Redefining Retirement Income

Transcription

1 Redefining Retirement Income Understanding the challenges of converting savings to retirement income and working toward effective solutions May 2018 In brief g While retirement income is a challenging problem, we believe plan sponsors have an opportunity to help drive investing behaviors among participants and retirees that could lead to a better retirement outcome. g Defined contribution participants and retirees understand what retirement income product features they might need, such as reliable income throughout retirement, but they don't always invest for this outcome. Peter Delaney, Director Investment Solutions MFS Investment Management g Given clear evidence that retirees are using the core menu options in their DC plan as retirement income solutions, we believe it makes sense to rethink core menu design to accommodate their needs. With 60% of US retirement assets invested in defined contribution plans, and that percentage expected to grow, the DC system's ability to provide sufficient income for retirees will continue to take on more importance. 1 Participants have made progress in doing their part to accumulate savings, and plan sponsors have made strides in driving the utilization of their plans. Going forward, however, the focus will change to identifying the most effective approaches for converting retirement savings into retirement income. Certainly that's a challenge, but it also presents a valuable opportunity for plan sponsors to help put participants and retirees on a path that may improve their retirement income experience. We believe it's a matter of redefining retirement income and rethinking the DC plan's core menu. That starts with a deep understanding of the retirement income challenges participants and retirees face today, the investment solutions available to them in DC plans now and, most important, how they're currently using their core DC menu for accumulation and deaccumulation. MFS' global retirement income survey of participants and retirees gave us great insight into these topics and many others, which we'll share from a US perspective. Retirement income today To fully understand what's driving participant and retiree investing behaviors, we should keep in mind their primary concerns about retirement maintaining their current lifestyle and creating income from their savings. According to our survery, less than half of participants and retirees feel they're knowledgeable enough to turn their potential resources (i.e. retirement savings, Social Security, pensions, stocks) into a sufficient monthly income in retirement. The DC industry is trying to lessen the burden on participants by developing retirement income options and providing resources aligned with their retirement income needs. 2 When we look at utilization rates, however, only 50% of plans offer a retirement income solution. Among those that do, managed accounts and drawdown modeling services are the most popular, while annuitybased retirement income products aren't widely utilized. 1 Data Sources: US Assets - Investment Company Institute ((2Q 2017), UK Assets - Broadridge Market Intelligence Source: 2017 Callan DC Trends Survey.

2 Low utilization certainly doesn't result from a lack of effort on the part of plan sponsors, as they are actively researching and exploring retirement income options for participants and retirees. While a single product solution that addresses the retirement income needs of every retiree is the hope, the reality is that the solution will likely involve many complementary elements that may already exist today or aren't far from coming to fruition. Complicating progress are mixed signals from participants with respect to what they want from retirement income products. Our survey found that participants value the features and benefits typically associated with annuities, yet they don't actually want or use an annuity in retirement. As shown in Exhibit 1, participants indicate that they're interested in longevity insurance (40%), products that provide a predictable income stream (49%) and products that provide payments that adjust for inflation (51%). Yet only 27% of participants and 35% of retirees include annuities in their top three choices when asked to rank the products best suited to their retirement needs. While annuities will likely be a significant part of retirement income solutions going forward, there may be major challenges to their gaining wider acceptance among retirees. Exhibit 1: Participants are interested in annuity-like features, but not annuities How interested would you be in learning more about the following investment options, services or features if they were offered by your company's retirement plan? 40% 49% 51% Longevity insurance A product that provides a predictable stream of payments/income throughout retirement, beginning at a predetermined age The provision of regular payments throughout retirement that increase with inflation 40% 49% 51% (Participants that strongly agree/agree) Annuities (Reporting: Ranked as top 3 product) 27% 35% Participants Retirees (Participants that strongly agree/agree) 27% 35% Source: 2017 MFS Retirement Income Survey. 2 of 6

3 Understanding participant perspectives That participants want predictable income that keeps pace with inflation through retirement isn't surprising. It's noteworthy, however, that retirees are using DC plans for their retirement income needs today. That finding indicates an important connection between the DC plan's core menu and current retirement income needs. The options within the core menu that participants and retirees deem suitable for retirement income are somewhat intuitive. In our survey, participants indicate that target date funds were the top choice, followed closely by equity mutual funds, individual stocks and fixed income (see Exhibit 2). For retirees, the top three products identified as suitable for retirement are equity mutual funds, individual stocks and cash, with target date funds ranked significantly lower. Exhibit 2: Reality: Core menu options are viewed as retirement income options Top-ranked investment products 19% 20% Participant Retiree 17% 15% 14% 15% 12% 11% 13% 8% 8% 9% 5% 3% Target date funds Equity mutual funds Individual stocks Fixed income mutual funds Cash Annuity Individual bonds Source: 2017 MFS Retirement Income Survey. This means that a core menu option selection may have to be viewed from the two distinct perspectives of participants and retirees. In addition, menu design may need to account not only for the growth that participants seek but also the income and safety that retirees require. This connection with the core menu will likely remain as retiree participants expect to stay in their employer's plan post-retirement. The data in Exhibit 3 indicate that only 26% of participants expect to keep their money in the plan upon retirement, but more than 54% of retirees surveyed end up keeping their money in the plan rather than rolling it over. 3 of 6

