Data & Research June 28, 2023

BlackRock, Policy Group Detail Results of Delaying Social Security, Adding Guaranteed Income

Researchers ran participant simulations to show retirement income spending power could get an almost 30% boost with the strategies.

 

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The retirement industry continues to work at solving the conundrum of decumulating assets in retirement . In the case of BlackRock Inc. and the Bipartisan Policy Center, the organizations tried 100,000 variations to come up with a best-case scenario for an average worker.

The researchers considered a 35-year-old retirement saver with an annual income of $44,000, a 5% savings rate into a 50/50 split of stocks and fixed income, and a current retirement account balance of $19,000. For that worker, delaying social security to age 67 (the full Social Security retirement age for anyone born after 1960) and adding a fixed income, insurance-backed annuity, would provide 29% more spending power in retirement when compared to a similar person taking Social Security at 65 and not adding an annuity, according to partnered research released last week title “Paving the Way to Optimized Retirement Income.”

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BlackRock and BPS ran two other strategies with their sample retirement saver. In the first example, the participant uses a de-risking strategy of shifting investment to 60% fixed income, 40% equities by retirement age, and takes Social Security at 65. In the second, the saver maintains a 50/50 stocks to fixed income split, begins “gradually” purchasing a series of deferred annuities between ages 55 and 65, and also starts taking Social Security at 65. In the simulation, the second saver ends up with more growth from equity investment, without sacrificing on risk with the annuity additions, according to the report.

The third strategy, however, adding guaranteed income and delaying Social Security to 67, comes out best.

“An optimal retirement-income strategy considers the totality of the retirement-income toolkit,” the researchers wrote. “Taking a whole-portfolio approach that protects against multiple risk factors allows for comprehensive solutions that help to increase the chances of meeting the saver’s ultimate financial objectives.”

BlackRock, which sells workplace retirement solutions including annuities provided through a defined contribution plans, said it did the research “because we think more people could use these levers if they knew about the benefits they can provide.”

The New York-based firm, as well as the BPC, noted in the report their endorsement of workplace retirement plan support given by federal law, including SECURE 2.0. But the organizations also called for more engagement and support from policymakers to both encourage participants to delay Social Security withdrawals and to bring lifetime-income options within plan.

“Regulators and policymakers have made important efforts to encourage innovation in lifetime-income products, yet more can be done to fuel this shift,” the report stated. “These actors have historically played an important role in contributing to innovation and serving as a sounding board for industry constituents. Continued—or even elevated—levels of engagement could lead to further product innovation to better prepare participants for spending in retirement.”

Wayne Park, the recently named CEO of retirement at John Hancock, noted in a separate interview that while the retirement industry has done well with retirement savings accumulation, finding the right formula for decumulation continues to be a challenge.

“You could say of accumulation—when you have a long time horizon—target dates have been great,” he says. “But on the income side you have to factor in so many things that are different from person to person and their situation. And I think that’s what makes it complex.”

Park says that working with a financial adviser, as opposed to relying on an in-plan product offering, continues to be the best way for a participant to maximize retirement saving and planning for decumulation. While he says John Hancock, which is owned by ManuLife Investment Management, is considering and will continue to work on in-plan retirement income options, the best outcomes for participants currently remain with individualized advice.

“Don’t forget the non-financial considerations,” he says. “People running out of money is probably one of the biggest fears out there, so how do you address that in a meaningful way? I think there’s a human element that you have to incorporate.”

The BlackRock and BPC report noted that, while Americans can hold off taking Social Security to age 70, almost 60% of beneficiaries claim the benefit before the full retirement age of 67.

When it come to in-plan income annuities, only 10% of retirement plans currently offer them, the report notes, citing a study by consulting firm Mercer, owned by MarshMcLennan.

The research was conducted earlier this year with lead authors Jason Fichtner, vice president and chief economist at BPC, and Matt Soifer, managing director and head of distribution, retirement group for BlackRock. The researchers leveraged BlackRock’s proprietary modeling, according to the report.

