Data & Research October 17, 2017

Investing Optimism and Health Care Cost Challenges

The head of Wells Fargo Institutional Retirement and Trust reflects on a strong boost in investor optimism measured in a recent survey published by the firm—and on the specter of ballooning health care cost projections.
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The 2017 Wells Fargo Retirement Study denotes a “20-point surge in optimism” about the equity markets.

As explained by Joe Ready, head of Wells Fargo Institutional Retirement and Trust, this impressive one-year jump in optimism is about as strong as any bump the firm has measured in its annual retirement surveys. As he sees it, the results show the financial crisis of 2008-09 continues to recede into the background for most investors.

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Indeed, as measured by the 2017 survey update, an investor who stuck with the markets since the last downturn has enjoyed one of the longest bull markets measured in American history.

“As part of our research we considered the power of compounded savings and market returns for a participant with a $50,000 401(k) account balance in the beginning of 2009. That balance would be $180,000 by September of this year, assuming modest returns and modest contribution rates,” Ready explains. “Had investors allowed the correction to scare them off, they would have missed out on that growth opportunity.”

And so one of Ready’s main takeaways from the latest run of the annual retirement survey is the “ongoing importance of reminding people to stay invested and to think about the long-term when making portfolio decisions.” He suggests right now is a sensible time to talk with participants about the importance of regular rebalancing and ensuring strong market returns—positive or negative—do not throw one out of alignment with their carefully considered risk tolerance or investing timeline.  

Also notable in the data, this year fully half of retirees say they are spending more than expected on health care, and just over one in three say their standard of living went down measurably once they retired. But even with these challenges, the percentage of workers who say they will “have enough savings to live on comfortably” throughout retirement increased to 62%, compared to 52% in 2016.

“In addition, 46% say they will need to work until at least age 70, which is down from 50% last year,” Ready says. “This is a positive because there is ample data to show that most people cannot actually continue working until 70—and that most people retire before they were planning to.”

In spite of increased optimism, Wells Fargo finds a sizeable portion (38%) of workers still say they do not think they will reach their savings targets, and 48% say they believe their “standard of living will fall.” 

“Again, one of the greatest hurdles appears to be healthcare costs,” Ready adds. “Fully 61% of workers say healthcare costs prevent them from saving more for retirement today.” 

Heath care concerns across generations 

Asked to choose the greatest threat to their current retirement savings, four out of 10 workers age 40 and over cite rising healthcare costs or catastrophic illness; on the other hand, four out of 10 workers in their 30s cite losing their job or not saving enough as their biggest threat.

The data also carves out members of the “sandwich generation” in between Millennials and Baby Boomers, tasked with taking care of both aging parents and their own younger children. This group is much more likely to cite rising healthcare costs as a major challenge compared with those people who do not have this dual set of responsibilities.

“Sandwich generation members are also more likely to cite higher health care costs as a reason they don’t save more right now for retirement,” Ready notes. “The sandwich generation is not a small group of people, keep in mind. This is something like 36% of the whole population—43% of women and 30% of men.”

In conclusion, Ready observes a simple truth about retirement savings in America: “Not surprisingly, workers who have had consistent access to tax-advantaged savings in the workplace have saved much more for retirement than those who do not have similar access. Among near-retirees, due to the power of compounding, the gap is quite large.”

He adds that he is optimistic about the future because there is strong evidence that Millennials are getting themselves on track to be a very success 401(k) plan generation. In rough figures, the average actively investing Millennial in the sample started saving nearly a decade earlier in life in a 401(k) than one measures among the Baby Boomers.

“People understand increasingly the importance of saving early for retirement,” Ready says. “Time is the biggest asset for retirement savers, so it’s good to see consistent savers getting a head start. For the 50-somethings in the survey, it’s getting harder to bend the curve as retirement closes in. This is why it’s important for those who are playing catchup to also understand what they can do to optimize their savings. They can do this by modeling when they take Social Security, the age they will retire, and how much they can afford to withdraw each month. All of these can have a meaningful impact.” 

Compliance October 6, 2017

CFA Urges Skepticism Regarding Industry Fiduciary Rule Concerns

An open letter penned by the Consumer Federation of America warns that some players in the investing industry may be sending false signals as to the impact of the widespread shift toward fee-based accounts.
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The Consumer Federation of American (CFA) frequently lobbies and comments on a variety of issues peripheral to the retirement investing industry—but this week the organization directly addressed a topic of paramount concern, for advisers and sponsors, in the Department of Labor (DOL) fiduciary rule.

Specifically, the CFA published an open letter detailing what it believes is an emerging issue: DOL enforcement standards related to the recommendation of fee-based versus commission-based account structures. As laid out in the letter, which was published online as well as mailed to DOL Secretary Alexander Acosta, a number of retirement industry groups opposed to the fiduciary rule reforms have suggested that changes already implemented have “caused brokerage firms to shift investors into fee accounts where they face higher costs than they would have in a commission account.”

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“There are good reasons to dismiss these arguments as nothing more than the misleading rhetoric of industry groups [that] are intent on watering down the rule’s strong investor protections,” the CFA contends. ”After all, those making the claim exaggerate the role of the Department’s fiduciary rule in prompting a migration to fee accounts that is several decades old, ignore evidence that most firms have chosen to continue offering commission accounts as an option under the rule, and provide no evidence that retirement investors who are moved to fee accounts are worse off as a result.”

Instead, the organization argues, to the contrary, these firms “both exaggerate the supposed cost advantage of commission accounts and fail to consider the significant benefits of fee accounts for many investors.”

Important to note, the CFA makes this concession: “Despite our skepticism, we cannot dismiss out of hand the possibility that some firms are using the rule as an excuse to shift customers into fee accounts, even when that is not the best option for the investor, or charging them unreasonable fees as a result. If this is occurring, however, that reflects a fundamental enforcement failure on the part of the Department and its fellow regulators at the Securities and Exchange Commission [SEC] and FINRA [Financial Industry Regulatory Authority], not a problem with the rule itself.”

The CFA letter points to a recent statement from one major retirement plan and investment provider to the SEC, suggesting that investors are being forced by the DOL rule to “pay an asset-based fee to receive exactly the same services that were previously provided to them for no additional fee under a transaction-based fee structure.” The CFA says these are “either gross misrepresentations or, if true, offer strong evidence that some firms at least are flouting the rule’s requirements.”

The organization goes on to clarify that, in the “relatively rare instance” where firms have chosen to offer only fee accounts to retirement investors, they are still obligated under the DOL rule to ensure that fees are reasonable in light of services offered.

“Where investors do not require the same level of service traditionally provided to fee accounts, the firm should lower the fees accordingly, and it is our understanding that some firms have done just that,” the CFA warns. “After all, the level of fee charged to these investors is entirely within the control of the firm. [Advisers] should not be allowed to act opportunistically to maximize their fee income, then point to their willingness to disadvantage customers in this way as evidence of the rule’s harmful impact.”

The CFA concludes, as long as the fees charged are reasonable, fee accounts even under the fiduciary rule reforms offer significant benefits for many investors.

“That presumably explains why the SEC has, in the past, gone to considerable lengths to encourage their adoption and why some of the same groups making this argument today once identified fee accounts as a best practice that offered broad benefits even for buy-and-hold investors,” the CFA says. “It is certainly true, however, that firms may have an incentive to recommend fee accounts even for investors who would be better off in a commission account, or to charge excessive fees. Moreover, when it comes to determining what type of account is best for the customer, the Department’s rule has changed the equation.”

The full letter is available for download here.