The Aon Hewitt 401(k) Index shows there were actually zero days of above-normal participant trading activity during
July—making it the first month with no above-normal trading days since August
2014.
Aon Hewitt says just 0.021% balances transferred each day. Among the 22
trading days in the month, the index reveals 12 had more money flow into fixed
income than equities.
The most popular asset classes
for inflows were GIC/stable value, large U.S. equity funds, and money market,
while the most common classes for outflows were target-date, company stock and
specialty/sector funds. Target-date funds continued to receive
the majority of new contributions into individuals’ accounts.
The index finds participants’
overall allocation to equities decreased to 66.4% from 67.0%, while future
contributions to equities dipped from 66.8% from 67.2%.
July Capital market returns were mixed, Aon Hewitt says,
with the large-cap U.S. and global stock indexes showing positive returns. Small-Cap
equities, both in the U.S. and globally, delivered negative returns.
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Significant attention is building around public-sponsored retirement plans for private-sector workers, but what will these plans mean for established industry providers?
By the end of the year, the Department of Labor (DOL) is expected to publish a proposed rule clarifying how
states can move forward in creating retirement plans for private-sector
workers.
“We really applaud the DOL and the President for addressing
what we believe is one of the most important topics for American workers today,
and that is the low percentage of working Americans that have retirement
plan access through their employers,” says Fredrik Axsater, head of global
defined contribution (DC) at State Street Global Advisors (SSGA). “We have for
some time highlighted the importance of providing greater access to retirement
savings plans,” he adds. “This is an important step forward on this issue.”
Now a growing number of states are coming in with their own
approaches to fill the gap, explains Lynn Dudley, senior vice president for global retirement and compensation policy for the American Benefits Council. Before legislators can build
these plans, though, there are more than a few hurdles to overcome. Axsater
points to three principles his firm believes need to be addressed before a
state-based retirement system for private-sector workers will take hold.
First, he says, participant and plan sponsor success should
be made easier by optimizing the plan design.
“State plans should encourage, for example, automatic
features,” Axsater notes. “That’s the way to use inertia in the right way,
nudging people to participate in the plan and to save more.” Different states may
pursue different auto-features, but the goal should be making savings
easier and simplifying the fund lineup. “We know that too much choice is
overwhelming, so listen carefully to some of the choice architecture that’s
been done.”
Second, participant and plan sponsor failure should be made
more difficult. Getting and keeping participants—and their savings—in the plan
is not just about facilitating enrollment but also limiting leakage. “Find ways
to make it a little bit more burdensome for participants to withdraw assets
from the plan, or reduce some of the cash distributions,” he says. If
participants do take loans or hardship withdrawals, or if they are going to
leave the plan and/or move to a new employer, “make loan repayments easier and
plan-to-plan transfers more operationally efficient and seamless.”
Finally, he says, these plans will require “superior,
ongoing governance” in order to be effective. “As participants’ needs change,
as their priorities change, as markets evolve, these plans [must] have the
ability to evolve and improve over time.”
NEXT: Staying on
track
“Their number one issue is they need to be able to be fair,”
Dudley says of state-based plans for private industry. The number two issue is
that companies need to be free to run their business, and they can’t have so
much complexity going into these plans that it is adding administrative costs.
As Dudley explains, these will likely be costs the participants would have to
pay.
“We don’t see it as a silver bullet,” Axsater adds, “and
this also can raise some issues on its own.” For example, how will these plans
serve employers and employees that cross state lines? “It’s important to look
at pros and cons and the trade-offs that will be involved.”
“Not only do [employers] have to track and comply with the
law, but they have to track the source of the money and the earnings on the
source,” Dudley says. “And one reason that’s problematic is that, in the
future, states will try and compete to tax the retirement money.”
“How different will individual state plans be?” Axsater
asks. “For employers that may have people across multiple states, it would be a
challenge. What policy would dictate a retiree’s decision to move out of state
when he exits the work force?”
If a person lives and works in one state, and has put
savings into a retirement plan and grows his assets there, what percentage of
the assets can be attributed to his time working in that state? “You have to do
these complicated calculations for every person,” Dudley points out, “and then
you get prone to making mistakes.”
“It’s important then, that these plans, as they emerge,
consider the entire ecosystem,” Axsater says. The problem is not just one of
access and investment—it’s also about strong communication support, strong
engagement with participants and, eventually, helping people with the transition
from savings to distribution.
“You don’t want to preclude innovation,” Dudley says, “but
you don’t want to create bureaucracy for the sake of bureaucracy, and you don’t
want to treat people differently.”
NEXT: The ‘Great
Divide’
“We talk about the ‘Great Divide,’” Axsater says. “There are
some really strong practices that are used by the mega plans, the largest
employers in the U.S. At the same time, the lack of access and the lack of
retirement savings for smaller plans are troubling. I think that the state
plans initiative is a way of addressing the gap, but it must be part of a
broader agenda.”
In terms of access, he says, the fundamental question
remains why far more large employers offer plans than smaller companies. This
is partly because fewer people enroll in smaller plans, and those who participate
tend to do so at a lower rate and have a smaller balance overall. This makes
the market less of a target for skilled consultants and advisory firms that can
bring in best practices and make running plans far more efficient.
Dudley feels that more small plans would launch if it was
more administratively feasible. “And they have to get credit for what they’re
doing, and they have to be able to get a fair deal,” she explains.
Given that federal-level solutions have been slow on the
uptake—see myRA, among others—the states are in various stages of trying out
legislation in a whole range of retirement- and compensation- related efforts, Dudley
says.
“It’s all part of a larger policy trend. Not only is there
more job turnover, but there has also been a change in the way people work,”
she feels. “Many more people have only part-time or project-based work. There
needs to be some options to fill the gap.”
NEXT: Impact on
private plans
“I think companies that are already offering very robust
retirement plans are thinking that, so far, at the state level, they would be excused
from new legislation because they’re already offering very robust plans,”
Dudley says. “To the extent that they have employees that are part-time or
contingent, then I think that they’re ok with having to comply with states as
long as they can do it in a reasonable way.”
Problems arise in a “situation where they have to go state
by state and there are different rules”—i.e., for the type of plan offered or
contribution made.
Further, the impact of state-run plans on employer-sponsored
plans will largely depend on the plan’s size, Axsater predicts. “The impact for
the mega market is limited,” he says, while for smaller plans it is
“potentially significant.”
The emergence of these plans may lead employers to rethink
their retirement benefit offering, Dudley warns, and policymakers likely will
struggle to do this in a way that will not cut off jobs.
“It’s important to consider the entire ecosystem here to
make sure that we don’t have any unintended consequences from the individual
state initiatives,” Axsater adds. “State plans can offer a very easy way to
provide access to retirement savings,” he says, but before they can meaningfully
affect potential savers, policymakers must ask themselves: “What are the needs
of individual investors?”
“I don’t know exactly how we’re going to figure this one
out,” Dudley concludes. “It’s a tough nut to crack.”