Client Service October 12, 2017

PANC 2017: Stronger DC Plans Built for a Changing World

J.P. Morgan Asset Management’s Anne Lester describes best practices and emerging strategies for helping plan sponsors deliver better participant outcomes in an evolving retirement landscape.
Reported by

Among the data points highlighted by Anne Lester, head of retirement solutions at J.P. Morgan Asset Management, and drawn from the firm’s 2017 DC Plan Sponsor Survey, is the simple fact that plan sponsors with a “proactive adviser” are generally much more confident and more likely to implement innovative features and strategies.

As Lester laid out during her address on the first day of the 2017 PLANADVISER National Conference in Orlando, defined contribution (DC) retirement plans “operate in a world where perhaps the most important stakeholders are not experts—the participants.” At the same time, there are numerous plan sponsors who are wholly committed to serving their participants loyally and effectively, yet they may lack the practical knowledge to get the job done effectively.

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

“While there are exceptions, certainly the average retirement plan participant cannot be expected to grasp the intricacies of efficient portfolio theory or the ins and outs of building a lifetime retirement income strategy,” Lester noted. “Adding to the challenge, there are not very many opportunities for all these stakeholders to come together and share information and knowledge. We need to continue to make improvements across the board.”

Lester urged advisers in the audience to ensure their clients—participants and sponsors—understand the risks of retirement investing that can be controlled versus those that cannot. Plans should be designed with this distinction clearly in mind. 

“So, what is up to the participant and sponsor? Participation-user risk, are they using the plan right? Accumulation risk, will they stay committed to saving regularly? And withdrawal risk, will they make early withdrawals?” Lester suggested. “Factors they cannot really control are things like longevity risk, to some extent, as well as market risk, event risk, interest rate risk and inflation risk.”

Lester suggested the “DC framework of the future must factor these challenges in directly.” The other crucially important factor for broadly boosting retirement plan outcomes is “understanding that all the averages we use do not actually tell us about the situations faced by individuals.” Averages are useful to guide decisions, but they say very little about the experiences of real people, Lester said. “We are reaching the point where we can do better.”

Another specific outcome from this thinking that Lester advocated is “to account for the edges in target-date fund [TDF] glide path design.”

“We’re used to stress-testing portfolios to address for normal market risks, but we should be doing the same thing for participant behavior risks,” she urged. “You have to look at what happens to the person who does everything right, versus the person who doesn’t do everything right. We have to be thinking both about the person who is healthy and working until 70 and doing everything right—and about the person who becomes disabled during [his] career and must retire early, with little DC savings. Both groups are important stakeholders.”

Data & Research October 11, 2017

'OOP' Health Care Spending Biting Into Retirement Income

Medicare costs are expected to rise and deliver a significant blow to Americans' retirement savings, according to a new report by the CRR.
Reported by

The high cost of Medicare is significantly reducing retirement income for a large portion of Americans, according to a study by the Center for Retirement Research (CRR) at Boston College. The organization found that, in 2014, average out-of-pocket (OOP) spending—excluding long-term care—was $4,274 per year. Approximately two-thirds of that, or $2,965, was spent on premiums. Thus, the average retiree had only 65.7% of his Social Security benefits remaining after OOP spending and only 82.2% of total income. In addition, nearly one-fifth (18%) of retirees were left with under 50% of their 2014 Social Security income after OOP spending; 6% fell below 50% of total income.

In its paper “How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?” the CRR also reports that women, retirees in poor health and those with traditional Medicare excluding supplemental coverage experienced the most increased cost. Across gender lines, the organization notes, the divide is driven by an unexpected cause. “For women, the post-OOP OASI [Old Age and Survivors Insurance] ratio is 62%, compared with 70% for men. Interestingly, the issue is not that woman pay substantially higher costs—they pay slightly lower premiums than men do (by just over $100 per year) and slightly higher other out-of-pocket costs (by about $80)—but, rather, that they have substantially lower OASI benefits ($12,900 vs. $16,600).”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The CRR warns that this issue could be exacerbated if projections of increasing Medicare costs hold true for the long term. The organization stated in the paper, “Medicare costs are expected to resume their decades-long increase after the recent pause, once the effects of the implementation of Part D and the Great Recession have worn off. These cost increases are expected to reduce the portion of Social Security benefits available for nonmedical spending by another few percentage points by 2026, and the Medicare Trustees Report (2017) suggests that medical costs will grow even faster than Social Security benefits in subsequent decades.”

Another important point, according to the paper, is these projections often exclude nursing home care. The CRR found that long-term care can range from $40,000 a year for health aides to more than $80,000 per year for nursing facilities.

The CRR concludes, “If costs resume their rise as expected, Social Security beneficiaries are likely to feel further pressure on their budgets.”

In fact, some studies suggest that Social Security is a bigger part of Boomers’ retirement income plans than previously thought, and the outlook for Social Security is faring no better in 2017. These findings elevate the importance of retirement income outside Social Security benefits such as savings from defined contribution (DC) plans. But the CRR has also outlined some proposals to shore up Social Security. Other organizations, too, have presented strategies for improving retirement outcomes considering low returns and longevity.

The full report “How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?” can be found at CRR.com.

«