Data & Research May 4, 2018

Confidence in Retirement Planning Correlates With Higher Retirement Income

Individuals who have an adviser are more likely to be on track to create adequate retirement income—by a wide margin, a study by Empower found.

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Empower has identified specific employee actions—which it calls “habits of success”—that correlate with significantly higher projected lifetime income when working years end.

In a white paper, “Scoring the Progress of Retirement Savers,” it says plan sponsors can foster these behaviors through various plan features, tools and access to professional advice.

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In Empower’s seventh study of how financially prepared Americans are for retirement, it found continuing improvement in many factors affecting lifetime income replacement percentages. The median projected income replacement among participants in its study was 64%. In other words, Americans are on track to replace 64% of their current income in retirement. However, Empower found a wide gap between those who have “habits of success” and those who don’t.

Two-thirds (67%) of households in Empower’s study report that at least one earner has a workplace retirement savings plan available. Participants who are eligible for a defined contribution (DC) plan and actively contributing have a median income replacement percentage of 79% compared to only 45% for those without access. The difference between current savers versus those who are eligible but not participating is significant. Current savers have a median income replacement percentage that is 25 percentage points above those who are eligible but not active in their plans.

The second major factor in generating a strong level of income replacement at retirement is how much a participant is contributing, Empower says. Its study found participants who contribute less than 3% of pay have a median lifetime income replacement percentage of less than 60%, while those who contribute 10% or more have a median retirement income replacement of more than 100%.

Empower suggests several steps plan sponsors can take to help facilitate savings—and higher levels of savings—within a plan. The first is automatic enrollment. Empower found an 11-point difference in median income replacement percentages between participants who enrolled automatically versus those who opted into the plan. A second feature that correlates with higher median income replacement is auto-escalation. The survey found that people who participate in a plan with this feature achieve a median retirement income replacement of 107%, 27 percentage points higher than participants in plans without it.

An employer match also affects employees’ saving behaviors—not only the fact there is a match, but the degree to which employees know what the match level is. Of those who know their match in the plan, 73% (56% of total survey participants) set their contributions accordingly. Empower says the opportunity area lies in the group that doesn’t know what their match level is. If these employees were more knowledgeable, they might well make different savings decisions to take full advantage of the match feature.

Empower explored what factors keep employees from participating when a plan is available—and what would have them begin or resume contributing. The greatest factor in beginning or resuming contributions cited was paying down debt (32%), followed by getting a raise (22%) and then reducing overall spending (12%).

Among participants who have access to an employer-provided savings plan, confidence that they are making the most of the plan to build retirement income is at a four-year high at 79%. In addition, among those who have a target retirement income (91% of survey participants), 57% are confident that they will be able to achieve that target income in retirement. Empower found that participants who are confident in various aspects of their retirement planning have projected income replacement results well above the survey median. “While the data only indicate correlation, not causality, the numbers suggest an opportunity area for employers. By offering planning support and tools that give employees a clear view of how much income they’re on track to replace—and how to generate better results for themselves—plan sponsors can better enable employee action and confidence in the future,” the white paper says.

Employees expressed interest in more personalized support for retirement planning and decision-making through their plans. With managed accounts, for example, an employee can work with a financial specialist on goal-setting, savings and investing strategies, approaches to minimize taxes on withdrawals, and effective responses to changing economic conditions. The majority of employees in the study—between 80% and 88%—find such features somewhat or very attractive.

The study also found those who have an adviser are more likely to be on track to create adequate retirement income—by a wide margin. Those who have a paid adviser have a median retirement progress score of 91% compared to only 58% for those without an adviser. The data indicates that one of the most important functions of a financial adviser is the creation of a formal financial plan. Those who have a formal plan have a median projected income replacement of 99%, while those without a formal plan are on track to achieve a median replacement level of only 58%.

Given the public debate regarding tax reform, Empower asked employees about the importance of the current tax treatment to their plan savings decisions. Individuals strongly value the pre-tax treatment of their employer-provided DC plan, and these benefits have a direct impact on contribution levels. At almost any level of current contribution, employees say they would contribute less if the tax benefit were not available. In total, the responses suggest adjusting taxes on retirement savings contributions would reduce deferrals by nearly 20%. Respondents earning less than $50,000 annually predicted a greater percentage drop in contributions (28%) compared to those earning $50,000 or more, should tax benefits alter.
Products May 3, 2018

Investment Products and Services Launches

Russell Investments Discusses New ESG Finding; Merrill Lynch Brand Designs ESG Portfolios; and EDHEC-Risk Institute Examines Retirement Products and TDFs. 

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Russell Investments has created research findings in environmental, social & governance (ESG) investing with a material ESG score, which more accurately identifies ESG factors that could impact the financial performance of publicly-traded companies. The paper, titled “Materiality Matters: Targeting ESG issues that impact performance,” presents research that material ESG scores are better predictors of stock return compared to traditional, non-material ESG scores.