Compliance June 27, 2023

Does Swing Pricing Have a Time Zone Problem?

Several House Democrats expressed concern to SEC officials that a hard close at 4 p.m. Eastern time would discriminate against investors on Pacific time.

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Democrats on the House Subcommittee on Capital Markets expressed skepticism on Friday at the SEC’s swing pricing proposal, especially the “hard close” element.

Republicans on the House Committee on Appropriations last week advanced a spending bill which would block the swing pricing proposal, on the recommendation of Republicans on the House Committee on Financial Services. The various blocked proposals in the bill will have to be negotiated with Democrats before it could be passed. If Democrats are also skeptical of swing pricing, there might not be much to negotiate on that item.

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Democrats in Congress have primarily voiced concerns about the proposed hard close, which would require that mutual fund trades be executed by 4 p.m. Eastern time. Under current rules, a trade must be received by 4 p.m., but not executed, in order to receive that day’s price for a mutual fund.

The problem for many Democrats is that the proposal would make processing orders for investors on the West Coast very difficult, given that 4 p.m. ET is 1 p.m. PT and 11 a.m. Hawaii-Aleutian time. Representative Brad Sherman, D-California and the ranking member of the subcommittee, said the proposal would have a “horrendously discriminatory effect” on investors living in the Pacific time zone.

The time zone concern expressed here by Sherman closely mirrors concerns expressed by other Democrats during a full committee hearing in April.

Mike Hadley, a partner in the Davis & Harman law firm and a member of the Society of Professional Asset Managers and Recordkeepers (SPARK) Institute’s advocacy team, says the concern about time zone discrimination is “a real issue.”

He explains that it takes time for a recordkeeper to process trade orders. He estimates that trades would likely have to be received by 12 noon ET to receive that day’s price. Some retirement plans would have to get their orders in the day before, Hadley explains.

This time zone issue was not invented by the SEC or by swing pricing, but the swing-pricing proposal “aggravates it by many times over.”

Sherman also expresses skepticism about the swing pricing mechanism itself, which passes the costs of trading on to the sellers of a mutual fund instead of the holders in order to mitigate dilution and discourage panic selling. Sherman likens this to charging for life preservers or lifeboats. He argues that investors will be less likely to invest in mutual funds if they believe they will penalized for selling in tough times in the future.

He says that swing pricing “seems like the worst idea you could have in trying to achieve our objectives.”

Sherman pressed Jessica Wachter, the director of the SEC’s Division of Economic and Risk Analysis, who was called to testify, if the SEC had done any analysis on whether swing pricing would discourage investment in mutual funds. Wachter did not offer a direct answer.

Market Structure Proposals

Other Democrats at the hearing also pushed back against some of the market structure proposals offered by the SEC in December 2022, suggesting that they may be on shaky ground as well.

Representative David Scott, D-Georgia, asked Haoxiang Zhu, the director of the SEC’s Division of Trading and Markets, if the SEC would consider implementing the update to Rule 605, which would require brokers to publish monthly quality-of-execution reports so that more data is available to the SEC before it implements the other three proposals.

This request mirrors many of the comments on the proposals, which Zhu acknowledged. A Republican spending bill also blocks all of the market structure proposals except the Rule 605 update. Zhu answered that he would consider Scott’s and others’ comments.

Scott answered that “using the latest and most available statistics” is critical to evaluating the merit of the other three proposals.

Representative Wiley Nickel, D-North Carolina, said many of his constituents are concerned about these proposals, especially the Order Competition Rule, which would require rapid auctions for certain retail orders to achieve more competitive pricing. Nickel asked Wachter if she would agree that smaller retail orders for less liquid stocks will actually receive reduced execution quality if nobody shows up on the other side of the auction.

Wachter answered that stocks outside the S&P 500 actually received better price improvement in the SEC’s economic analysis of the Order Competition Rule than those inside it and that the analysis suggested this “might not be a concern.”

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