Many of the problems facing the U.S. retirement system today are far from local phenomenon, says Fredrik Axsater, State Street Global Advisors’ head of global defined contribution.
In a recent interview with PLANADVISER, Axsater suggested three long-developing themes have clearly crystalized in 2015 as global retirement challenges—faced by plan sponsors in the U.S. and across Europe and most other developed economies.
“Often as I attend client and prospect meetings across the various markets we serve, I hear clients talking about their challenges as if they are unique,” Axsater explains. “Really it’s the same list of problems we are hearing about, whether talking with plan sponsors in the U.S., the U.K., Australia or elsewhere.”
The three problems will certainly be familiar to U.S. industry practitioners, he adds. These are the difficulty of saving enough and efficiently converting savings to distribution income; the tendency of non-professional investors to chase performance and sell the portfolio when stock prices have fallen; and the increased understanding of the importance of good governance in the face of regulatory and market pressures.
Different retirement systems have started to take different approaches to solving these challenges, and so the contours of the issues are playing out differently in markets around the world. Axsater suggests a helpful framework for thinking about global retirement issues and comparing the progress of different countries goes as follow: On one side of the spectrum is the U.S. system, in which individual choice has been preserved at the heart of the retirement savings effort. In the middle is the U.K., which has started to move down the path of more mandatory savings (more than in the U.S.) but has maintained some aspects of individual choice. Finally, on the other side of the spectrum is the Australian approach, in which most savings decisions have been mandated.
“Thinking about and comparing the progress of these three systems over the next several years and beyond will be a tremendous case study for what types of public policy approaches can help overcome the familiar challenges we have all been talking about,” Axsater predicts.
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Another commonality across the different markets, Axsater says, is that with every piece of progress in the retirement savings effort, one can usually expect a new challenge to emerge.
“So for example, we are all familiar with the fact that in Australia they’ve gotten very progressive about the retirement savings effort and are, broadly speaking, at a 9% automatic and mandatory savings rate for most workers, moving up to 12% over time,” Axsater says. “They have had success in boosting average balances because of this, but it’s highlighted how much of a challenge leakage and early withdrawals still are.”
The system still is far from perfect, in other words, partly due to a lessening of choice.
“The U.S. is facing essentially the opposite scenario,” Axsater continues, “where people talk about being ‘overwhelmed by choice’ when it comes to deciding how to save for and spend money in retirement.”
This is one of several reasons Axsater says he is looking forward to watching and participating in the growth of the U.K. defined contribution planning market. He suggests the market could easily triple in size in the next decade, and it will be interesting to see how the middle-ground approach performs relative to the U.S. and Australia.
Turning to the U.S., Axsater feels innovative thinking is still needed in the area of encouraging workplace retirement plan savings—and savings outside the workplace, should it be through individual accounts or even retirement plans established by the U.S. states for private sectors workers otherwise lacking coverage. He falls squarely in the camp that feels state-run plans for private sector workers would benefit existing private market defined contribution plan providers by bringing more people and more investible assets into the financial system.
“The global lesson from a client service perspective is that plan sponsors and participants are looking for holistic support, whether on automated plan designs or financial wellness,” Axsater concludes. “We are starting to see a real shift globally, I think, where plan sponsors are realizing they have to be somewhat paternalistic about the retirement plan to bring good outcomes.”