PANC 2015: DC in Perspective

Plan advisers are the linchpin in the constantly evolving retirement landscape, said Anne Lester, portfolio manager and head of retirement solutions, J.P. Morgan Asset Management, and keynote speaker on Tuesday at the 2015 PLANADVISER National Conference in Orlando, Florida.

From bettering outcomes to dealing with changing regulations, every decision will be easier to make, Lester said, every question easier to answer if the adviser asks: is what I’m doing going to increase the probability that someone will get to retirement safely? “Every choice we face is going to be clearer in that context,” she said.

The current retirement landscape has several notable features, according to Lester. Government is increasingly interested in seeing people retire with adequate resources; plan sponsors motivated by business risk management also want to do the right thing for employees; and demographic shifts are adding to financial market anxieties. All of these factors mean the role of the adviser is ever more important.

Lester called the daily work of advisers essential to shifting participant outcomes and supporting plan sponsors. “Helping employers to navigate and understand the landscape is an important and powerful job,” she said.

“We’re struggling to understand living longer,” she said, “and it’s key to help plan sponsors understand this. As we live longer, are our financial assets lining up behind that?” Although the Boomers have accumulated substantial wealth, Lester noted, their average individual net worth—about $200,000—is mostly in such illiquid assets as residential properties, other nonfinancial assets and pooled investment funds. “This generation’s liquid assets may not be enough to meet their consumption in retirement,” she said.

Individuals face a range of multifaceted risks, some of which they can control and some they cannot. For example, individuals have it in their own power to decide that they’re going to save for retirement, a preset for participant user risk.

Accumulation risk is determined by the amount someone saves. Individuals saving at 8%, with a company match of 4%, are probably on track to meet their retirement goals. User risk—whether an individual allocates assets properly and assumes the right level of risk—is another measure, and most people, Lester said, don’t even understand how much risk is right for them.

If they disengage from the plan when the markets are rocky or panic when they open their statements and sell, Lester said, these sub-optimal behaviors can be mitigated with auto features.

Market risk can come in several varieties, Lester said, from garden variety volatility to cataclysmic events like the Great Depression or the crash of 2008. “Most people have only experienced falling interest rates,” Lester pointed out, but rising rate risk still exists. Inflation might return in the future, and longevity risk, which individuals can control to some extent with diet and exercise, is another factor ultimately beyond control.

A slew of changes on the horizon, among them money market fund regulation and the Department of Labor’s proposed definition of fiduciary, means the regulatory environment is constantly in flux. Another challenge: the lower-return environment. Though a 60/40 portfolio returned 7% in 2014, Lester said, this year that same portfolio is likely to yield 75 to 80 basis points less.

To address these challenges, the retirement industry can turn to several tactics, Lester said. Auto features can help ensure people save for retirement and escalate contributions even beyond 6%. Adviser fees must generate value, and fees in general need scrutiny. However, she noted, fees are not a solitary factor. Passive management, which can make sense in a portfolio, is not always the answer, Lester said, “not always the straightest path to success.”

Ways to measure if a plan is helping participants achieve successful outcomes are participation rates, (which can be met with auto enrollment), adequate savings levels (Lester recommends auto escalation increases beyond 6%) and the use of target-date funds (TDFs) to ensure that participants allocate appropriately. The need for income, she said, will necessitate a thoughtful withdrawal strategy.