age 40-to-50-something-year-old Generation Xers struggle through these two obstacles concurrently, and usually, with more impending financial barriers on the horizon. 

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Raising children, saving for college tuition, and caring for a sick parent are only three of the many financial (and emotional) issues slowing the progress of saving for short- and-long term needs. Add in the anxieties behind 2018’s wave of market volatility, it makes sense why this middle generation is sacrificing more to fund their retirement.

Katherine Roy, chief retirement strategist at J.P. Morgan in New York City, says participants in this middle-age group should heavily consider discussing sequence of returns risk. Primarily a concern for those nearest retirement or already retired, this risk affects the amount of income for retirees—especially during periods of market downturn, withdrawing money from investments can hinder the direction of remaining withdrawals. If negative returns commence at the start of an investor’s retirement, it may heavily influence withdrawals for remaining years.

Since market volatility plays a large role in accessing negative or positive returns, Roy advises Gen Xers to protect their assets against sequence risk, even before retirement.  “Thinking about sequence of returns risk during your savings years, even before you retire, is really important,” she says, pointing out that even target-date fund (TDF) glide paths start derisking when participants reach their 40s and 50s.

Moving into this age group, a larger account balance is at risk, so losing a certain percent return, or utilizing the standard aggressive portfolio all younger workers have, can drastically alter the final outcome, Roy adds. 

Instead of continuously focusing on savings, Roy recommends participants take a look at their portfolio and question if they should be derisking—considering their risk capacity— either with the help of a target-date fund (TDF) or adviser. “Professional management with a target-date fund [TDF] or working with an adviser can be helpful in terms of actively guiding participants through that derisking process,” she says.

With a TDF, when investment managers see, or predict, a market decline, they can dial back or reduce the risk leading to the drop, says Tina Wilson, head of investment solutions at MassMutal in Enfield, Connecticut. “If you can protect their downside by allowing them to still participate in the upside of the market, that will have a significant difference on how much income they can produce in retirement,” she says.

According to Wilson, for those participants in their 40s, investing holds a heavier weight than savings, when related to impending income, even more so during a market downside. She says providing retirement plan participants with a financial score—a type of wellness calculator indicating financial health—is beneficial to approximating retirement wealth and deciding how to invest.

“Investments, the risks you take and the downside that you’re subjected to, are incredibly important in driving your future outcome,” she says. “You not only need to have a financial score, but you also need to have different product and investment strategies available to help protect assets on the downside.”

Additionally, Wilson mentions the usefulness of stable value funds during market volatility. While Millennials can afford an aggressive portfolio, Gen Xers and Baby Boomers are typically more interested in this type of account, since it provides returns with less risk. “When you’re very young you get little to no allocation to stable value, but as you progress and get closer to retirement, that stable value begins to be a core component, and it is designed to give you some downside protection,” she says.

And aside from concentrating on long-term savings, investments, risk and market volatility, Gen Xers need to fund for their short-term and mid-term needs as well, whether it’s a rainy-day savings fund for an emergency, a 529 plan for a child’s college education, or just everyday expenses.

“We have to help investors really think through all of that, says Wilson. “Give them prescriptive guidance on how to fund each of those things based on their needs, because if we don’t help them on the short term, then we can’t get them to be focused on retirement.”
Investing January 30, 2019

DC Plan Sponsors Slow to Adopt Hybrid QDIAs

Just as defined contribution (DC) plan sponsors were once concerned about automatically enrolling employees in the plan when they didn’t actively select it, they have hesitations about using qualified default investment alternatives (QDIAs) that automatically place participants in a managed account.
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Advisers and plan fiduciaries should keep abreast of new market offerings that may align with their participants’ needs. Such may be the case with new managed account strategies.

 

Nathan Voris, managing director, strategy, at Schwab retirement services in Richfield, Ohio, says managed accounts are growing in terms of market share. He says that “88% of the eligible defined contribution plans Charles Schwab administers offer either managed accounts or advice as an option.”

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“I’ve noticed anecdotally that the consultant community is conducting more due diligence regarding using managed accounts as the QDIA. If the consultants are starting to dig in to the details, then that’s a leading indicator that there will be some growth around the corner.”

 

Schwab recently built out the capability to offer dynamic qualified default investment alternatives (QDIAs), which are also called hybrid QDIAs.

 

The entry point for a typical hybrid QDIA is a target-date fund (TDF). But the thought behind a hybrid QDIA is that TDFs may lose their usefulness over time and moving into a more individualized investment option that considers more specific participant information may serve as a better choice when a participant reaches pre-retirement age.

Voris says, “Although we have the capability to offer dynamic QDIAs to our sponsors, when managed accounts are included as a QDIA, they are typically used as the QDIA for all participants in the plan rather than just a segment of participants.” 

 

Lorianne Pannozzo, senior VP, workplace planning and advice in Fidelity’s Boston office, says interest is really picking up on hybrid QDIA’s. 

 

Hybrid solutions by definition start as a simple and cost-effective balanced fund or TDF, and morph into a professionally managed account when the account balance becomes large enough to make additional customization worthwhile.

 

Pannozzo says, “The number of questions we’ve been receiving from sponsors and consultants has increased, however, we don’t have any who have done that. I’d say that it’s still in its evaluation stage and sponsors are taking baby steps towards it but not making what Fidelity calls its Smart QDIA the standard for their plan.”

 

In Fidelity’s Smart QDIA, plan sponsors enroll employees in either a TDF or a managed account–Pannozzo says it does not necessarily have to start as a TDF then evolve to a managed account. “If a participant meets certain eligibility and criteria determined by the plan, then their initial default could be the managed account and each year after, they are re-evaluated to ensure they still fit the criteria assigned by the sponsor. Simply put, some participants will default to a TDF and eventually switch to managed account default over time as their situation changes and the criteria set forth is a fit, but it doesn’t have to happen in that order or sequence, it is unique to the participant situation and sponsor criteria.” 

 

Roughly one-quarter of Fidelity’s plan sponsors offer a managed account, and the number of individuals using Fidelity’s workplace managed account solution has grown 400% over the last five years. Nearly 50% of employers on its platform with 5,000 or more employees offer managed accounts.

 

When asked why plan sponsors are slow to adopt managed accounts as the QDIA, Pannozzo said, they are still evaluating. She said that the first step is to make managed accounts available on their platform. Then they should do more campaigns around the active opt-in.

 

But in general, Pannozzo says, features like this take a while to adopt. “For example, auto enroll had been around for a super long time but it didn’t take off until the Pension Protection Act in 2006.  Two percent of plans had auto enroll in 2006 and now one-third of plans have auto enrollment.” 

 

Pannozzo continues, “The same trends were there. Early on sponsors were concerned about enrolling employees in something they didn’t actively select. That same parallel exists today with managed accounts. They’ve done that with a QDIA around a target date and I think they are still in the testing phase for the managed account before they feel that comfort in making it the default solution for someone who may not have selected it.”

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