Data & Research September 13, 2018

Modern Retirement Framework Must Consider Health Care Costs

Vanguard engaged Mercer Health and Benefits to develop a new model to forecast health care costs for U.S. retirees; the effort has resulted in a number of pragmatic recommendations for individuals and employers.

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Vanguard has published a report recounting recent analytical work conducted in collaboration with Mercer Health and Benefits, aimed at helping employers better understand their role in supporting the health care needs of late-career workers and retirees.

According to the report, “Planning for health care costs in retirement,” planning for annual health care insurance premiums and out-of-pocket expenses at retirement “should be distinct from planning for long-term care expenses.”

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“Some research on health care costs in retirement estimates these expenses as a lifetime lump sum,” the report points out. “We believe that a better planning framework considers these costs as annual expenses personalized to an individual’s health status, coverage choices, retirement age, and loss of any employer subsidies.”

According to the analysis, for a typical 65-year-old woman, the Mercer-Vanguard model predicts an annual health care expense of $5,200 in 2018. To meet this sizable expense, during their working years, the model suggests many individuals should save at higher rates to account for potential future incremental health care spending.

“Workers with generous employer health care benefits that may not be offered in retirement and those at higher risk of chronic conditions because of their family history or current health status should target higher replacement ratios,” the analysis posits. “Long-term care costs represent a separate planning challenge given the wide distribution of potential outcomes. Half of individuals will incur no long-term care costs—but there is a small but meaningful risk that costly care will be required for multiple years.”

According to the research report, for a typical 65-year-old woman, the Mercer-Vanguard model predicts an annual health care expense of $5,200 “based on purchasing a Medicare Supplemental Plan F and a standard prescription drug plan.”

“Understanding how an individual’s annual health care costs will change at retirement requires understanding the impact of key personal attributes, including health status, coverage choices, geography, income, and loss of employer subsidies,” the report states. “Routine health care costs include insurance premiums and out of pocket costs, but not expenses associated with paid long-term care.”

Vanguard and Mercer warn that employees with generous health benefits, but which do not continue to receive those benefits in retirement, may need to target higher income replacement ratios when it comes to their preparedness to meet health care costs in retirement. Important to note, health care costs are likely to increase during retirement because of both increased health care consumption and faster-than-inflation growth in the cost of health care services.

“Planning frameworks need to balance this growth against substitution effects that occur when retirees spend less in other consumption categories as they age,” the report suggests. “The expression of annual health care costs as a lump sum is not a useful framework for discussing retiree health care expenses. Instead, individuals should focus on annual costs, especially the incremental annual changes they will experience at retirement and at Medicare enrollment.”

The report concludes that “framing annual health care costs as an incremental change, at retirement and at Medicare eligibility, is a more practical approach than focusing on daunting lump sum estimates.”

“Financial plans should factor in the personal characteristics of each retirement investor,” the report states. “Factors that can significantly affect costs include health status and risk, Medicare coverage choice, retirement age, employer subsidies, geography and Medicare surcharges.”

Products September 13, 2018

Investment Product and Service Launches

Securian Incorporates Custom Investment Models and American Century Expands ETF Suite.

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To help financial advisers stand out from competitors in today’s competitive retirement plan marketplace, Securian Financial is adding unitized model portfolios to its suite of 401(k) investment solutions.

Securian Financial’s program, offered in conjunction with Mid Atlantic Trust Company, integrates custom investment models with Securian’s recordkeeping services, resulting in a platform featuring valued services for advisers’ clients. There is no asset minimum, making this typically large client service available to plans of all sizes.

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“Unitized model portfolios are for professionals interested in taking target-date funds [TDFs] to the next level by building customized risk-based solutions for participant usage,” says Kent Peterson, a retirement solutions vice president with Securian Financial. “They provide a value proposition and competitive differentiator to retirement plan specialist advisers who focus on investments as part of their practice. Wealth management firms that, in addition to working with individual investors, offer retirement plan consulting to small businesses find unitized model portfolios particularly appealing and highly efficient.”

American Century Expands ETF Suite

American Century Investments has announced  another expansion of its suite of exchange-traded funds (ETFs). In particular, the American Century Quality Diversified International ETF (QINT), the American Century STOXX U.S. Quality Growth ETF (QGRO) and the American Century Diversified Municipal Bond ETF (TAXF) are now available to clients and investors and are listed on the NYSE ARCA. STOXX is a registered trademark of STOXX Ltd.

“We are building a lineup of ETFs that apply our unique insights to solve common investment problems and help investors achieve their goals,” says Edward Rosenberg, senior vice president and head of ETFs for American Century Investments. “We are excited to launch these additional funds.”

The American Century Quality Diversified International ETF and the American Century STOXX U.S. Quality Growth ETF utilize American Century Investments’ Intelligent Beta methodology, which systematizes many of the same attributes that fundamental research and security selection seek to identify, but in a rules-based, indexed approach.

The American Century Quality Diversified International ETF is a foreign large blend fund that seeks to enhance core international exposure. Its rules-based approach analyzes each stock’s quality, growth and value characteristics to select individual securities. It also dynamically adjusts exposures in an effort to take advantage of prevailing market conditions.

The American Century STOXX U.S. Quality Growth ETF is a large-cap growth fund that seeks to enhance the core growth component of investor portfolios. The fund features a rules-based approach to identify stocks that feature a combination of quality and growth. The methodology distinguishes between stable growth and pure growth companies, dynamically allocating to each category and adjusting sector exposures, depending on the market environment.

Both funds will be managed by senior vice president and portfolio manager Peruvemba Satish and ETF portfolio manager Rene Casis. Satish leads American Century Investments’ global analytics team and joined the firm in 2014. Casis joined American Century Investments in early 2018 after serving in ETF portfolio management roles with BlackRock, Barclays Global Investors (BGI) and 55 Institutional.

The third fund, American Century Diversified Municipal Bond ETF, is an actively managed municipal bond fund that combines investments in thoroughly researched high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures based on prevailing market conditions. Senior Vice President and Portfolio Manager Steven Permut and Vice President and Portfolio Managers Joe Gotelli and Alan Kruss are managing the fund. The firm’s municipal team averages 24 years of industry experience coupled with an average tenure of 21 years with the firm.

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