The Markets May 25, 2017

Life Events Drive Choice of Managed Account

Investors widely report that a particular life event, such as a marriage or a child being born, prompted the first use of a managed account. 
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According to the Fidelity Managed Accounts Survey, the overwhelming majority of investors who use them (89%) believe that using a managed account simplifies their investing process.

Survey respondents cite the top three benefits of owning a managed account as “having confidence my portfolio is properly diversified; being able to talk to a financial professional about my investments; and having confidence I’m on track to meet my investing goals.”

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“Working with a professional money manager can benefit even the most seasoned investors by taking the emotion out of their financial decisions,” explains Rich Compson, head of managed accounts at Fidelity. “We hear time and again from investors—particularly nervous ones—that a managed account has helped them stay properly allocated during stressful times when they otherwise would have overreacted, like in volatile markets.”

The survey results show investors “don’t have to have a complicated portfolio to reap the benefits of a managed solution.” In fact, according to Fidelity, just 10% of survey respondents “say their financial needs are very complex.”

Fidelity’s survey examined triggers that prompted people to make the move from do-it-yourself investing to a professionally managed account. They cite “lack of skill, will or time to manage my own investments” as the most prominent reason, at 31%, followed by a desire for a financial professional to tell them what to do (23%) and a life event (22%). Investors of all ages report that a family member or friend (30%), a financial adviser (25%) or their company’s retirement plan (20%) introduced them to a managed account.

While on average respondents started investing around age 30, pivotal life events such as marriage, change in job status or birth of a child commonly serve as the triggers pushing an investor to use professionally managed investments. And as Fidelity lays out, “managed accounts offer more than a point in time solution, as 72% of Baby Boomers surveyed have invested in a managed account for more than 20 years.”

Fidelity’s data shows users of the structure on average hold 68% of their total investable assets in a managed account, with Baby Boomers reporting the highest average at 77%. Millennials hold 64% of their assets in a managed account compared to Gen Xers at 62%.

The Markets May 25, 2017

Plan Sponsors Should Not Fear of Using In-Plan Lifetime Income Products

Prudential Financial says adding guaranteed income solutions in defined contribution (DC) plans can help reduce the amount participants would need to save by as much as 36%.
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Guaranteed income solutions provider Prudential Financial says adding guaranteed income solutions in defined contribution (DC) plans can help bring financial security within reach of employees, helping to reduce the amount they would need to save by as much as 36%.

A Prudential Retirement paper, “On the Road to Financial Wellness, Lifetime Income Is Key,” says offering income that is guaranteed for life is a key component to participant financial wellness.

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While a variety of options have been available for some time, in-plan guaranteed lifetime income solutions are not being used as much as they could. Fewer than half of plan sponsors offer a retirement income solution as part of their defined contribution plan—typically a 401(k)—and only one-fifth of those offer a guaranteed income product, Prudential says.

“The fear of outliving one’s retirement assets is a top concern for many employees as they contemplate retirement. A guaranteed income solution can help assuage their fears about longevity risk and help them weather market volatility,” says Douglas McIntosh, vice president, Full Service Solutions at Prudential Retirement.

Employers who add a guaranteed income option to their 401(k)s have the potential to experience positive outcomes, too, Prudential contends. When employees feel more secure about retirement, they are more likely to retire on time. A 2017 Prudential study found that a one-year increase in average retirement age results in an incremental workforce cost of over $50,000. Also, retirees with lifetime income are much more likely to keep their assets in-plan—helping plan sponsors retain the cost benefits that come with scale.

NEXT: Overcoming fear

Prudential notes in the paper that in-plan guaranteed lifetime income solutions range from immediate fixed annuities, which are purchased at retirement for immediate annuitization, to guaranteed minimum withdrawal benefits (GMWBs), which can be purchased at any time and activated at a set age. It advocates for GMWBs.

According to the paper, some advisers and plan sponsors have shied away from offering guaranteed lifetime income in DC plans, believing there to be a lack of regulatory guidance. But, Prudential reminds plan sponsors and advisers that the Department of Labor and Treasury have relaxed required minimum distribution (RMD) rules, so participants can purchase qualified longevity annuity contracts (QLACs) and have provided guidance for pairing annuities with target-date funds (TDFs). In 2014, IRS Notice 2014-66 provided guidance intended to expand the use of income annuities in 401(k) plans, particularly within target-date funds (TDFs).

In 2015, the DOL released Field Assistance Bulletin 2015-02, which reiterated and clarified the principles set forth in the annuity safe harbor regulation (2008) relating to plan fiduciaries’ responsibilities and liabilities in the prudent selection of an annuity provider.

Also, in late 2016, the DOL issued an information letter stating that a DC plan could prudently choose a default investment for the plan that includes lifetime income elements.

The perceived complexity of in-plan guaranteed lifetime income options has also been a stumbling block for some advisers and plan sponsors. They fear that the product is too complex for participants and may harm plan participation rates. Prudential says that has not been its experience.

The Prudential Retirement paper is here.

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