Data & Research May 6, 2015

Boomers, Gen X Call Retirement Passe

Many Baby Boomers and members of Generation X feel the traditional notion of retirement is out of reach, according to a study from Allianz Life.
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Baby Boomers are in the throes of retirement, and Generation X is only steps behind. According to Generations Apart—a new study from Allianz Life Insurance Company of North America—the vast majority of both groups believe the traditional definition of retirement is a “romantic fantasy of the past.” More than eight in 10 (84%) from both generations said they feel that a retirement starting at age 65 spent “doing exactly what you want” is now unrealistic.

Gen X respondents were much more hopeless about their ability to achieve retirement goals and about their overall financial situation than their Boomer counterparts, the study found. More than two-thirds (67%) of Gen Xers agreed with the idea that supposed targets for how much you need to retire are way out of reach versus less than half of Boomers (49%).

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Significantly, more Gen X respondents also admitted to getting “bogged down with uncertainty when planning for retirement” (64% versus 43% of Boomers), believing it is “useless to plan for retirement when everything is so uncertain” (44% versus 31% of Boomers), and feeling that they will “never have enough money to stop working” (68% versus 43% of Boomers).

It’s been widely reported that Baby Boomers are worried about their retirement, but the financial planning and retirement concerns of Generation X have gotten less attention, according to Katie Libbe, vice president of consumer insights at Allianz Life. “While our study confirms that many Boomers still lack confidence about their future, it reveals alarming realities about the significant angst and pessimism Gen X feels regarding the current and future state of their finances,” she says. “They’re the next generation that’s quickly approaching retirement, and their hands-off approach to planning and preparation is alarming.”

Perhaps it’s a case of the grass is always greener on the other side of the fence. The study found that each generation in the study feels their circumstances are tougher to manage. Both Gen Xers and Boomers think that their generation is burdened with more expenses (90% and 80% agreement, respectively), more uncertainty (86% and 72%) and more risk (78% and 64%) than their counterparts.

However, when it comes to jobs, money, and retirement, even Baby Boomers agreed that Generation X has it much tougher in a number of areas. A majority of both Gen Xers (86%) and Boomers (65%) agreed that Gen X has it tougher when it comes to planning for retirement. Gen Xers (89%) and Boomers (68%) say it’s harder for Gen X to save money. Respondents also agreed it’s harder for Gen Xers to:

  • Keep a job – 85% of Gen Xers and 69% of Boomers agreed
  • Stay out of debt – 90% of Gen Xers and 72% of Boomers agreed
  • Get a job – 85% of Gen Xers and 73% of Boomers agreed

Next: Does financial anxiety lead to planning?

A Surprising Calm

The concerns about finances and the prospects of a comfortable retirement are quite clear, but both generations are disturbingly calm about planning for their financial futures. More than half of each generation agreed with the statement, “When it comes to retirement, I just have this feeling that everything’s going to work out.”

Nearly half of Gen X respondents (46%) said they would just figure out retirement when they get there, compared with just over one-third of Baby Boomers (36%). About half of Gen X (52%) also admitted they “just don’t think about putting money away for the future,” versus 32% of Boomers.

This “head-in-the-sand” approach to financial planning likely goes back to feelings of hopelessness these generations – particularly Generation X – have about their current situation, Allianz believes. Nearly three-quarters of Gen Xers (72%) and 60% of Boomers agree that it is “almost impossible to figure out what your (retirement) expenses are going to be.” More than half of Gen X respondents (52%) and nearly one-third of Boomers (32%) also agreed that with the amount of current expenses, they “just don’t think about putting money away for the future.” Present-day financial challenges mean that nearly half of Gen Xers (48%) and more than one-quarter of Boomers (27%) say they are not clear about how much money they’ll need to retire.

“The disconnect between planning and expectations from both generations is concerning, but it’s clear the financial services industry needs to provide more resources and support for Generation X,” Libbe says. “Although they are not as close to retirement as Boomers, Gen Xers need to understand that a successful tomorrow can only happen through careful planning today. Whether they choose to start making simple changes on their own or get advice from a financial professional, they must move past the negativity and take control of their finances.”

The Allianz Generations Apart Study, fielded by Larson Research and Strategy Consulting, was conducted online in November with 2,000 U.S. adults nationwide, ages 35 to 67, with a minimum household income of $30,000. Respondents were split evenly between men and women, and between Baby Boomers (ages 49 to 67) and Gen Xers (ages 35 to 48).

More information about the Generations Apart Study is on the website of Allianz Life.

Compliance May 6, 2015

Money Market Fund Reform Likely Warrants Changes

Some believe more 401(k) plans will switch to government money market funds to respond to SEC rule changes.
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The recent money market fund reforms adopted by the Securities and Exchange Commission (SEC), which take effect in October 2016, will require retirement plan advisers to review the money market funds in their plan sponsor clients’ lineups and possibly recommend changes, experts say.

