Investing For a New Decade
The next 10 years are sure to bring a different set of opportunities and obstacles than the past 10.
Generating income in retirement remains one of the Holy Grails of investing. For plan sponsors looking to design and implement robust offerings, the challenges are many, including demographics and an ever-changing regulatory environment.
Sponsors are looking for safe harbor and support from regulators to more effectively incorporate lifetime income solutions in their plans, and provisions in the just-passed SECURE Act (Setting Every Community Up for Retirement Enhancement) will help.
“The passing of the SECURE Act affirms the notion that the regulatory environment is different this time in terms of the support for retirement income in the DC space,” said Josh Cohen, Managing Director, Defined Contribution, for PGIM’s Institutional Relationship Group. “Going forward, a comprehensive solution to income will require thoughtful asset allocation, institutional investments, technology-enabled customization, an LDI framework to hedge risks and support a spend-down, and some form of guaranteed income to hedge longevity risk.”
Over the past decade there’s been a substantial change in some of the fundamental aspects that impact both employees and plan sponsors. Workers are clearly becoming more dependent on DC plans, and according to the U.S. Bureau of Labor Statistics, in 2008 18.9% of the workforce was 55 and older, while in 2018 that number was 23.5%. Meanwhile, plan sponsors are showing far greater appreciation for financial wellness, with a 2019 study from Alight Solutions showing that in 2018 65% of sponsors said that’s something they focused on, versus just 30% in 2014.
“Financial wellness is about a lot of things, but effectively it’s saying, ‘If I have a workforce that’s less financially stressed and more retirement ready, it’s not only good for the employee but it’s also good for the company,’” Cohen said.
Indeed, it’s true that the cost of delayed retirement for corporate America is expensive. Research from PFI published in 2017 found an incremental cost to employers of over $50,000 per employee for each additional year of working beyond when the employee could have otherwise retired.
Constructing a more retirement-income-friendly plan is about more than offering a specific product. Cohen notes that plan design is an integral part of any strong DC program. If DC 1.0 was a do-it-yourself plan, and 2.0 was built around enhancing participation and diversification to support accumulation, what he calls DC 3.0 is designed to help people really think about lifetime income.
Regardless of changes coming out of Washington, it’s incumbent upon plan sponsors to help participants meet their long-term needs. Much of the focus up to this point in the DC industry has been on helping individuals accumulate enough assets to achieve their retirement goals. However, this is solving for only part of the challenge as participants will be faced with new risks in meeting their retirement spending needs. With discussions around retirement income within DC plans gaining momentum, now may indeed be the time for sponsors to make meaningful enhancements to their plans to support retirement income.
As of 12/31/19. PGIM does not establish or operate pension plans.
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