Data & Research March 10, 2020

Ongoing Volatility Projected by J.P. Morgan’s Guide to Retirement

Retirement investors have little choice but to stay the course; even backing away from the markets for a short period can prove detrimental to long-term returns.

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J.P. Morgan Asset Management has released its 2020 Guide to Retirement—the eighth edition of the report—examining the most significant issues influencing the retirement landscape.

During a press event that was moved from an in-person gathering to a webinar platform because of concerns about the ongoing COVID-19 viral disease outbreak, Katherine Roy, chief retirement strategist, said it is appropriate that the 2020 Guide emphasizes the increased anticipated market volatility that investors will likely face in coming years.

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“The past few weeks have brought this theme to the forefront of retirement investors’ minds,” Roy said. “If you are a retirement investor, what should you do right now? Our message is clear—stay invested. If you respond emotionally and pull out of the equity markets, you will lock in your losses.”

Roy encouraged investors to remember the hard-earned lessons from the Great Recession more than a decade ago. The losses experienced during that time period were dramatic—particularly for those near their retirement date—but those who stayed the course have been richly rewarded.

On this point, Roy turned to page 43 of the new Guide to Retirement, which shows that participants can’t afford to sit out even a week or two based on daily volatility concerns. Specifically, the page shows that six of the best 10 days for the equity markets during the January 2000 to December 2019 time period occurred within two weeks of the 10 worst days. Case in point, the best day of 2015 (August 26) came only two days after the worst day (August 24).

“If you miss even a handful of these big rebound days, you will really damage your long-term returns,” Roy warned.

Sharon Carson, J.P. Morgan retirement strategist, joined Roy in introducing the 2020 Guide to Retirement. She emphasized the importance of investors understanding and accepting the role of volatility in the markets, suggesting they can help to steel themselves by establishing sufficient liquid emergency reserve funds.

“This kind of volatility event highlights the need for emergency funds and for a disciplined investing approach,” Carson said. “Times like these are going to happen now and again during the retirement savings journey, so committing to having that cushion is really important.”

As detailed in the Guide to Retirement, J.P. Morgan advocates for a three-pronged investment approach, defined on the short-end by immediate goals to establish and maintain an emergency reserve fund of total spending needs for three to six months. Mid-term wealth management goals can then be built around such things as saving for college expenses or a home purchase, and the long-term portion of the strategy can focus on retirement.

Stepping back from the topic of market volatility, Roy and Carson pointed to several pages in the guide—for example page 19—that emphasize the importance of balancing pre- and post-tax savings. They said their analysis shows that many more people could benefit from taking advantage of Roth 401(k)s or Roth individual retirement accounts (IRAs), especially in the current low-tax environment established by the Tax Cuts and Jobs Act.

“Managing taxes over a lifetime requires a balance of your current and future tax pictures,” Carson explained, encouraging investors to make income tax diversification a priority in order to have more flexibility and control in retirement.

According to the 2020 Guide to Retirement, contributing to a Roth early in one’s career and shifting as one’s income increases remains a generally effective strategy. On the other hand, one might also consider switching to Roth 401(k) contributions in peak earning years if wealth is already concentrated in tax-deferred accounts. Additionally, Roy and Carson said, making proactive Roth conversions in lower income retirement years can make sense if an individual’s or couple’s required minimum distributions are likely to push them into a higher bracket.

On the topic of health care for older workers and retirees, Roy and Carson suggested it may be prudent to assume an annual health care inflation rate of 6%—which may require growth as well as current income from the investment portfolio in retirement. They also pointed to page 34 of the guide, which shows there is need for more long-term care planning among the U.S. workforce.

“This care often starts at home before progressing to other settings,” Carson explained. “While considering the range of possibilities, take into account that one in 10 men and nearly two in 10 women are projected to have a significant care need for more than five years.”

Compliance March 10, 2020

‘INFORM Act’ Seeks Pension Lump-Sum Buyout Transparency

The bill would require an explanation of how a lump sum was calculated—including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies.

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U.S. Senator Patty Murray, D-Washington, the ranking minority member of the Senate Health, Education, Labor and Pensions (HELP) Committee, has introduced the Information Needed for Financial Options Risk Mitigation Act.

Given the short title “INFORM Act,” the bill would require pension plan sponsors to provide plan participants and retirees with what Murray calls “critical information” when offering defined benefit (DB) lump-sum buyouts.

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“No one should ever have to make a decision that could seriously affect their plans to securely retire without being given all the information they need to understand the consequences,” Murray says in a statement published alongside the legislation.

Technically, the bill requires that “a plan sponsor of a pension plan that amends the plan to provide a period of time during which certain participants or beneficiaries who are receiving or will receive lifetime annuity payments into a lump sum under section 401(a)(9)(A)(i) of the Internal Revenue Code of 1986 shall provide notice to each participant or beneficiary offered such lump-sum amount, in paper form and mailed to the last known address of the participant or beneficiary, not later than 90 days prior to the first day on which the participant or beneficiary may make an election with respect to such lump sum.” The bill further requires notice be similarly sent to the U.S. Secretary of Labor “not later than 30 days prior to the first day on which participants and beneficiaries may make an election with respect to such lump sum.”

The text of the bill spells out a fairly extensive set of requirements plan sponsors would need to include in their lump-sum notices. For example, the notices would have to include a summary of available benefit options, “including the estimated monthly benefit that the participant or beneficiary would receive at normal retirement age (if not already in pay status).” The notices would have to enumerate “whether there is a subsidized early retirement option, the monthly benefit amount if payments begin immediately and the lump-sum amount available if the participant or beneficiary takes the option.”

Also required is an explanation of how the lump sum was calculated—including the interest rate, mortality assumptions and whether any additional plan benefits were included in the lump sum, such as early retirement subsidies. Further, the bill requires that plan sponsors calculate and share with participants the “relative value of the lump sum option compared to the plan’s lifetime annuity, in comparable terms.”

Other requirements are that plan sponsors clarify “whether it would be possible to replicate the plan’s stream of payments by purchasing a comparable retail annuity using the lump sum,” as well as detail the “potential ramifications of accepting the lump sum, including possible benefits, investment risks, longevity risks, loss of protections guaranteed by the Pension Benefit Guaranty Corporation [PBGC], loss of protection from creditors, loss of spousal protections and other protections under this act that would be lost.”

Various other points of information are required by the text of the INFORM Act, such as explanation of the general tax rules related to accepting a lump sum and a statement that financial advisers “may not be required to act in the best interest of participants and beneficiaries with respect to determining whether to take the option.”

As Murray emphasizes, the filing of the INFORM Act comes one year after the Trump administration made its own policy changes in this domain. Back in March 2019, the Trump administration announced it would not pursue a proposal made by the Internal Revenue Service (IRS) under President Barack Obama that would have prohibited certain lump-sum buyouts, for example buyouts entered into after the pension annuity income stream has already commenced.

In announcing it would not pursue the project to limit lump-sum buyouts, the Trump administration said at the time that the policy change would give more flexibility to both employers and employees. Critics, including Murray, said the Trump administration’s actions in truth “gave employers the green-light to offload pension liabilities and transfer risk to retirees through buyouts.”

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