Welcome to The PLANADVISER Interview, a new online series bringing you the most influential people in the industry discussing the trends and issues of the day—in their own words.

Anne Lester, a former retirement solutions head at J.P. Morgan, was among the first creators of the target-date fund. Now, some 20 years later, the TDF is one of the most prevalent investment vehicles in retirement savings. Meanwhile, the industry has turned its focus from retirement accumulation for savers to sustainable decumulation for retirees—just one of many areas that Lester has kept her hand in as an education fellow with the nonprofit Alliance for Lifetime Income. Lester also serves on boards of retirement-saving-related firms and is a regular speaker on financial wellness. In about a year, she will also be a debut author on the subject, with a book set for 2024 publication by William Morrow and Co.

We caught up with Lester in our Midtown New York office.

PLANADVISER: When you were first working on the target-date fund, did you have any sense of how massive it would become for 10s of millions of Americans?

Lester: That’s an impossible question to answer. … On the one hand, it seemed obvious at the time to us that TDFs were going to be a big thing. Whether they were going to be as big as they eventually became is an entirely different question, and whether they were going to become as big as they did at J.P. Morgan was also something else. Certainly, you know, the first two, three or four years we were doing it, it felt a bit like what Hemingway said, which was: ”You go bankrupt very slowly, and then all at once.” The TDFs grew pretty slowly at first.

At the beginning, I believe in 2005, was our first fund launch – we were seeing just phenomenal performance [in our glide paths] at J.P. Morgan and had such a great story, and we had powerful connections with our institutional clients. But it felt agonizingly slow and, honestly, was just frustrating. It was just after the tech bubble and just before the Pension Protection Act [of 2006]. It ended up being just the right time, right in a little sweet spot. And then suddenly a few years later they were huge.

PLANADVISER: What was it like seeing the work finally pay off like that?

Lester: In a word, it was fun. And in multiple dimensions. … It was fun for us to build stuff and have it work. It was a great investment idea—for better or for worse, and the way that we were investing the money worked really well. In ‘07, at the start of the financial crisis, it worked really well. In 2008, it worked really well, and in ‘09 and then again in ‘10. … It was gratifying, and humbling, to realize how many people trusted us and how many people had plans to re-enroll into target-date funds.

The thing that’s the hardest about target-date investing, having moved from the defined benefit world, is that, in the defined benefit world, you’re looking at smooth returns over periods of time, and everybody shares everything. For a defined contribution investor, you’ve got one roll of the dice with a one-time series of returns, and that is completely going to dominate almost everything else that you can do. (Aside from how much a participant saves, which is still the most important thing.) So that individual and the timing of when they happen to do something is just so important. It’s something I think money managers really have to remember—speaking of humbling—because you’re used to looking at this big block of money. It’s easy to lose sight of all the individual cash contributions that come in and out of there.

PLANADVISER: We hear a lot about in-plan annuities solving the retirement income question. But when you look into actual implementation, it’s very minimal. Do you think we need to move in another direction to solve questions around retirement income?

Lester: Let me go back a bit. J.P. Morgan launched the target date funds a little late compared to some, and we were the last out of the door as the first generation of target-date funds was closing. … Most of the shops that were offering TDFs then, if not all of them, were what I would call retail mutual fund shops who had 401(k) recordkeepers. They were living in large cap, small cap, fixed-income-style boxes. When we took a run at it, we thought, “Well, we’re a little late, what do we have that nobody else does?” And we thought, “Well, we have two things: One is an institutional set of asset classes to use, including emerging market equities and emerging market and high-yield debt, as well as direct real estate. And aggressive alpha.”

We said, “How do we take the investing stuff that we have, including tactical asset allocation, and marry that with the asset liability problem solving and come up with a better mousetrap?” My colleague, Katherine Santiago, who did the research with me initially … we assumed that people should—and this is literally what we said—they should take half of their 401(k) balance and annuitize it, because that’s the best way to make sure your money lasts through retirement. Now that was a totally naïve assumption that we made at the time.

PLANADVISER: Why was it naïve?

Lester: When we designed the glide path, we designed it around minimizing the number of people who would experience a catastrophic failure and maximizing the number of people who would get over the finish line, and we were defining the finish line as 80% wage replacement. If you took the money and bought an annuity, because that was the easiest way to figure out the math, you didn’t have to answer the question: How long are people going to live? And we don’t know. So we just assumed they annuitize at the end so we could create that finish line. And then when we were modeling cash flows and thinking about how the money would end up leaving the plan, we said, ‘Well, I think most people should utilize half the money, because that just makes sense.’ Right? So that was, you know, almost 20 years ago, and we were kind of sticking our thumbs in the air.

PLANADVISER: So why not just set that annuity default when close to retirement?

Lester: Well, part of it is: How do you take the idea of guaranteed income for life and create a context for it that doesn’t make people run screaming? We did focus groups at J.P. Morgan right before the crisis of 2007 and 2008. We were trying to figure out an income-annuity type of guaranteed-income product, because there was a little surge in interest in them. Then the financial crisis happened, and everybody thought, “Whoa, we definitely need this.” In our focus group, we tested different kinds of guaranteed lifetime income benefit products. In the focus groups, when we described them to people, they said, ‘Oh, yeah, I love that,’ and they’d be willing to pay a fee for it. Then we said it was an annuity, and they said, ‘Oh, then never mind.’ … They’d say, ‘That’s expensive, right? And it’s insurance, right?’ They weren’t interested.

The assumption [behind a retirement income annuity] is that people should have more guaranteed income then they will have from Social Security. … But what’s the right answer for how much more? If you earn $50,000, or $150,000, or $350,000, Social Security is going to give you a radically different level of guaranteed income, and radically different levels as a percent of your salary. For instance, what is the amount that you should annuitize if you want to cover, say, 50% or 70% of your fixed expenses? You first have to come up with a number that’s the right number to lock in. The thing is, I don’t know what that number is, and often the saver has no idea what their fixed expenses will be, or if 50% or 70% is the right answer. … Should people be defaulted or not? I don’t think we can definitively say the answer to that is yes. Because we can’t answer all these other questions.

PLANADVISER: You said earlier that your book is going to be focused more on how people can work every day toward a better financial life, both before and in retirement. Can you tell us about that?

Lester: When I think about what I’m doing now with my life—in addition to having enough time to go skiing multiple times a year, and hiking on long pilgrimage walks—the only things I’m really thinking of is the ways I can make a difference. The thing I’m most focused on right now is my book and speaking career, which is helping people understand how they can save more effectively. If you don’t save, the best investments in the world aren’t going to matter. I just think there are so many people who are full of shame and fear about money, and the jargon that our industry uses does nothing to help.

Everybody knows what to do to save more money at the basic level. I’m not talking about if you should have a Roth or not, but just going to the bottom line: You need to spend less than you earn. And you need to put some of that aside, right? But people really struggle with that. And it’s not because they don’t know how to do it. It’s because other stuff starts getting in the way, and the fact is: Life is expensive. That’s even more true now than it was 20 years ago, for sure. But in addition to that, I think people feel that it’s complicated. They feel that it’s difficult. They know they’re not doing it right. And they feel shame. And when you feel all of those things it puts you in a really bad place to make decisions.

Frankly, that was a big part of how we designed the target-date funds at JP Morgan. We looked at people’s lives and their lived experiences and how to account for that. … What happened to you growing up really creates very deep patterns of behavior that, if they’re not constructive, you really need to unpack that. That’s what I want to write about and discuss with people to help them save and feel good about their financial lives.

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