“Our new material metric allows ESG investors to differentiate between companies in a more precise way than a traditional ESG score,” says Scott Bennett, director, equity strategy and research, at Russell Investments and an author of the research paper. “We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability.”

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Bennett added that the relevance of ESG issues varies industry to industry and company by company, undercutting the effectiveness of a one-size-fits-all ESG scoring system. For example, fuel efficiency has a bigger impact on the bottom line of an airline than an investment bank.

“We have found that traditional ESG scores are composed of many issues that are not material to the business being scored,” Bennett says. “Using a diverse market sample in the Russell Global Large Cap Index universe, we found that less than 25% of the data items in the traditional ESG score are considered material for two-thirds of all securities in the index.”

To create the new scoring methodology, the research team began with comprehensive ESG scores from data provider Sustainalytics—which are used for a wide variety of reasons beyond investment selection—and the industry-level materiality map developed by the Sustainability Accounting Standards Board.

“Our material scores are positively correlated to traditional scores, but they are meaningfully different,” Bennett says. “We now have research which indicates that investing in companies based on high material ESG factors is significantly better than those with greater immaterial factor.”

The team back-tested the new scores between December 2012 and June 2017, using the Russell Global Large Cap Index, and found that a firm’s material ESG score offers a promising signal for informing investment decisions.

The early results also have encouraged Russell Investments to incorporate the new material ESG scoring approach into its current decarbonization strategy, which serves as the foundation for low carbon investment funds available in several markets globally.

Merrill Lynch Brand Designs ESG Portfolios

Merrill Lynch and Merrill Edge have launched five new portfolios incorporating environmental, social and governance (ESG) factors in response to growing demand for investments with the potential to produce positive societal outcomes without sacrificing financial returns. 

Designed by the Global Wealth and Investment Management (GWIM) Chief Investment Office (CIO), the new CIO Core Impact Portfolios incorporate the CIO’s disciplined investment process, portfolio construction views, portfolio management and oversight routines.

They consist primarily of exchange-traded funds (ETFs), require a minimum investment of $5,000 and range from conservative to aggressive. These offerings expand upon an existing array of impact offerings on both the Merrill Lynch and Merrill Edge platforms.

“The demand for ESG-integrated investment options has increased, as more investors are seeking a ‘double bottom-line’ approach to investing and a way to add an environmental or societal impact objective to a financial return,” says Chris Hyzy, chief investment officer for GWIM.

“These new portfolios are part of the ongoing expansion of our investment offerings and build upon a broad platform of both solutions and thought leadership in the impact arena,” adds Keith Banks, vice chairman of GWIM and head of the CIO and the Investment Solutions Group for Merrill Lynch and U.S. Trust.

EDHEC-Risk Institute Examines Retirement Products and TDFs  

 

In a new publication entitled “Applying Goal-Based Investing Principles to the Retirement Problem”, EDHEC-Risk Institute and Professor John Mulvey of the Operations Research & Financial Engineering Department at Princeton University outline the shortcomings of existing retirement products, and lay the academic foundations for a new generation of risk-controlled target-date funds (TDFs).

The research efforts towards the design of more meaningful retirement solutions, with the support of Bank of America’s Merrill Lynch Global Wealth Management group, have led to the design of the EDHEC-Princeton Retirement Goal-Based Investing Index Series.

Commenting on the research publication, John Mulvey, professor of Operations Research and Financial Engineering in the ORFE Department at Princeton University, says “Applying Goal-Based Investing Principles to the Retirement Problem discusses important issues with developing the index series and its practical usage. Many developed countries are moving to a society with greater personal responsibility for financial decisions. This trend is evident with the shift from defined benefit (DB) to defined contribution (DC) plans. Unfortunately, most people do not have the tools nor the training to help themselves with the critical decisions about asset allocation, about savings, and about spending during retirement. The EDHEC-Princeton index series is aimed at informing the decision process. It provides superior information to the popular target-date funds, which do not distinguish among investors within an age category.” 

Offering a perspective on the applicability of these indices, Anil Suri, managing director and head of Portfolio Analytics and The Innovation Development Center in the Chief Investment Office of Bank of America’s Global Wealth and Investment Management group, says “the EDHEC-Princeton Goal-Based Investing Index Series are an important innovation that can help individuals, and the institutions they rely on, to achieve critical retirement goals in a more efficient and effective fashion.  Importantly, by using a very strong analytical foundation and demonstrating the practical feasibility of such an approach, the EDHEC-Princeton Retirement Goal-Based index series can help in the design and management of the next generation of retirement investment solutions that use liquid asset classes to generate income in retirement, while managing the effect of uncertainty on this very broadly applicable goal.”

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