Products July 25, 2018

Prudential Promotes After-Tax Savings for the Unexpected

The feature utilizes an after-tax approach to accrue emergency savings.

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As Congress considers recently proposed legislation aiming to make it easier for employers to enroll employees in payroll deduction emergency savings accounts, Prudential Retirement has introduced an after-tax supplemental savings feature meant to help employees build emergency savings. 

Prudential worked with the Washington, D.C., nonprofit organization Prosperity Now to design a potential solution using payroll deductions to fund after-tax contributions. Prudential Retirement is now offering this feature to plan sponsors as part of their holistic workplace financial wellness package. According to the firm, the solution uses after-tax employee contributions to an existing retirement plan to build savings that can be accessed to cover emergencies. 

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“A small additional contribution each pay period may help build a financial cushion and reduce the effects of 401(k) plan withdrawals and loans that may cut into employees’ retirement savings and increase workforce costs for employers,” says Phil Waldeck, president of Prudential Retirement. “For employees that never need to use it, the money eventually adds to their long-term retirement savings.”

Prudential’s move comes at the same time that four U.S. senators proposed bills calling for increased access to various types of workplace savings accounts. Specifically, these series of bills would allow for pooled employer plans (PEPs); encourage employers to adopt automatic enrollment; automatically register workers in emergency savings accounts (otherwise referred to as “sidecar accounts”); and allow participants to automatically save tax refunds.

According to a Prudential white paper, “Increasing Financial Security with Workplace Emergency Savings,” 63% of participants state that they do not have the means to pay for a $500 emergency. All too often, participants are tapping into their tax advantaged retirement savings accounts to meet short-term needs, which in turn, sacrifices long-term financial goals. According to the survey, the millions of people with outstanding retirement plan loans are spending some $9 billion annually on loan fees alone. Overall, Prudential reports, 1.5% of 401(k)/individual retirement account assets are leaked out each year, reducing retirement wealth dramatically.

Investing July 24, 2018

Passive Investing and Smart Beta Stole the Show in 2017

Although smart beta is still a small category with just $430 billion in AUM, or 0.5% of the global total, it has grown by 30% a year since 2012, according to Boston Consulting Group.

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The Boston Consulting Group has published an expansive new report, “Global Asset Management 2018: The Digital Metamorphosis,” which includes numerous findings of interest for the retirement planning audience.

A team of 10 Boston Consulting staffers penned the report, finding that the global asset management industry has ballooned in recent decades to oversee $79.2 trillion in client wealth. During 2017, assets under management (AUM) grew at their strongest rate in a decade, a fact the report describes as “especially remarkable,” given the previous year’s “plodding performance.”  

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Important to note, however, is that “most of the bounce-back growth of 2017 was market driven, not structural.”

“Below the surface, pressure on margins due to continue fee erosion and cost pressures will persist,” the report warns, “especially when the strong equity market run eases or turns, as it eventually will.”

According to the report, when the equity market’s growth slows, net asset flows will likely return to lower levels. Signs of slowing in fact appeared in the first quarter of 2018 but have since abated somewhat.

“Institutional long-only asset managers recorded global net outflows in that quarter, after four positive quarters in 2017,” the report states. “Flows into mutual funds remained strong in most markets through the end of April 2018, representing 1.3% of AUM at the end of 2017. But in the U.S., a highly sophisticated global market, year-to-date net flows slowed to just 0.3% of AUM.”

Passive investing popularity continues

According to BCG, among asset management products, passives were far and away the fastest growing category in 2017, with a record 25% increase in AUM over an already very sizable base. As a result, the report shows, traditional active management products “continued to lose share against solutions and specialists.”

“Active now represents just one-third of total AUM, compared with 57% in 2003, even though strong flows in active fixed income more than compensated for outflows in active equity,” the report states. “Solutions, specialties and alternatives now own 50% of the market, versus one-third in 2003. … The results confirmed investors continuing shift to passive strategies, both in the retail segment and in the institutional segment.”

According to the BCG report, asset managers are feeling pressured by the popularity of passive investments, given that they can collect a lot more in fees from actively managed products. Notably, despite the major uptick in the relative use of passive products versus actives, passives accounted for just 6% of the asset management industry’s total revenues in 2017.

Smart Beta, alternatives and real assets

The report suggests the smart beta investing market remains small but is poised for strong and lasting growth.

“Although smart beta is still a small category with just $430 billion in AUM, or 0.5% of the global total, it has grown by 30% a year since 2012,” the report states. “In the future, smart beta will pose a substantial threat to traditional active players—potentially even greater than that of the overall shift to passives. That is because smart beta seeks to replicate active management results at lower costs to investors.”

According to BCG, fee levels for smart beta equity funds average about 35 basis points, or “well below the average of about 50 basis points for active equity products.”  

“We believe that smart beta growth will become a driver of organic consolidation in the industry going forward,” the report concludes. “The winners in smart beta should be able to leverage their scale, along with any early investment they make in relevant data infrastructure, to maintain lower fees than those that follow.”

Turning to alternative investments, the report finds this category grew by “just 8% in 2017,” or half the category’s pre-financial crisis growth rate.

“Nevertheless, their share of AUM and of revenues is increasing, and the category seems likely to remain relatively stable,” the report states. “Real-asset categories continue to benefit from fast growth, led by infrastructure’s 17% gain and followed by strong numbers for real estate and private debt. Private equity and hedge funds, on the other hand, were in low-growth territory, rising just 5% to 6% each.”

Also important to note, although costs decreased by 0.5 basis points for asset managers, the report concludes “this statistic reflects cost containment, not cost management.”

“Costs effectively increased by 69% of average AUM growth during 2017,” the report states. “This is a considerable rise, given the quantity of fixed costs involved. On the positive side, firms have a significant opportunity to boost efficiency. Many asset managers have not yet duly noted the importance of cost management.”

The full report is available for download here.

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