David Solomon, national sales manager of Goldman Sachs Asset Management platform solutions group, and Tina Wilson, senior vice president and head of product management, MassMutual Retirement Services, discussed the following nine topics currently impacting the retirement plan space.
1) The Real Cost of Not Having Employees Retirement Ready
With the rising cost of health care, both employers and employees will need to spend more on these benefits. Due to the rising employer costs, other benefits such as employee match contributions may also be affected—that, too, affecting retirement readiness. With employees having to pay more for health care, a greater number will need to work longer.
As a result, disability costs will increase, as will worker’s compensation. There will also be a “lack of presence” on the part of employees forced to work longer. “There’s a difference between people over 65 who stay with an employer because they love their job versus people who are trapped and cannot afford to retire,” Wilson said.
2) Leveraging Big Data to Provide Better Choices/Outcomes
Businesses are benefiting from the use of big data to help track metrics and investment options, Solomon said. Two sectors of the retirement industry particularly benefit—recordkeepers and investment managers.
Recordkeepers house all data, which allows them to better understand participant behavior, Solomon said. Using data analysis, recordkeepers can optimize plan design for better participant outcomes and to change participant behavior. Their ability to use this data will continue to increase.
Investment managers find organizations that employ big data to drive decisions and then invest in those companies. Along with this comes an increased use of index funds and smart beta solutions.
3) The Value of Investments in Driving Outcomes
“As an industry, we are obsessed with investments in our plans—everyone wants to talk about investments,” Wilson said. But, she continued, for participants, particular investments are almost irrelevant for the first two to three decades. Ninety percent of outcomes are driven by how much those participants contribute to their account.
When participants reach approximately 40 to 45, investments become critical. Using more big data will indicate the right level of risk for each individual at this stage of his life. Wilson noted that MassMutual sees too many participants taking too much risk at that age. Outcomes and investment relationships are key at that time.
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4) Developing Next Generation DC Investment Menus
Solomon said that Goldman Sachs’ platform solutions group has conducted studies to see how participants choose from investment menus. They’ve found that there is still a large population of participants who do not invest in qualified default investment alternatives (QDIAs), reinforcing the need for well-designed plan menus.
Major investment menu trends include the increased use of R6 shares classes, model portfolios, custom target-date funds (TDFs), a heightened level of due diligence when evaluating TDFs due to increased litigation, and streamlined menus—not for purposes of reducing funds but, rather, as a way to blend asset classes. In addition, offering fewer funds makes it easier for participants to make decisions and causes less confusion.
5) Data-Driven Asset-Allocation Solutions
The Pension Protection Act (PPSA) opened the door for TDFs, freeing participants from having to make investment decisions on their own. These funds were chosen simply based on a participant’s birthday, Wilson said.
“Today, managed accounts marry data as well as look at the consumer on a continuous basis. These accounts are only now gaining traction, and their price will be coming down, so there will no longer be a cost barrier. This will make managed accounts justifiable for the customization of services,” Wilson said.
Custom allocations are coming down-market, driven by the same trend. “Based on the huge amount of participant data now accessible, we can see that receiving asset allocation assistance allows for far better results,” she observed.
6) Money Market Reform and Capital Preservation
“Plan sponsors do not want participants to park money where it will not grow,” said Solomon.
With the money market regulations going into effect in October, what should plan sponsors do?
“Cash is now complicated,” Solomon said. “Plan sponsors need to understand the trade-offs of each capital preservation product. You may want to achieve yield, stability of principal, and liquidity, but you can’t achieve all three in one product. It’s important to understand the rules, but look for the right investments for your participants.”
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7) Navigating Health Care Costs and Building Financial Wellness
“Financial wellness has become a buzzword with several different meanings, depending on the plan sponsor,” Wilson said.
Due to increased health care costs, employers lack the capacity to fund other benefits, but they can guide employees holistically. For instance, do participants actually use the benefits they have signed up for?
“There is research out there that says, if employees are given various benefits choices, they over-invest in health care because they feel it’s the safe thing to do,” she said. “If we can help them with their investment in health care by using algorithms for budgetary guidance, they’d be able to invest in other benefits such as their retirement plan.”
8) Managing Plan Costs – Active/Passive and the Rise of R6
R6 shares are a big trend in the industry, with significant dollars involved. Solomon thinks it will continue to grow. He also saw a big move into index strategies, to lowers costs.
Indexing is one tool to use when managing plan costs. But what vehicles? What share class?
While active management has become more popular, it increases the costs for the plan—a plan sponsor must understand the trade-offs, he said.
When does a plan sponsor use an index fund, and when does it use a proprietary fund? Each serves a different purpose in a retirement plan. Layering different elements is the way to go, he said.
9) Solving for Income
According to Wilson, “When people in the industry talk about decumulating, and making savings into income, it seems as if they are talking about one product, but participants need several customized products and not necessarily guaranteed income.”
There is still much to do to create sustainable income. Before now, participants had been saving too little to create a sustainable amount of income. Customization and algorithms should change this.
“This will evolve over time,” Solomon said. ”Many players will come together to create customizable solutions that will be applicable, beginning the five years before retirement. This is an area the industry will look at more closely as more people hit the retirement button.”