Data & Research May 12, 2014

Retirement Investors Get More Aggressive

Average investors are showing renewed confidence and have set aggressive investment targets, according to Natixis Global Asset Management, but outlooks for retirement remain depressed.
Reported by

The firm recently released its fourth annual Investor Insights Survey, finding that U.S. investors are showing more trust in the investment markets and have set more aggressive investment targets for the year ahead. Natixis researchers say this is a positive sign about the overall health of the economy, but the firm warns that many investors still lack a sound savings and investing plan to help achieve long-term financial goals.

Survey results show investors are beginning to fall into two groups, Natixis says. One is stuck at an impasse between competing desires for growth and stability; the other is at a turning point, ready to reset its expectations and approach to investing.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“Many investors have set aggressive investment targets, but don’t have a realistic way of reaching them,” says John Hailer, CEO of Natixis Global Asset Management in the Americas and Asia. “Something has to change. The markets have reached new heights, and investors feel generally comfortable about portfolio performance. But without a plan that incorporates individual risk and personal benchmarks, the odds are diminished that investors will meet their goals.”

According to the survey, Americans say they need average annual returns of 9.8% above inflation to meet long-term discretionary, housing and health-care spending needs. This is an ambitious goal that could drive investors to take on more risk than they can handle, Hailer notes.

“With average yearly inflation of 4.2% since 1964, these investors would actually need to earn 14% to meet their needs, surpassing the 10% average annual gain of the Standard & Poor’s [S&P] 500 Index over the past 50 years,” he says.

Other survey results show the typical U.S. investor is still somewhat confused and conflicted about how to approach retirement investing, Natixis says. For example, while more than seven in 10 (71%) investors say asset growth is increasingly a priority over principal-protection, 56% also say they are only willing to take minimal risk to achieve high returns. Additionally, just one-quarter of investors surveyed feel their overall investment knowledge is “very strong.” Even fewer (12%) say they have strong knowledge of alternative investments,which are not correlated to the broader market and are increasingly becoming part of retirement and retail investor portfolios.

“This demonstrates a great opportunity for financial advisers and the industry to help educate investors on realistic expectations and strategies to reach their goals,” Hailer says.

When they do make investment decisions, more than three-quarters (79%) of investors say they simply follow their gut instinct.

“Fifty percent have no clear investment goals and 54% have no financial plan,” Hailer observes. “So it’s not surprising that when asked how they define investing success, some look at asset levels and others look at comfort level, rather than meeting long-term financial goals.”

The two top indicators investors rely on to measure investment performance are the current level of their total assets (50%) and the financial comfort level (49%) currently felt. Less than four in 10 investors (37%) say they consider long-term financial goals in defining investing success—the strategy Natixis says is best for retirement investors.

Other findings in the annual survey show that market volatility has eroded confidence for nearly half of investors (49%), and six in 10 no longer believe traditional asset-allocation strategies that rely solely on a mix of stocks and bonds are the best way to pursue returns.

“Investing today is complicated, and there’s a lot of noise in the market,” Hailer says. “But investors are beginning to understand that market indexes may not be the best benchmark for their personal success. They’re looking for a better strategy to help them stay invested for the long term.”

In what could be a turning point in investor behavior and expectations, Natixis says, 82% of investors are willing to set a target for investment returns that is independent of overall market returns. Americans also seem to be growing more aware of the risks of having too little income to meet their needs in retirement. Their biggest concern observed by Natixis is the uninsured cost of long-term care in old age, which 53% of investors identify as a top risk to their financial security in retirement. This is a substantial increase from 40% in Natixis’ 2013 survey of individual investors.

Asked where they would turn if their retirement funding fell short, 46% of Americans say they will continue to work and 31% would rely on support from family members. Only 19% expect to be able to rely on the government, a reflection that Americans are beginning to accept the reality that they will be responsible for financial security in retirement.