The reforms will affect nearly two-thirds of all defined contribution (DC) plans, as 63.5% have money market funds in their lineup, according to the 2014 PLANSPONSOR Defined Contribution Survey.

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The rule amendments require investment managers to establish a floating net asset value (NAV) for institutional prime money market funds, among other changes. The amendments also allow non-government money market funds to use liquidity fees and redemption gates to better control outflows in times of stress.

“Institutional clients in endowments and pension plans aregoing to be greatly affected because of the floating NAV,” says Jay Sommariva, vice president and senior fixed-income portfolio manager at Fort Pitt Capital Group in Pittsburgh. “While on paper, retail clients in 401(k) plans will not be affected because the retail funds will maintain a constant $1 NAV—just like in 2008, when the largest money market fund in the nation ‘broke the buck’ due to its holding of Lehman Brothers and some structured investment vehicles (SIVs) associated with distressed mortgages—there is a chance assets in the retail funds can depreciate. They might also impose a redemption gate or a 2% penalty to take your money out.”

These changes underscore the fact that money market funds, as Sommariva puts it, “were never risk-free and should not be viewed as such” moving forward.

Fund providers seem to be taking note of the changes as well—with large volume providers such as Charles Schwab recently announcing to clients that in times of major market stress, its retail prime and municipal money market funds will have the ability to implement liquidity feeds or redemption gates. This is why Sommariva believes that advisers to 401(k) plans will recommend that the plans replace their retail money market funds with government money market funds, “which provide higher credit and liquidity standards”—and will not have liquidity fees or redemption gates.

The typical money market fund in 401(k) plans today is a prime fund that invests in both corporate and government bonds, says Kendrick Wakeman, founder and CEO of FinMason, a provider of an online financial research tools, based in Boston. As a result of the money market reform, Wakeman expects prime funds will be replaced by a “bifurcated” approach where some funds invest solely in government bonds and others solely in corporate bonds.

“The net effect is that sponsors whose participants want a pure cash alternative will invest in the government money market funds, while sponsors whose participants want to get more yield to at least keep up with inflation will invest in the corporate money market funds, which will have redemption gates and liquidity fees,” Wakeman says. Advisers should begin the conversation with their plan sponsor clients now as to which approach they want to take, he says. If the adviser believes a corporate money market fund is the right choice for the sponsor, they “should be prepared to explain why the extra return is worth the extra risk,” he says.

The redemption gates and liquidity fees should “only be a rare occurrence,” says Joan Ohlbaum Swirsky, counsel with Stradley Ronon Stevens & Young LLP of Philadelphia. “If weekly liquid assets fall below 30%, the fund can impose a liquidity fee up to 2% as well as a redemption gate. If weekly liquid assets fall below 10%, a 1% liquidity fee will be imposed, unless the board decides otherwise,” Ohlbaum Swirsky says. “Under normal circumstances, the fee and gate requirements aren’t expected to be imposed.”

Advisers to pension plans are also likely to move to government money market funds, Sommariva says. “When their money market funds move to a floating NAV, they cannot be considered to be cash, and the best alternative is the government money market funds. I have never thought of stable value or guaranteed fixed-income funds as suitable replacements for money market funds or cash,” because they have inherent risks and are not as liquid as government money market funds, he says. Wakeman, however, doesn’t expect the floating NAV will be of any great concern to pension plans, as “they are sophisticated investors who have a great deal of exposure to equities and are therefore used to seeing the value of their holdings fluctuate.”

Because the new rules include enhanced diversification disclosure and stress testing requirements, along with updated reporting, advisers will need to review the money market funds in a plan’s lineup “more stringently and every quarter,” Sommariva says. “The review should be part of the overall investment policy decision, just like any other investment.”

Advisers should look at the credit ratings of the holdings in money market funds, Wakeman adds. “The reporting will make for more transparency for money market funds,” Ohlbaum Swirsky says. “There will be more information on their daily and weekly liquid assets, along with daily weekly inflows or outflows, and the Securities and Exchange Commission will require them to report their NAV to the fourth decimal place.” In addition, she notes, instead of the money market funds publicly reporting their holdings every month with a 60-day delay, the SEC will require them to publicly report their holdings every month within five business days.

At the end of the day, all money market funds will be invested very differently by October 2016 than they are today, Sommariva believes. Because of the higher credit standards the rule imposes on the funds, “the rules will mandate money market funds to look different—with shorter duration, higher quality and more liquid investments.” That means even non-government money market funds will hold more government securities, he says. And the institutional money market funds with a floating NAV “will dramatically decline in number or disappear entirely. Since the funds can no longer qualify as cash, investors will move into another vehicle,” he says.

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