Among the data points highlighted by Anne Lester, head of retirement solutions at J.P. Morgan Asset Management, and drawn from the firm’s 2017 DC Plan Sponsor Survey, is the simple fact that plan sponsors with a “proactive adviser” are generally much more confident and more likely to implement innovative features and strategies.
As Lester laid out during her address on the first day of the 2017 PLANADVISER National Conference in Orlando, defined contribution (DC) retirement plans “operate in a world where perhaps the most important stakeholders are not experts—the participants.” At the same time, there are numerous plan sponsors who are wholly committed to serving their participants loyally and effectively, yet they may lack the practical knowledge to get the job done effectively.
“While there are exceptions, certainly the average retirement plan participant cannot be expected to grasp the intricacies of efficient portfolio theory or the ins and outs of building a lifetime retirement income strategy,” Lester noted. “Adding to the challenge, there are not very many opportunities for all these stakeholders to come together and share information and knowledge. We need to continue to make improvements across the board.”
Lester urged advisers in the audience to ensure their clients—participants and sponsors—understand the risks of retirement investing that can be controlled versus those that cannot. Plans should be designed with this distinction clearly in mind.
“So, what is up to the participant and sponsor? Participation-user risk, are they using the plan right? Accumulation risk, will they stay committed to saving regularly? And withdrawal risk, will they make early withdrawals?” Lester suggested. “Factors they cannot really control are things like longevity risk, to some extent, as well as market risk, event risk, interest rate risk and inflation risk.”
Lester suggested the “DC framework of the future must factor these challenges in directly.” The other crucially important factor for broadly boosting retirement plan outcomes is “understanding that all the averages we use do not actually tell us about the situations faced by individuals.” Averages are useful to guide decisions, but they say very little about the experiences of real people, Lester said. “We are reaching the point where we can do better.”
Another specific outcome from this thinking that Lester advocated is “to account for the edges in target-date fund [TDF] glide path design.”
“We’re used to stress-testing portfolios to address for normal market risks, but we should be doing the same thing for participant behavior risks,” she urged. “You have to look at what happens to the person who does everything right, versus the person who doesn’t do everything right. We have to be thinking both about the person who is healthy and working until 70 and doing everything right—and about the person who becomes disabled during [his] career and must retire early, with little DC savings. Both groups are important stakeholders.”