Helping people approaching retirement “is one of the key questions we spend our time on at Franklin Templeton,” said Tom Waters, senior institutional DC strategist, Franklin Templeton Investments. Helping people retire really means “working with people over age 50 who are thinking about retiring. This group is drastically different from the monolith called ‘the participant base.’ Sixty percent of the assets in the DC [defined contribution] system are with people 50 and older.”
Advisers need to realize that participants in that age group are very engaged with their retirement savings—and looking for personalized help, Waters said. “Among the married people age 50 and older, only 39% of their assets are in a DC plan. They have assets in other plans. This is only a piece of the puzzle,” he said. “Financial Engines’ TDF study found that 95% of TDF investors use other options. Fifty-four percent said it was because their TDF wasn’t aggressive enough or was too risky. We need to build better DC plans for this group. People are more engaged than we give them credit for.”
Jeffrey Bograd, director, managing ERISA [Employee Retirement Income Security Act] consultant at John Hancock Retirement Plan Services, said a big part of helping people approaching retirement is focusing on life after retirement, taking into consideration that “people are living longer, returns are projected to be lower, and, today, people have less access to pensions with guaranteed income.”
NEXT: ‘The bigger challenge’
“The accumulation stage is not that challenging,” Bograd continued. “We know what works: automatic enrollment, sweeps, TDFs, making a 6% initial deferral rate the ‘new 3%.’ The bigger challenge is going from 65 to 95 without outliving your savings. People need advice. They get only one chance at retirement.”
Advisers need to help retirees with a “drawdown strategy,” he said and
suggested they urge them to “fill up lower marginal tax brackets such as a Roth
plan or a 401(k) before their brokerage accounts. [An effective drawdown
strategy] could also [mean] developing Roth conversions to delay taking Social
Security until age 70,” he said.
Managed accounts and personalized attention are the real key, Bograd said, noting that, as the industry begins to make more effective use of “big data,” advisers may start to understand each participant’s unique situation and be able to help him make the right investment and drawdown decisions in retirement. “Ask them health questions,” Bograd said. “Look at their marital status, their zip code—to determine their individual situation. Figure out their expenses each year because we know there are the ‘go-go years, slow-go years and no-go years.’”
Franklin Templeton suggests to many of its clients that they offer retirement plan participants four different investment tiers, Waters said. The first is a TDF, as the default option. Tier two is a core menu, to allow the participant to customize his allocation. Tier three is a brokerage window, and tier four is the retirement tier that includes “investment options, plan design changes, targeted communications and tools for retirement,” he said.
Many employees ages 50 and older are unaware of the Internal Revenue Service (IRS) catch-up provision that allows them to invest an additional $6,000 in their 401(k) plan, on top of the maximum allowed $18,000, for a total of $24,000, Waters noted. Franklin Templeton educates this age group about that option, he said, along with a plethora of investment options, including “GMWBs [guaranteed minimum withdrawal benefit annuities] and other guaranteed income choices, managed payout strategies, TIPS [Treasury inflation-protected securities], diversified inflation strategies and partial withdrawals. Even offering them a Social Security optimization tool makes a huge difference.”
Bograd added that those offerings should also
include “longevity annuities that kick in at age 85.”
According to Barker, advisers should recommend more conservative TDFs for participants in the “red zone,” which he defined as the 10 years prior to retiring and the first 10 years in retirement. These investors need TDFs that offer “downside protection by de-risking through the glide path or offer income guarantees.” By providing these safeguards, there is a better chance to encourage people to remain invested, he said.
John Hancock is a big proponent of Roth options, as 77% of U.S. households are in a 15% tax bracket or lower, Bograd said. “Roth options can have an incredibly positive impact for lower-paid people, those making $50,000 or less,” he said. “For highly compensated employees [HCEs], put them in an after-tax contribution option, such as a ‘mega back door’ Roth 401(k) or IRA [individual retirement account].” These options permit an employee to contribute up to $54,000 of salary each year, Bograd said. However, advisers need to make sure that, by offering these options to HCEs, it does not set up the plan to fail nondiscrimination testing, he warned.