The Markets July 27, 2017

Plan Sponsors Taking a Closer Look at Fixed Income

To better protect participants against longevity risk and low market returns, plan sponsors intend to improve fixed income strategies in the next year, T. Row Price reports.
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Even though several plan sponsors are concerned about helping participants preserve capital especially as they near retirement, a study by T. Rowe Price show many can use improvement when it comes to executing fixed-income strategies.

The firm finds that fixed income on average receives only 18% of the allocation of time that plan sponsors spend on their plans. That figure is even lower for capital preservation (13%). When asked to name their top three concerns for fixed income investing, 93% named rising interest rates at the top followed by low yields (69%), and inflation (56%).

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Today, most sponsors offer stable value (80%) and core bond strategies (85%), but few offer global income strategies. Less than half (44%) offer a TIPS strategy or some other type of inflation-hedging strategy. Furthermore, 22% include global bond strategies or other inflation-hedging options, and only 4% offer unconstrained and/or absolute return strategies.

However, T. Rowe Price finds that plan sponsors are looking at the next 12 months as a period of change characterized by a widening focus on fixed income strategies. Fifteen percent intend to implement a multi-strategy/white label fixed income offering, 11% look to offer inflation-linked bonds or Treasury Inflation Protected Securities (TIPS), and 9% are eying unconstrained and/or absolute return fixed income offerings.

And while fixed income strategies can help any participant by offering diversification and protecting against market losses, it is especially important for older participants nearing or in retirement. According to T. Rowe Price, this population of the workforce is quickly expanding, raising the concern that many participants may be facing longevity risk.

Almost half (44%) of respondents to this T. Rowe Price survey reported a shift toward an older participant base compared to 10 years ago. A separate study of the plans that T. Rowe Price services as recordkeeper found that in the past decade, the percentage of participants at least 50 years old rose from 34% to 38%.

“The role of fixed income in defined contribution plans is becoming more complex because of shifting participant demographics, market and interest rate uncertainties, and the limitations of core bond strategies,” says Lorie Latham, senior defined contribution strategist. “The U.S. and global bond markets have developed over the past two decades to the point where they now offer investors many attractive opportunities to enhance portfolio diversification, improve returns while maintaining an eye on risk. While some of these levers have been underutilized in defined contribution plans, it appears that plan sponsors are growing more receptive to them, based on their stated intentions over the next 12 months. This could help plan sponsors address the longevity and inflation risks their participants face.”

Data & Research July 27, 2017

Only 55% Started Saving for Retirement Before Age 28

Among those participating in a 401(k) plan, 70% or more say company matches would be very motivating to save more.
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Eighty-five percent of Millennials believe it is important to start saving for retirement before age 28, but, in fact, among people of all age groups, only 55% start saving before that time, according to Cerulli. The most frequently cited reason for not starting to save for retirement is that they do not make enough money.

“For Millennials, who are generally at the lower end of the income spectrum and face a host of competing financial priorities, this is often a legitimate reason,” says Cerulli Analyst Dan Cook. “Thinking of retirement, which is 30 to 40 years away, in the same light as immediate savings needs such as rent, mortgage and groceries is also a challenge for this group. Education on topics such as personal budgeting, student loan debt and adjustments to spending habits can help Millennials free up funds for retirement savings that they previously thought were unavailable.”

Company matches can also motivate Millennials to start saving, Cerulli says, as 79% of those younger than 30 and 70% of those between the ages of 30 and 39 said company matches would be very motivating to them to increase their 401(k) contributions. “This group of younger investors communicates that, if their employer were to offer greater matching contributions, they would be highly likely to save more for retirement,” Cook says.

Millennials also greatly value online tools; 37% of those younger than 30 and 45% of those between the ages of 30 and 39 value 401(k) online tools. By comparison, only 4% of those older than 70 find online tools valuable.

“Members of this demographic frequently interact with digital bands and applications such as Amazon, Uber and Facebook,” Cook says. “Providers should recognize that Millennials are accustomed to these digital interactions and seek to engage them in this fashion.”

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