Forecasting is inherently risky, but forecasts are essential for business planning. We asked several retirement plan experts for their thoughts on the key developments plan consultants should monitor in 2018.
Head of Specialist Field Sales, overseeing DCIO sales
Fidelity Institutional Asset Management
There are three key areas I think plan consultants should consider. First is whether or not plans are ready if active management were to outperform in the coming year. While I’m not making a market call, many strategists are looking ahead to a rising interest rate environment with the potential for increased volatility—conditions that have historically favored stock pickers. Secondly, health savings accounts are an emerging area and consultants should decide if they’ll include HSAs in their discussions with plan sponsors in the future. It’s up to plan advisors to decide if they can provide value in this area. Lastly, the first two topics I’ve mentioned are related to the personalized needs of a plan participant. To that end, managed accounts also provide a vehicle for personalization of investment advice for participants—a trend that may become increasingly important in the retirement space. In working with sponsors, plan consultants must compare initial added cost to a program versus long-term benefits to participants. With the importance of personalization increasing in the retirement space, plan consultants should determine how managed accounts work into their value proposition.
Eric Endress, CFA, AIF
Vice President/Senior Investment Consultant
CBIZ Retirement Plan Services
The rise of HSAs as retirement vehicles is an interesting development. This is a fairly untapped retirement savings strategy today; however, due to triple tax advantages and the rising cost of healthcare in retirement, these vehicles should become more widely used over time. There has been talk of increasing deferral limits, and plan recordkeepers are now offering HSA products that can mirror the 401(k)-investment lineup, allowing the participant to have a fully integrated solution.
Financial wellness continues to be an important item on the minds of plan sponsors. The shift from the typical 401(k) education topics—increasing contributions and diversifying asset allocations—has continued as participants may have obstacles that need to be address before even getting involved with the retirement plan. Financial wellness programs can help them to tackle their issues, whether it be budgeting, student loans or insurance, to name a few, so that they can then begin to maximize their 401(k) or 403(b) and be on the road to a successful retirement.
George P. Fraser, CRPS, AIF, PPC, CBFA
Retirement Benefits Group
In 2018, monthly income in retirement will be hugely important. The average family household income in the country is less than $40,000. Educating individuals about what their monthly income will be allows them to create a retirement budget. The ability to feasibly plan for day-to-day life psychologically allows people to conquer the fear of retirement. We often spend so much time discussing accumulation with clients and how we’re going to save more and create the largest accounts possible for employees, we [overlook] the need to educate them about de-accumulation and what happens when they stop working.
We also need to have conversations about income-in-retirement products that will allow participants to stay in a 401(k) plan, rather than rolling over to an IRA, and receive an income stream that’s not unlike a paycheck. Our job as advisors and educators is to help reduce the stress associated with income in retirement, this creates happier, healthier and more productive employees.
DST Retirement Solutions
We expect to see continued bipartisan support for legislative initiatives designed to enable the use of electronic delivery of pension plan information.
Additionally, since 2011, we have seen more than 10 legislative proposals that have contained some level of retirement reform focused on Multiple Employer Plans. Although these proposals have been introduced separately and sponsored by individuals from both parties, the proposals have shared many common provisions. These commonalities include the elimination of the “one bad apple” rule as well as the requirement outlined in DOL Advisory Opinion 2012-04A. This requirement dictates that all adopting employers to an MEP must be part of a “bona fide” group or association of employers connected by an “organizational nexus” other than the adoption of the plan.
Currently, much of the air in the room has been taken up over the contentious debate on comprehensive tax reform. However, the hope is that once that effort is complete, Congress will have the time and energy to return to these legislative efforts. If that happens, then you never know, perhaps we could see a retirement reform package passed in the coming year.
Institutional Retirement Income Council
Defined Contribution industry and federal lawmakers will begin to study the prudence of a nationally mandated retirement savings plan for employers above a certain size. Additionally, lawmakers concerned with the financial status of Social Security and Medicare, as well as rising healthcare costs for seniors, will want a higher level of retirement readiness for all citizens so that seniors can stay above poverty levels. The financial pressure of such social programs can be partially relieved through higher levels of retirement readiness that could be accomplished through various mandated savings programs and tax incentives. Consultants will need to understand coverage gaps, the retirement security gap, how auto features and plan design mandates can become best practices, and be ready to respond to the changes that mandated requirements will bring.
De-accumulation strategies: Consultants, service providers and sponsors that want to hold on to large retirement nest eggs within the DC system will consider implementing multiple de-accumulation strategies. We expect to see growth of guaranteed and non-guaranteed de-accumulation products and strategies as consultants, and others see the positive impact this will have on overall retirement security and readiness.
Correction and market conditions: A lower stock market along with steady or rising interest rates would cause even well-diversified portfolios to decline in value. How participants react could usher in higher use of stable value contracts, insurance products, such as deferred annuities and guaranteed income benefits, alternative funds, real asset funds and holdings of certain financial sector funds.
Principal and Head of Strategic Retirement Consulting
Vanguard Institutional Investor Group
For defined benefit pension plan sponsors and consultants, improving funding status and reducing asset-liability risk continue to be areas of strategic focus. Some plan sponsors, motivated by rapidly increasing PBGC premiums for underfunded plans and/or the recently enacted reduction in corporate tax rates for next year, made extra contributions to their plans in 2017. These additional contributions, together with strong equity returns in 2017, have improved funding status for many plans, giving those plans additional flexibility to consider risk-reduction strategies ranging from changes in asset allocation to pension risk transfer, and perhaps even full plan termination. Given the complexities of managing pension risk, we expect continued interest from pension plan sponsors in partnering with an outsourced chief investment officer for strategic advice and fiduciary oversight.
Lastly, conversations with plan sponsors on fiduciary best practices and prudent oversight of plan expenses will likely continue in today’s increased litigation environment. As such, we anticipate continued interest in low-cost index options in retirement plan line-ups in 2018. While important, cost shouldn’t be the only consideration when evaluating index products. Plan sponsors and consultants should also consider a number of differentiating factors, including tracking, pre- and post-tax returns, and benchmark composition.
Matt Sicking, ASA, EA, FCA
Senior Consulting Actuary/Regional Sales Leader, Retirement
Willis Towers Watson
Increasingly, employers will apply integrated, proactive approaches to DC plan governance. Past governance approaches sponsors relied on are gone or insufficient. Plan sponsors must construct and document processes that demonstrate to external stakeholders (lenders, auditors, etc.) that a plan is designed and operated appropriately. In addition, litigation continues regarding participant-paid fees and the selection of plan investment choices, and more plan sponsors are discovering that they carry greater fiduciary risk than they might have imagined. Governance risks are very interrelated and sponsors are recognizing that getting out in front of emerging issues is a net cost-saving effort.
Targeted financial well-being strategies will become a driver, not a supplement to, successful DC plans. More and more employers are realizing that they have employees under financial stress and that encouraging retirement readiness of employees cannot be viewed in a financial vacuum, separate from their employee’s debt levels, healthcare costs and other spending. Surveys suggest that many employees welcome insight and employer-provided spending planning tools, as long as the employees’ sense of “help us, don’t judge us” is a framework of their employers’ assistance.