The Markets May 17, 2011

Examining the Impact of ETFs on Investment Strategy

At the ETF & Indexing Investments USA 2011 Conference in New York City this week, panelists discussed the pros and cons of the “democratization” of exchange-traded funds (ETFs).  
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Speaking on the panel were Joe Gawronski, President and Chief Operating Officer of Rosenblatt Securities; Mark Scheffler, Founder of the Appleton Group; Simon Lack, Founder of SL Advisors; and Eric Pollackov, Managing Director, ETF Capital Markets at Schwab ETFs. Moderating the panel was Eric Balchunas, ETF Specialist at Bloomberg.

When asked about the impact ETFs have had on the marketplace, Gawronski said, “You have to look at the way these things trade; they’re very different from equities. The ‘Flash Crash’ report showed ETFs had more trouble that day than equities…we have to attack this market differently.” He added that he’s not a big believer in the over-arching arguments that all ETFs are good or bad; instead, he says it’s important to focus on how they differ from other investment vehicles and to adjust your strategies appropriately.

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Pollackov followed up by saying how the industry has “democratized” a lot of the asset classes for ETFs, “but we need to provide education on them, so every-day investors know what they have access to,” he said. He pointed out that it will take time, in a “trickle-down” pattern, for the whole investor community to use ETFs appropriately.  “The educational process is imperative,” he said, and that the “manufacturers” of ETFs are not taking on enough educational initiatives.   

Hailing from Wisconsin, Scheffler elaborated on the responsibilities of the ETF “manufacturers,” but preferred to use an agricultural metaphor. “When we ‘plant’ a portfolio, we want to know what we’re planting. Know what you own is a great mantra, and the way ETFs are structured allows for that naturally,” he said.   

At which point, the moderator asked the panelists to discuss transparency issues surrounding ETFs, specifically how some are considered to be “less transparent” than others.

Pollackov argued that there is no such thing as a “less transparent” ETF. “It’s simple – just go to the Web site of the manufacturer. They have to show what’s inside that fund on a given day. You can call them to ask,” he said. “It’s a major breakthrough as compared to a mutual fund, which shows [the fund parts] quarterly. ETFs have to show everything.”

 

 

 

Data & Research May 17, 2011

Study Finds Workers Lacking Backup Plan for Retirement

Research from the Transamerica Center for Retirement Studies found many workers are planning to work past - or through - their retirement years.
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However, the research also reveals some potential shortcomings with that “strategy” – not only are many American workers largely unprepared for retirement, but relatively few have a backup plan in the event they are forced into retirement earlier than planned.

According to The Center’s research, 40% of respondents expect to work longer and retire at an older age since the recession began. Altogether, 39% of American workers plan to retire after age 70 or not at all and over half (54%) of workers plan to work in retirement. Of those who plan on working after retirement or age 65, the most commonly cited reason is – out of necessity (44%).

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The results of the 12th Annual Transamerica Retirement Survey—conducted among 4,080 American workers (all full-time or part-time)—found that for many Americans, the foundation of their retirement strategy is simply to not retire or to work considerably longer than the traditional retirement age of 65.

Not Enough?

Strikingly, a full one-in-five of Generation Y workers “strongly believe” that they could work until age 65 and still not have enough saved to meet their retirement needs (though that’s only about half the rate among Baby Boomers), and more than half (52%) “somewhat believe” in that reality.  On the other hand, the participation rate of those Gen Y workers in company retirement plans was 70% in the research, much improved from the 53% in 2007, and not too far behind the 75% reported for the Boomer cohort (which, however, was down from 82% in 2007).

Asked to expand on the apparent pessimism of the Gen Y group, Catherine Collinson, president of the Transamerica Center for Retirement Studies, acknowledge that these “Echo Boomers” may, in fact, be reflecting some of the pessimism of their parents. 

While many workers may plan to work past the traditional retirement age or never retire, unforeseen circumstances could force them to stop working before they planned. The 12th Annual Transamerica Retirement Survey—conducted among 4,080 American workers - found the majority of workers are unprepared for this scenario; 70% agree they could work until age 65 and still not have enough money saved to meet their retirement needs.

Moreover, this sentiment spans across age and income:

  • 69% of those in their twenties and 72% of those in their thirties agree they could work until age 65 and still not have enough money saved.
  • 80% of those with a household income (HHI) of less than $50,000 agree, as do 74% of those with an HHI $50-$100,000, and 59% of those with an HHI over $100,000.

Meanwhile, about a third of workers (31%) anticipate not just needing to provide for themselves in retirement, but for additional family members as well.

“With all of life’s uncertainties, planning not to retire is simply not a viable retirement strategy,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “Planning to work past age 65 is an important opportunity to continue earning income, save more, and help to alleviate a retirement savings shortfall; however, it’s important that workers be proactive in setting a retirement savings goal, saving and investing for retirement, and having a backup plan if they are forced to retire sooner than expected.”

Safety “Not?”

The survey found that most (82%) of surveyed workers either do not have, or are not sure if they do have, a backup plan in place in the event they cannot work as long as they need to.  Even more – 87% - of the group who plan to work past age 70 or never retire feel that concern.

 “In today’s society, it’s more important than ever for workers to take personal responsibility for achieving a financially secure retirement. Our research highlights the risk American workers are taking by not having a backup plan in place in the event they are forced to retire sooner than expected,” says Collinson.

Nearly half (44%) of American workers lack a strategy to reach their retirement goals, but even of those who claim to have a plan, only half have factored in healthcare costs and just one-fifth have factored in long-term care insurance. Additionally, just 57% of workers have factored in Social Security and Medicare benefits, though that may be just as well; just 40% claim to know quite a bit or a great deal about Social Security, only 28% say they know quite a bit or a great deal about Medicare and a mere 23% claim to know quite a bit or a great deal about Medicaid.

The research notes that while American workers estimate their median retirement savings needs at $600,000, less than one-third (30%) currently have $100,000 or more saved in all household retirement accounts. Little wonder that the top fears about retirement cited were “outliving my savings and investments” (23%) and “not being able to meet the basic financial needs of my family” (21%).  However, the concern that Social Security would be reduced or eliminated in the future was cited by 15%, and the high cost of healthcare loomed large for 12%.

The survey results are online at transamericacenter.org. 

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