IMHO: London “Bridges”

While it afforded a good opportunity to visit with a number of providers in the European retirement plan market, the primary purpose of my trip was to acknowledge thefund manager and consultant standouts recognized by PLANSPONSOR Europe (which has just celebrated its one-year anniversary).

The luncheon itself was fascinating: As is often the case with such gatherings here, many of the attendees were well-acquainted with each other, a number had common employment histories and, as in the U.S., even those who worked for competing firms at the moment seemed to sense that it could change at any time.

Once we got past the potential impact of the latest Icelandic volcanic ash cloud, the traffic disruptions attendant with President Obama’s visit (which, of course, had been impacted by the latest Icelandic volcanic ash cloud), and the beautiful weather (which, fortunately, was apparently completely unaffected by the latest Icelandic volcanic ash cloud), the discussion turned to “shop.”

The group had some interesting questions for me:

Why are American pensions so heavily invested in stocks?

For the record, this audience apparently felt that a 60/40 allocation to stocks/bonds was the mirror image of a prudent allocation.  Of course, every fund is different, and every fund’s allocation is different.  I mentioned that I thought that, certainly over the long haul, American pensions have likely benefited more than they have suffered from their exposure to equities.  However, regardless of the realities, I know that those who make those decisions believe that.  One of the consultants at my table asked a corollary to the first question: why more American pensions haven’t adopted a stronger LDI (liability-driven investment) focus.  To that, I offered three observations: First, I think most American plan sponsors still believe they can, in fact, do “better” by pursuing alpha.  Second, while I think most American plan sponsors who have given some thought to LDI are intrigued with the concept, they aren’t quite convinced that the “theory” will work in reality.  But finally, I sense that more have embraced the concept than is probably appreciated, albeit in baby steps (purists will, of course, argue that incremental adoption can actually serve to undermine the effectiveness, but…).

Are target-date funds now totally discredited? 

The question was actually posed in a way that suggested that, whether they were or not, they should be.  That said, my short answer here was, absolutely not; that while 2008 had certainly shaken some, the rebound in the markets seemed to have taken much of the edge from that issue.  I noted that while I’ve seen data that suggest some are more interested in something other than a pure “date-based” allocation approach, and that, while there is more discussion around the whole “to versus through” retirement date design, my sense was that most providers hadn’t made significant shifts to their approach (or assumptions), and that few plan sponsors (and no participants) had made any changes in their target-date fund, or allocations to that suite.

In sum, I told this audience that I thought that the market rebound had given our industry a second chance on target-date designs—but that I wasn’t sure anyone was taking advantage of that, sadly.          

Why are Americans so opposed to annuities?

I told the audience that I have, on more than one occasion, noted that if we could figure out how we taught participants that annuities were “bad,” and could deploy that to teach them how retirement savings were good, we’d be on to something.  That said, I still think that there is a behavioral issue here—one that makes individuals reluctant to hand over a large pot of money today to someone else (particularly a large, faceless institution) so that they can have little pieces of that returned to them over a long period of time.  That the annuity ostensibly is expensive, that the individual may lack trust in the institution to which they are expected to hand over a life’s savings, that they can’t access those funds in an emergency—those are also legitimate issues.

All that notwithstanding, I think things could change—and perhaps change dramatically—if American plan sponsors were, in any credible way, encouraged to connect this post-employment investment decision to their workplace retirement plans.  The reality today is that most plan sponsors see this as an extension, rather than a reduction, of liability (and with reason, IMHO); there is a palpable sense that product development is still ongoing (and that the best model isn’t yet on the market); and beyond that, we all know that the Labor Department is evaluating alternatives/approaches as well.  In sum, employers have no compelling reason to jump in here, alongside several key indicators that suggest doing so could be expensive and/or premature.  Consequently, they are inclined to wait—and until that dynamic changes, it seems unlikely that participants will be overcoming their current reluctance, either.

Lessons Learned

Asked to share insights on “lessons learned” by the American pension system, I noted a couple.  First off, I noted that I thought we had never helped workers appreciate the value of a pension, and that, certainly from a financial standpoint, employers had probably never fully appreciated what it would take to fulfill that promise.  Moreover, that we were only just beginning to focus on helping workers appreciate what it would take to provide a lifetime of post-retirement income—and that, for some, that message would come too late to be of value. That whereas workers once blithely assumed that the market would “fix” their savings shortfalls, today’s most common unrealistic assumption was that they would simply be able to work longer (this, by the way, is a problem of a different ilk for employers in the UK, who might actually have to provide that employment).

One lesson that I thought we were only recently beginning to “get” was that, if retirement security is going to rely on a defined contribution system—particularly one where “defaults” are driving utilization—you can’t be coy about what it’s going to take.  And defaulting people into these programs at contribution levels that don’t even maximize the match, much less come close to what needs to be saved to achieve financial security in retirement—well, that is literally setting people up…to fail.