4 Exhibit 3: Reality: Retirees are using current plan sponsors' options for retirement income today What will participants do with their employer plan upon retirement? Did you roll over assets out of your employer s plan upon retirement? Roll over to savings account Purchase annuity 6% 3% Keep money in plan Not sure 19% 26% Participants No 54% Retirees Roll over to account I ll manage myself 23% 23% Roll over to account managed by FA Source: 2017 MFS Retirement Income Survey. If most retirees aren't rolling their assets out of their employer's plan and they view core menu options as retirement income solutions, how can employers play a role in the retirement income conversation? The role of the employer According to our survey, more than half of participants and retirees consider their employer influential when it comes to saving and investing for retirement, and nearly half consider their employer to be a trustworthy source of advice on saving and investing. We believe these data suggest that employers have been successful building a strong rapport with participants on topics related to saving and investing. Addtionally, the survey indicates that this rapport isn't as strong when the topic turns to retirement income. We believe sponsors looking for the opportunity to play a bigger part in the retirement income conversation should leverage the trust and influence they've built through the participant's saving years as they seek to foster a better dialogue in the years leading up to retirement. Revisiting the core menu Tapping that opportunity starts by recognizing that the DC plan core menu plays a dual role saving for retirement and investing for retirement income. Currently, the majority of DC plan assets are invested through the core menu. Exhibit 4 shows that older participants allocated approximately three-quarters of their assets using core menu options on average, while younger participants, typically more frequent users of target date funds, invested less than half their assets in core menu options. 4 of 6

5 Exhibit 4: Dual role of the core menu Participants Average asset allocation to core menu Retirees Remaining in the plan post retirement 45.9% 74.2% 77.2% 54.0% Age 20s 40s 60s Overall Source: Participant data: EBRI Issue Brief, no. 346: "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015." Core retiree data: MFS 2017 Retirement Income Survey. While default options like target date funds will likely continue to gather assets and may be utilized more often, the core menu will also play a critical role in driving retirement outcomes. We see this as an impetus to redefine retirement income in such a way that the role and impact of the core DC menu are factored in. To help improve the retirement income experience of their employees, plan sponsors should consider taking the steps below related to core menu design. The solution: design a dual-role core menu There are three areas of focus in rethinking core menu design to address retirement income needs: Demographics Plan sponsors should work with their record-keeper to see who's using the investment options available in their plan today. This could help identify certain asset classes or options widely held by retirees. Core menu structure Sponsors with a large retiree population that holds equities, for example, might consider their equity options in light of the needs of this population. They should consider equity options that focus on downside risk management to help manage sequencing risk for retirees. Another idea to consider is white-labeled, objective-based solutions. White labeling essentially the core options in such a way as to help participants and retirees better understand the intended objective or role. Sponsors willing to consider a more innovative option could add a tier of investment options just for retirees (i.e., a "retirement tier"). Governance Here, sponsors need to take a step back and thoughtfully evaluate their governance, first by looking at their plan documents and asking some important questions. Are retirees allowed to stay in the plan? Does the sponsor want retirees to use the plan? How easy is it for participants and retirees to roll in assets from outside the plan? What's the naming convention of the plan and how might that influence participant or retiree investment choices? 5 of 6

6 Continuing the conversation At present, retirement income remains a challenging proposition, as the efforts to develop suitable products and solutions are still ramping up. In the interim, however, with clear evidence that participants and retirees use their DC core menu options as retirement income solutions, plan sponsors have an opportunity to help them make better choices through education and core menu design. Getting retirement income right is becoming increasingly important, as more and more baby boomers retire every day and fewer individuals have access to defined benefit plans. The steps we take today with respect to core menu design could potentially drive better outcomes for participants and better retirement experiences for retirees. MFS Institutional Advisors, Inc. 1 MFS Retirement Income Survey Methodology: Mode: 15-minute online survey. Sponsorship: MFS was not identified as research sponsor. Field period: May 30 June 13, Weighting: Data were weighted to reflect the age/gender balance of retiree and participant populations. US base: 700 members, 300 retirees, US Census 2010 balanced gender within each age group; Participant, 2014 ERBI Databook balanced age/gender by participants in workplace plans. The views expressed are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. MFS-RETINC-WP-5/18 6 of