The closings in general won’t have much impact, according to
Rusty Vanneman, chief investment officer of CLS Investments in Omaha, Nebraska,
because in the defined contribution (DC) world, ETFs have not had a lot of
traction. “Over mutual funds, in aggregate, they have lower costs,” Vanneman
tells PLANADVISER, and this notable cost advantage might persist, especially as
new smart or strategic beta ETFs come to market.
“These smart beta ETFs are eating mutual funds for lunch,”
Vanneman says. “They’re taking active management in a rules-based format and
putting them in a portfolio at a very attractive cost.”
One issue that could be preventing greater use of ETFs in DC
plans is their tradability, Vanneman says. It can be complex and challenging to
trade ETFs effectively, he says, adding that Schwab’s launch of a full-service 401(k) program based on ETFs will be interesting. “It could be a game changer, to see
them in the DC world in a much bigger size. I’m enthusiastic about the
possibility of ETFs in DC plans.”
Vanneman calls the BlackRock news disappointing, even though
at only about $300 million the asset flows were very low in the target-date
series. “BlackRock does some cool work, so it’s mildly surprising, but I get
it,” he says.
In Vanneman’s opinion, the big three in the target-date fund (TDF) marketplace
are T. Rowe Price, Vanguard and Fidelity. Because of this expertise, he expects they will eventually have
target-date ETFs. “That said, I think the one who will crack this nut is
Schwab,” he says. “They’re not one of the big three, but they are leading the
charge on figuring out how to put ETFs in DC plans. Just a guess, though.”
Trading in the following iShares ETFs will halt at the end
of business on October 14:
MSCI
Far East Financials (FEFN)
MSCI
Emerging Markets Financials (EMFN)
MSCI
Emerging Markets Materials (EMMT)
Retail
Real Estate Capped (RTL)
Industrial/Office
Real Estate Capped (FNIO)
Global
Nuclear Energy (NUCL)
NYSE
100 (NY)
NYSE
Composite (NYC)
Trading in the following iShares target-date ETFs will also
end at the close of business on October 14:
Target
Date 2010 ETF (TZD)
Target
Date 2015 ETF (TZE)
Target
Date 2020 ETF (TZG)
Target
Date 2025 ETF (TZI)
Target
Date 2030 ETF (TZL
Target
Date 2035 ETF (TZO)
Target
Date 2040 ETF (TZV)
Target
Date 2045 ETF (TZW)
Target
Date 2050 ETF (TZY)
Target
Date Retirement Income ETF (TGR)
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Some Participants Using RMD as Guide for Draw Down
Some retirement plan participants think the required
minimum distribution (RMD) is a good guide for an appropriate withdrawal rate
in retirement, research suggests.
Researchers at TIAA-CREF set out to determine the effect on
participants of the RMD waiver allowed in 2009,
but as they probed the issue, it created more questions, according to David
Richardson, a Charlotte, North Carolina-based senior economist for the TIAA-CREF Institute. According to the survey report, published by the Bureau of Economic
Research, a key motive for the survey was to explore the reasons behind
participants’ decisions to suspend or not suspend their RMDs.
More than 80% of respondents indicated that “allowing money
to continue growing tax free/save on taxes” was a very important factor in
their decision to suspend their RMDs. Among those that did not suspend, roughly
one-third indicated that they “depend on distributions for daily spending
needs,” and another 27% listed this as a somewhat important factor in
their decision not to suspend. However, 39% of those who did not suspend
indicated that this was not important in their decision-making. This led
researchers to further explore the responses about needing RMD funds to cover
spending needs, and ask whether respondents think RMDs are a guide to an
appropriate draw-down rate in retirement.
Using
administrative records TIAA-CREF holds for retirement plan participants who
take RMDs, the researchers assigned survey respondents to quintiles by assets
under management. Those in the lowest quintile have a 37% suspension rate,
compared with 48% for those in the highest quintile. Researchers were surprised
to find the percentage of survey respondents who say they could cover their
spending needs without the RMD declines as the amount of assets at TIAA-CREF
rises, from 88% (lowest quintile) to 79% (highest quintile). The researchers
say this raises the possibility that some of those who are in the lowest
quintile may have assets at other financial services firms that they use to
support day-to-day consumption.
The survey responses also suggest that those with larger
asset holdings at TIAA-CREF are more likely to assign some guidance role to the
RMD amounts. The difference of more than twenty percentage points in the
response to this question between the participants in the lowest (36%) and
highest (58%) quintiles also may indicate that those with larger asset holdings
at TIAA-CREF may not have as much assets elsewhere and rely more on income from
assets from TIAA-CREF as a source of household income. Richardson admits this is
a limitation of the survey and that it would be helpful to know about
participants’ assets in other accounts.
A 2012 study found that using
the RMD as a retirement savings withdrawal strategy does almost as well as
traditional withdrawal options and outperforms the 4% rule. But, Richardson tells
PLANADVISER “under a certain very restrictive set of assumptions about
mortality and return, the RMD can provide a good guide for a draw down
strategy, but we would think almost no one would meet that restrictive
criteria.”
He says there are a number of risks of using the RMD as a
guide to spending in retirement. “It is not like longevity insurance;
participants will draw down assets earlier and will have a lower level of
assets generating income in later years than if they annuitized. What if there
was another recession like in 2008? What if the participant has unexpected
expenses? I don’t see RMDs as helping participants be prepared for these
scenarios.”
Richardson adds that people using the RMD as a guide to a good
spendable amount in retirement do not take into account market volatility.
“That’s why the government allowed the suspension in 2009, they didn’t want
people to realize capital losses on RMDs after the economy crashed,” he notes.
Richardson says it is important to remember that the RMD was designed to meet tax-policy
objectives, not retirement-security objectives—it was established to help the
government get back some of the tax deferral of retirement account
contributions. However, he notes that as defined contribution (DC) plans
become the dominant way people receive retirement income, there is more
interest in making sure RMD rules do not damage participants’ retirement
security. “We don’t want a draw-down schedule that reduces the likelihood of
people having financial security later in life.”
Richardson says a good first step in the trade-off between
tax-policy objectives and retirement security objectives was included in the
Internal Revenue Service's (IRS) proposed rules about longevity annuities—the rules would permit retirement account holders
to use up to 25% of their account balance or $125,000, whichever is less, to
purchase a qualifying longevity annuity without concern about noncompliance
with RMD requirements.
For people really concerned about being forced to take
assets out of their retirement accounts too early, Richardson suggests they can
convert their assets to Roth accounts and will not have to worry about taking
an RMD.
According to Richardson, the research shows there is still a
lot of work retirement plan sponsors can do to provide retirement guidance and
advice. “Especially as participants approach retirement, they need to be able
to look at strategies for spending in retirement and making sure their assets
are sustainable throughout their lifetime,” he says.
While behavioral finance has sparked changes to how plan
sponsors get participants to accumulate assets for retirement—automatic
enrollment, automatic investing solutions—the TIAA-CREF Institute is thinking
about how to apply behavioral finance to at-retirement decisions. “We want plan
sponsors to offer programs for education and advice about retirement withdrawal
strategies, and incent participants to take advantage of those programs,” Richardson says.
The
research report, "Do Required Minimum Distributions Matter? The Effect of
the 2009 Holiday on Retirement Plan Distributions," is available for download here.