Compliance December 1, 2023

Report Outlines Policies That Could Support Social Security Bridge

A New School report includes the option of a policy or program that would incentivize collecting Social Security at age 70, not earlier.

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Americans would get more out of Social Security if they had access to information and programs that made it clear why they should wait until age 70 to claim their benefits, according to a report published by the Schwartz Center for Economic Policy Analysis at the New School in New York.

The report examined different types of “Social Security Bridge” strategies to incentivizes retirees waiting longer to collect benefits; outlined reasons why some seniors start drawing benefits at younger ages; and suggested some policy fixes.

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More than 90% of seniors begin claiming Social Security benefits before the age of 70, despite waiting until age 70 being a better financial decision for most people, “except when someone urgently needs the money and has no alternatives,” the report stated.

The reduction in benefits that happens when claiming benefits earlier than age 70 also extends to survivor benefits, because survivor benefits are tied to the beneficiary’s age when they first claimed. Thus claiming early does not just harm one’s retirement security, but it can also negatively affect the financial wealth of dependents.

As an example, the report described a hypothetical retiree born in 1960. If the person filed for Social Security in 2022 at age 62, they would receive a $1,400 monthly benefit. The same person would receive a $2,000 monthly benefit if they waited until age 67, and a $2,480 benefit if they waited until age 70.

The report made several policy recommendations for programs that would encourage retirees to wait longer before claiming, some of which have already been proposed.

For example, the report recommended improving the communication of Social Security’s age structure, which could be done by outlining the opportunity costs of collecting early, both for individuals and for their survivors. If seniors are not generally aware that waiting to age 70 will usually be a better choice, then a bridge is unlikely to be effective.

A bill proposed in the Senate in March would do precisely this. The bill would require the Social Security Administration to inform workers of their earning history and potential benefits by mail every several years. Drafters of the bill also recommended changing the terminology of Social Security claiming ages. It suggested referring to age 62, currently called the “early eligibility age,” as the “minimum benefit age,” that age 67 be renamed as the “standard retirement age” instead of “full retirement age,” and that age 70 be renamed to “maximum retirement age” from “delayed retirement credits.”

Recognizing that the reason many collect early is simply because they do not have adequate retirement savings to put off collecting for eight more years, the report endorsed passage of the Retirement Savings for Americans Act, which proposes creating a federal automatic individual retirement account that could have a governmental match as high as 5%.

Some states are already considering programs like this, including Maryland, where its retirement savings program for people with no employer-provided retirement plan is researching adding a Social Security bridge element.

For savers that do have plans, the report recommended structuring defined contribution plan payouts such that payments mirror would-be Social Security payments from ages 62 through 69, attempting to mitigate the incentive of early collection so that retirees can get the most value out of Social Security.

Client Service December 1, 2023

Wilshire: Personalized Investing Is Future of DC Plans

Customization will be focused on target-date funds combined with managed accounts, with other options still emerging, according to a new investment advisory white paper.

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The future of defined contribution investing is poised for a major shift toward personalized solutions, ranging from more customized target-date funds to managed accounts to model portfolios for retirement savers, according to a white paper by Wilshire.

“An adviser’s next best wealth client will be found in the workplace,” Brian Thomas, managing director at Wilshire, says via email about his paper, “The Future of DC: Personalized Investing.” “There is an opportunity [for advisers] to reach this prospective client far before an IRA rollover.”

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Thomas notes that there are now multiple ways advisers can facilitate custom default investment models that are personalized at the plan level for participants of varied ages and needs. The next step, it seems, is for plan advisers, sponsors and asset managers to start leveraging them.

“Portfolios can be further personalized as participants engage with financial wellness tools or financial advisers to volunteer insights regarding their financial needs, plans and circumstances,” Thomas says. “This bridge to wealth can be put in place through careful alignment and integration between retirement plan advisory firms, recordkeepers and asset managers.”

Retirement plan recordkeepers’ ability to capture and integrate individual participant data is part of the catalyst for advancing portfolio personalization, according to the paper. Beyond age, those data points can include gender, account value, salary, bonus, retirement saving deferral and any employer match—even without direct participant engagement.

Hybrid Approach

The emergence of hybrid qualified default investment alternative solutions has been a significant development favoring personalization, according to the paper. These hybrids typically start with a participant in a TDF as the default, then transitions them into a more personalized managed account based on investor age and other factors.

“Differences among younger plan participants tend to be small, supporting the use of TDFs initially, whereas differences among older participants become comparatively much larger over time, particularly as investors enter their 50s and approach retirement,” Thomas wrote.

Personalization, however, will also come with more enhanced TDFs themselves in the form of custom TDFs, he wrote. By utilizing the same participant demographic information, a managed account chassis can fine-tune TDF assignment and allocation, resulting in a more tailored investment portfolio.

Model Portfolios, Adviser-Managed Accounts

Another area of personalization is coming with the introduction of QDIA model portfolios, which further blur the lines between TDFs and managed accounts, according to the study.

Unlike custom TDFs, QDIA model portfolios are not unitized, meaning they offer custom portfolios at the individual participant account level. This allows plan sponsors to choose pre-packaged glide paths tailored to their participants’ demographics and preferences. Importantly, QDIA model portfolios can be designed for each age cohort, the paper noted, so the vehicle can reflect the differences among participants, making QDIA model portfolios easier and less costly to implement than customized TDFs.

The white paper also highlighted adviser-managed accounts as a key development that can help advisers take a more hands-on approach to retirement saving. In this model, the traditional investment fiduciary’s role may shift to third-party consultants, investment advisers or plan sponsors. This approach, previously established in custom target-date funds, is expected to gain traction in managed accounts and QDIA model portfolios across plans of varying sizes.

The position of advisers as managers of participant data opens opportunities not only for directing participants into managed accounts, but also for highlighting rollover IRA opportunities with the adviser, the paper stated. This development aligns with the broader trend of moving from commission-based to fee-based advisory relationships.

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