Compliance May 12, 2014

Retirement Advisor Council Sees Flaw in 408(b)(2) Review

In an open letter to the Department of Labor (DOL), the RAC contends the regulator’s proposed methodology for assessing the impact of 408(b)(2) fee regulations is flawed.
Reported by

The Retirement Advisor Council (RAC) issued its commentary following the federal agency’s announcement that it may soon amend 408(b)(2) fee disclosure regulations approved in 2012. That announcement included a request for comment on a proposed rule change to Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) that would require covered service providers issuing overly complex fee documentation to develop a “guide” or “road map” that could help less experienced clients find relevant fee data (see “DOL Proposes Service Provider Fee Guides”).

In addition to seeking public comment on these fees guides, the DOL said it would soon conduct a series of focus groups among small-plan sponsors—those serving fewer than 100 participants—to determine if these fee guides are necessary. The DOL said it is also interested in assessing the impact of existing fee disclosure regulations more generally, to identify any unanticipated difficulties.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

While the RAC says it supports the DOL’s intelligence-gathering effort, it warns that only sampling small-plan sponsors for focus group research will lead to flawed results that may under-represent the concerns of large-plan sponsors—who are, the council says, far more influential than small-plan sponsors when it comes to retirement readiness in the U.S. That is because, while plans with fewer than 100 participants represent a substantial percentage of the total number of retirement plans, participants of plans in this segment make up only a fraction of the total number of participants in all U.S. plans. In other words, while there are fewer large plans, their expansive size means they represent far more participants than the small-plan segment.

To address this, the RAC recommends that DOL investigators take the opposite approach and focus review efforts on the so-called mega-plan segment, stratifying the focus group sample to over-represent plans with more 1,000 employees. This approach will better reflect the structure of the U.S. retirement planning system, the RAC argues, and so will provide the DOL with more accurate and insightful data on 408(b)(2)’s successes and failures (see “Fee Guide Proposal Misses the Point, Some Say”).

The RAC argues that the DOL’s proposed methodology for conducting fee disclosure focus groups is flawed in other ways. For example, the RAC points out that the DOL hopes to conduct eight to 10 in-person focus groups in select locations—with seven to 10 sponsors in each group. As an alternative, the RAC argues, it would be more effective for the DOL to conduct fewer, online focus groups while utilizing a nationwide sample.

“Our rationale is that focus groups are qualitative in nature, meant to discern a range of attitudes and behaviors, not their frequency,” the RAC writes. “Quality of the research is less a factor of the number of focus group attendees than of the variety of recruits. Redundancy in observations past the initial four or five sessions makes additional groups wasteful.”

The RAC argues that the digital format is preferable to in-person reviews, as it will allow the DOL to gather input from sponsors outside large metropolitan statistical areas. The digital methodology will also save travel dollars, the council says, and significantly compress the data-collection schedule.

“Internet access among employers in all sectors has become so ubiquitous as to make bias irrelevant,” the RAC observes.

RAC members say they also take issue with the DOL’s intention to focus solely on plan sponsors in the effort to asses 408(b)(2), arguing that sponsors will be unable to give a complete picture of the regulation’s performance thus far. Many sponsors rely almost entirely on the services of a specialist retirement plan adviser to comply with the requirement to regularly and prudently review service provider fees, the RAC says, suggesting it will be necessary to solicit additional input from professional retirement plan advisers whom sponsors have retained in a fiduciary capacity.

“Our experience suggests the feedback you will receive from plan advisers will be more insightful than the opinions of individuals who hired a professional adviser specifically because they personally lack the knowledge and confidence that an expert can impart,” the RAC explains.

To collect information from plan advisers, the RAC recommends the DOL conduct a series of in-depth, one-on-one interviews with advisers serving in various fiduciary capacities—including 3(16), 3(21) and 3(38) fiduciary arrangements, named for the sections under which they are described in ERISA. A series of 20 to 30 interviews using a structured discussion guide will provide the range of consistency and input needed to make informed decisions on changing 408(b)(2), the RAC says.

“Of all the professionals with whom plan sponsors interact, we believe the adviser is the best placed to deliver 408(b)(2) disclosure education,” the RAC says.

The full text of the RAC’s comment letter is available here. A coalition of advocacy groups representing U.S. retirement plan service providers filed its own comment letter last month, available here, which suggests there may be other flaws in the DOL’s fee guide proposal.

«