With the prospect of rising interest rates, continued investment market volatility and potential gridlock in Washington, it’s natural to wonder what the current environment will mean for retirement plans. We asked several industry leaders for their thoughts on the key developments that retirement plan consultants should monitor in 2019.
Head of Retirement-U.S. Intermediaries
T. Rowe Price
The year ahead will likely continue to be shaped by the evolving and diverse needs of plan participants. Participants of all ages are increasingly thinking about their holistic financial pictures and, for the large number of near-retirement boomers, how it will affect their lifestyles and incomes in retirement. This will shape the way offerings are developed, delivered and utilized throughout the defined contribution ecosystem.
Demand for holistic financial wellness will accelerate. Participants can now visualize retirement and they want help making it a reality. Considering the growth in financial wellness requests we’ve received, plan consultants and advisors will need to incorporate some version of this into their offer or run the risk of losing business going forward.
Along these lines, we believe successful advisors in 2019 will also understand both plan demographics and qualified default investment alternative (QDIA) providers’ asset allocation philosophy. Our internal surveys reveal a tension among sponsors in weighing the trade-offs between long-term retirement income and downside protection. Incorporating those unique needs and preferences will be essential in evaluating investment options and will be critical in the year to come.
John Faustino, AIFA, PPC
Chief Product and Strategy Officer
While fee compression has received a lot of attention in recent years, we expect more plan consultants to evaluate their offerings in 2019 with a focus on growing fees, through delivery of high-value services. Our research has identified acting as a 3(38) investment manager, providing custom models and direct participant engagement (including wellness programs) as three services associated with higher plan consultant fees, all else being equal. Those who focus on needs and value, as opposed to cost, should do well.
Driven primarily by concerns over lower fees associated with plans for which investment selection is fully outsourced, less than desired liability mitigation offered by some outsourced 3(38) providers and potential disintermediation, more broker/dealers will offer in-house 3(38) programs in 2019. These in-house offerings and competition from fiduciary plan consultants will drive down "broker of record" market share.
In the past two years, there’ve been meaningful regulatory and product advances with lifetime income QDIAs. Combined with recent increased demand from plan sponsors, and with the backdrop of a long bull run, we expect QDIAs with annuity features to start taking market share from traditionally dominant “vanilla” TDFs. Prudent plan consultants will consider these new QDIA alternatives going forward.
Chief Operating Officer
Ascensus’ retirement division
The industry is watching closely as legislators consider the latest proposals related to multiemployer plans (MEPs). MEPs offer employers the potential for reduced investment fees, can reduce fiduciary liability and can create efficiencies in plan administration. But broadening employers’ ability to reap the benefits of MEPs has been a galvanizing issue for years. Most recently, the concept of the “open MEP,” in which employers would not be required to have common ownership or business purpose, has gained some serious traction. The most recent DOL regulations stop short of permitting “open MEPs", but they do broaden the definition of an “employer.” This could be a step in the right direction as we continue into 2019.
We’re also expecting to see an even more considerable convergence of health and wealth this year. As health savings accounts become a bigger part of the industry dialogue, advisors will likely engage with their clients more proactively about how HSAs can fit into their retirement savings strategy. Nearly 20 percent of all HSA assets are now held in investment-based accounts. There’s undeniable interest from investors, meaning there’s also great opportunity for advisors to offer guidance and add value.
We foresee 2019 being the year of retirement income in defined contribution plans. As 10,000 people in the U.S. turn 65 every day, the need for income in retirement is front and center on almost everyone’s mind who is involved in the retirement and investment industry. Plan sponsors will begin to seriously evaluate what they should do to help best prepare their employees for retirement. A dependable, consistent income stream at low cost is the solution we are all seeking—we call this retirement income nirvana. Over the past two decades, the focus has been on savings, accumulation, automation, investment menu design, the participant experience and fees. It is now time to turn our attention to the true purpose of defined contribution plans—meeting participants' needs in retirement. The discussion will shift from how many and what type of funds to offer—TDF, index and active investment menu tiers—to the design and implementation of a retirement income tier. Income-focused funds, managed payout funds, low-cost annuities, etc. will be on agendas of plan sponsors in 2019 and solution implementation will begin later in 2019 and 2020.
Institutional Retirement Income Council
Two trends to monitor in 2019 are the development of alternative retirement income generators and efforts to keep plan assets in DC trusts. IRIC believes growing interest in lifetime income will present opportunities for plan sponsors and advisors. The emergence of specialized nonguaranteed (investment-only) lifetime income options represents a simple, straightforward complement to annuities and guaranteed products as alternative income options. Additionally, amending plan documents to allow for periodic payments and systematic installments may allow recordkeepers to retain assets under management while providing participants with institutionally priced funds as they draw down their nest egg. This could benefit participants immensely as keeping assets institutionally invested through the draw-down phase allows them to receive the benefits of better pricing.
The DOL fiduciary rule, the pending SEC best interest rule and the exiting of over $1 billion in DC trusts daily for IRA custodial accounts and annuities will continue to drive the industry to enable income generators from DC plans directly instead of rolling assets over to an IRA. Under growing pressure, recordkeepers could look to improve their revenues and increase their participants’ security by offering institutional income solutions as part of their DC services. Additionally, HSAs will continue to maintain their spotlight on retirement security as high deductible plans become more popular. DC recordkeepers that integrate with HSAs will have an advantage as the definition of “retirement security” broadens to include health care costs late in life.
Willis Towers Watson
Retirement plans and planning will have to be viewed as integrated with broader financial well-being, as employee dollars are getting stretched thin. Many employees struggle to find dollars to max out the “free money” in defined contribution matches while also covering regular living expenses, medical costs and ongoing debt payments, like student loans or mortgages. Encouraging more retirement savings won’t resonate with many employees, as circumstances force then into hard choices, possibly skipping retirement savings as a “later” goal. Expect employers to look for ways to help employees with limited resources to reduce financial stress and make the best decisions for their situation now. Employers may find many useful clues in how to approach this in their existing HR data.
Tax-efficiency of future retirement plan drawdowns will get more attention, especially in how HSAs play a part. HSAs will be increasingly viewed and communicated as part of retirement planning, instead of just a means to cover current medical costs. It can be taken as a given that health care will be a significant portion of retirement costs—with many retirees reporting medical costs higher than they expected—and HSAs provide the most tax-efficient savings mechanism for employee-funded post-retirement health care costs.
Head of Vanguard Strategic Retirement Consulting
We expect to see more emphasis on customized financial wellness in 2019. In particular, generational aspects of financial wellness will come into focus. For younger employees, there will be continued interest in the “next best action” as it relates to spending discretionary income and in the unique tax advantages of HSAs. Younger employees are also concerned about managing student loan debt, and recent IRS guidance will likely fuel this interest more in 2019. At the other end of the generational spectrum, older employees will remain interested in drawdown strategies—specifically, how to manage payouts in the de-accumulation stage to satisfy retirement sufficiency needs while managing longevity risk.
In an environment in which new legislation affecting retirement plans seems unlikely and regulatory projects are at a virtual standstill, focus is likely to shift to enforcement in the form of agency audit initiatives. One pernicious example is audits related to missing participants and uncashed checks, a trend likely to accelerate in 2019. Looking forward, we hope to see more objective, consistent standards of conduct with regard to plan sponsors’ duties. To date, plan sponsors have received little guidance from the DOL national office, and local offices have filled the void by imposing their own, often inconsistent, standards.