Market Volatility Hasn’t Tempered Historically High DC Plan Optimism

As head of Wells Fargo Institutional Retirement and Trust, Joe Ready is regularly called on to discuss how shifts in the equity markets, inflation, regulation, politics and global events all come together to influence the behavior of defined contribution (DC) retirement plan participants.

To help get a handle on the matter, the firm works in regular concert with Gallup to produce the Wells Fargo/Gallup Investor and Retirement Optimism Index, which stands today at a 17-year high. Offering a sneak peak of the Q1 2018 index data to PLANADVISER, Ready said it is important to contextualize the findings with the fact that the underlying polling was conducted between February 12 and February 25, 2018.

“The latest round of polling began a week after January’s solid labor report was released, but also after a major sell-off on Wall Street, when the Dow Jones Industrial Average dropped below 24,000,” he explained. “By the time of the survey, the market was already starting to recover, so the data really show the opinions of investors as they grappled directly with resurgent volatility.”

At a high level, Ready observed, investors remain solidly optimistic on three key economic aspects—economic growth, stock market performance and unemployment. Sixty percent of investors say they are at least somewhat optimistic about the 12-month outlook for these economic aspects, and fewer than a quarter are at least somewhat pessimistic. Investors are less optimistic about inflation than the other factors, with 40% at least somewhat optimistic and 34% at least somewhat pessimistic.

Overall, investors are most positive about maintaining their household income over the next year and about reaching their five-year investing goals, Ready reported, with 71% at least somewhat optimistic about each.

Fiduciary uncertainty not a major concern

Asked how, in his position leading a very large DC plan recordkeeping provider, he thinks about the uncertainty that has reemerged in the last couple of weeks around the Department of Labor (DOL) fiduciary rule expansion, Ready candidly admitted it can be something of a challenge to keep it all straight. He agreed that it was “surprising and quite notable to see” the emergence of the Fifth U.S. Circuit Court of Appeals’ decision to vacate the entirety of the Obama-era rulemaking.

“Yes, it can be a challenging environment to maintain your direction, but on the other hand, the overall direction simply has to be about continuing to focus on great client service,” Ready said. “We always have to start from the position of focusing on what is best for the end client; that is what the fiduciary rule reforms have been about from the beginning, after all. Whatever happens with the particulars of the rulemaking, it will continue to be very important to act in the best interest of clients while minimizing and avoiding and disclosing any conflicts. The rule really emphasized the importance of remaining independent and steering away from conflicts. This will remain quite important.”

DC plan quality promotes investor optimism

Pointing back to the optimism index data, Ready said that the evidence is becoming quite clear that the DC plan industry has improved in quality and is effectively serving people planning for retirement. For that reason he is less concerned about the specific future of the fiduciary rule, and he feels the industry will continue to improve from the perspective of pricing, fairness, transparency, etc.

“When I think about the changes that are going on, the ERISA world is changing for the better,” he explained. “Alongside the debate around the fiduciary rule has been an increasing realization that the industry has just been so focused on the question of accumulation. This will be another great source of improved outcomes, as all the providers get better at serving clients on the draw-down or decumulation phase.”

With this in mind, Ready said he is gratified to see lasting optimism unchanged from the previous two quarters.

“What really sticks out to me is that we remain at a 17-year optimism high point that goes back to September 2000. In other words, folks are more confident today than they have been since the dot-com bubble burst,” he noted. “Beyond this, seven out of 10 investors say that they are optimistic about their finances looking ahead to the short- and even mid-term future, come what may in the equity markets. This is a reflection of one of the really good things that has come out of our industry in the last decade—I mean the mantra of automatically getting people in the plan, saving enough and setting the right allocation for them.”

Whether one wants to point to target-date funds (TDFs) or other qualified default investment alternative (QDIA) options that are helping people feel like they have a long-term investing plan that they can stick to—this is where the lasting resiliency and patience with volatility are coming from, Ready argued.  

“Naturally, I was thrilled to see the statistic that 53% of people we polled said they would be okay withstanding a correction of 10% or more without feeling the need to pull money out of the market,” Ready noted. “Tied to this, 45% said they currently have concern about volatility, which is down sharply from the 64% measured just a year earlier. People are feeling like they have a plan and that they can stick to it. Target-date funds and other QDIAs may not be the most sophisticated products one can choose to invest with, but even having a simple glide path and understanding how the savings journey is designed to include both ups and downs is so important for people. It sets the rational context that will help them to limit emotional behaviors.”

There is also still the fact to consider that many savers who are active in DC plans today suffered some real losses through the 2008 and 2009 recession. Crucially, those who stuck in the market through that difficult period and into today have been very handsomely rewarded.

“So there is a little better understanding of how the ups and downs go together and feed into each other,” Ready said. “Another interesting point in the data is that there is a pretty sizable difference in optimism between the retired folks (+155) and the pre-retired folks (+134). It’s not a huge gap but there is a story to tell here. It speaks to the fact that, once you’re in retirement, you are forced to plan for things in a concrete way and you have more concrete variables to consider. You are forced into a plan about how to draw Social Security and how to draw private assets—and quite frankly you will likely be invested more conservatively, so you may not be as attached to the daily ups and downs of the markets.”

A few concerning findings

Asked what was the most concerning finding in the latest cut of the optimism index data, Ready pointed to the asset allocations of respondents between ages 55 and 65.

“Comparing this group against what we would consider the optimal glide path, almost six out of 10 are too aggressively invested,” Ready warned. “Another two out of 10 are too conservatively invested. This group is getting to the point where their decisions are very much subject to major point-in-time risks. It’s such a critical time for people. You can get 25 or 30 years of great savings under your belt but then have some real wealth destruction at this point if you aren’t making the right decisions. This is something we think about very much, as the provider, in concert with advisers and sponsors. How can we get the right messaging at the right time to these people to help them make the right changes?”

Ready also said it is concerning to see that only 45% of individuals have spent “a lot of time” considering what would be the best age and strategy for drawing Social Security. Similarly weak numbers have spent significant time planning for how they will pay for routine medical care, and even fewer (41%) have spent time crafting a specific plan about how to draw income from retirement accounts or how to minimize the amount of taxes they will pay in retirement (34%).

“The fact that about half of people haven’t given serious thought to their future taxes, healthcare expenses, draw-down strategy or Social Security could explain why only a third of investors are highly confident about their retirement savings,” Ready concluded. “The act of thinking through these important drivers of retirement outcome can help inform people about their financial preparedness for retirement.”