At a press briefing Tuesday, Prudential panelists noted the effect the financial crisis is having on the retirement industry at the participant, plan sponsor, and regulatory level. Amid the crisis, Prudential is continuing to encourage its plan sponsor clients to look more toward auto-enrollment and guaranteed income products within 401(k) plans.
As other recordkeepers have reported, one of the largest changes on the participant level is a record number of calls and Web site logins (see “Time to Be Bold, Says T. Rowe Price Retirement Head“ and “Schwab Finds Participants Paying More Attention“). So, while more participants are taking interest in their retirement savings, more participants than usual are also changing their asset allocation in a way that could have a negative effect. “It’s certainly understandable, but not the right thing to do,” said Jamie Cornell, senior vice president and chief marketing officer at Prudential Retirement.
Cornell also told PLANADVISER.com he is seeing more plan sponsor clients who want a financial intermediary. “The role of the financial adviser is dramatically increasing, not only to help the participants … but also to help plan sponsors making decisions about plan design,” he said.
Participant Rates Steady
So far, Prudential can report that hardship withdrawals and loans have come back down to normal rates after spurting up in 2008—however, future layoffs could cause those rates to go up again, Cornell predicted. He also said participation rates are not seeing any dramatic declines—noting, however, that participate rates across the industry are still not where they should be. He said Prudential sees the trend toward auto-enrollment and auto-increase of deferral rates as “an important step forward.” Prudential is encouraging its plans to both auto-enroll and re-enroll participants.
Cornell said recent match suspensions and changes at even some large companies such as Motorola and NCR (see “NCR Reduces 401(k) Match” and “Motorola Freezes Pension, Suspends 401(k) Match“) could potentially have a negative effect on participation. Although it might not cause current participants to suspend contributions, it could very well discourage new participants, such as younger workers and minorities, he said.
Prudential would like to see more guaranteed income products within retirement plans, such as its own IncomeFlex product, which embeds an annuity within a 401(k) plan (see “The Inside Story“). Cornell said in the future he expects to see more companies putting guarantees within target-date funds.
Cornell suggested that guaranteed income products within target-date funds will enable retirees to have exposure to equities while also securing a guaranteed income stream. As Ed Keon, managing director at Quantitative Management Associates, Prudential’s equity index investing business, put it, “Baby Boomers like to have their cake and eat it too.” The question remains as to what percentage of assets should be placed in a guarantee. Also, the amount of equity exposure retirees should have depends on the individual, Keon said, but the answer is “something over zero.”
Changing Retirement Landscape
Americans had gotten used to retiring at age 65, but that notion is changing. Keon said that Baby Boomers working longer will be good for the economy, but it will also create conflicts for the workforce as it adapts. Furthermore, it will create some conflict for advisers, because a key point of advice they provide is when a client should retire, Keon said.
Policymakers will likely have much more to say about retirement. Cornell predicts that policymakers will be looking more toward guaranteed income—more specifically, lawmakers might provide greater clarifications to the Pension Protection Act about how guaranteed income can be used within qualified default alternative investments (QDIAs). We might also eventually see mandates to provide guaranteed income, he said.
The recent legislation about required minimum distribution requirements is one step toward what Cornell believes will be a busy year, he said (see “Bush Signs RMD, Pension Relief into Law“).