35 million Americans known as the “Early Boomers” are expected to retire in the next 10 years. Most of them will need an 80% income replacement ratio. Social Security is likely to provide 35-40% of this for the Early Boomer demographic. In its third annual defined contribution survey, BlackRock set out to examine how this income ratio gap can be filled.
Speaking at a press briefing in New York City this week, Castille discussed the general reluctance of plan sponsors to adopt a retirement income option into their plans at this point in time, mainly due to a lack of regulatory guidance. However, BlackRock data paint a picture in which retirement income options are both wanted and needed by the Early Boomers.
BlackRock says sponsors should recognize the similarities that can be drawn to the Pension Protection Act of 2006.
“The PPA endorsed trends that were already happening, it didn’t create them,” Castille said. “We need to take the same attitude today to meet the needs of the Boomers. The danger is that this is the last best stand for privately-funded retirement plans. If this goes by the wayside, 30 years would have been wasted and what else can we do? There’s not a lot left on the horizon.”
A BlackRock survey of 1,000 participants in defined contribution plans found that many participants are concerned with the complexities of retirement spending. However, a survey of 119 employers revealed that they want more regulatory guidance regarding fiduciary protection for retirement options. Castille says they will get guidance eventually, but it won’t come soon enough.
“They’ll have to act alone, which scares them, but they’ve done this before. TDFs were in use before the PPA endorsed them,” he said.
Where Paternalism Ends
When asked how much responsibility they feel towards their participants, plan sponsors felt a great amount of responsibility in their participants’ working years. Ninety-six percent of sponsors said they felt some degree of responsibility for “giving employees an incentive to save and invest for retirement.” The same percentage felt some degree of responsibility for “helping employees learn about investing and building their nest egg.”
The numbers drop when asked about responsibility towards participants’ life in retirement. Seventeen percent feel a “great deal of responsibility,” 61.5% feel “some responsibility,” and 22% feel “no responsibility at all” for helping employees make sure their money lasts through retirement. Thirty-three percent feel no responsibility for helping employees secure an income stream in retirement, and 30% feel no responsibility for helping employees safeguard their assets in retirement.These numbers are at odds with what the participant survey found – 40% want “a great deal more” information on how to generate secure income (see “Sponsors and Employees Diverge on Post-Retirement Roles”).
Retirement Income Options for Sponsors
Castille compared the hesitancy of plan sponsors to adopt retirement income solutions to the confusion over target-date funds a decade ago. Now, forecasters predict that 50% of retirement flows will be into TDFs soon, he said.
The BlackRock survey found that 85% of participants find TDFs appealing; 66.5% even had a positive response to the idea of being automatically enrolled into one. BlackRock’s proposal is to put an annuity in a TDF – to take something popular, like TDFs, and give workers what they are asking for, an income stream.
Castille showed illustrations comparing two types of retirement income solutions – annuities and bond ladders (a sequence of bonds that mature in a sequence of years). Using the assumptions of having a 4.0% discount rate, 2.5% inflation rate, and a 30 year planning horizon, BlackRock found the bond ladder to be much more expensive that an annuity.
The company’s concluding calculation is if the industry puts half of Early Boomer’s assets into annuities, the Boomers can gain $1 trillion of adding spending money in retirement.
“The DC system will work for younger workers,” Castille said, “it’s the Boomers who didn’t get a chance to save enough and will challenge the system.”