Letter from the US: Boomer balancing act
In the US, the oldest baby boomers recently turned 70. That is also a turning point for the US pensions industry. In fact, Americans at that age have to start withdrawing from tax-deferred savings plans, such as Individual Retirement Accounts and 401(k) funds, or face a penalty. Then, every year they must withdraw an increasing larger portion of their assets. Baby boomers hold an estimated $10trn (€9.3trn) in tax-deferred savings accounts. So their ageing will have a discernible impact on the asset management industry and the economy.
“We believe that the overall demographic trend of a higher percentage of Americans being in retirement and spending down their savings will be a net drag on the economy,” says Anne Ackerley, head of BlackRock’s US & Canada defined contribution group. “This trend contributes to our expectations of lower market returns for both stocks and bonds, as these structural changes to the global economy – ageing populations, slow growth in the labour force, and excess savings – are limiting growth.”
Joe Ready, director of Wells Fargo Institutional Retirement and Trust, says: “Historically, the defined contribution (DC) plan industry was very focused on saving for retirement, the accumulation side of the equation. Now we’re starting to see [baby] boomers move into the distribution side of the retirement curve, which is creating a big shift in where the focus needs to be – solving the retirement equation from the first day on the job through retirement.”
The industry will have to move towards a multi-goal retirement philosophy, according to Maria Bruno, senior investment strategist at Vanguard Investment Strategy Group. “Increasingly, retirees will be faced with balancing their discretionary versus non-discretionary spending desires, longevity-related needs, as well as, potentially, legacy and estate-planning needs. Financial planning decisions will be more complex than asset allocation. Retirees will need to consider, social security optimisation, tax-efficient portfolio-construction strategies, annual tax planning in advance of required minimum distributions, flexible dynamic spending, and informed self-insurance for long-term care”.
The trend features in Mercer’s ‘2017 top priorities for DC plan sponsors’, says Bill McClain, principal at the consulting firm. “We are seeing an increasing number of support services being provided by record keepers, managed account providers, et cetera, that we are assessing,” he adds. “All other things being equal, we would prefer to select vendors with these services in place. We believe that would assist retiring members to make more effective decisions.”
Ready says: “The industry needs to adjust products and services to provide more distribution-oriented services. We at Wells Fargo are preparing for helping people with concepts such as deciding what age to retire, the monthly amount to withdraw, developing a withdrawal strategy for taxable and non-taxable assets, hedging longevity, and developing a budget.”
Wells Fargo is planning to roll out a qualified longevity annuity contract (deferred income annuity at age 80) and evaluating other guaranteed income-investment products.
The industry needs to focus on the decumulation phase, says Ackerley. “As with accumulation, we believe that a combination of automation and education is key. We believe that automated approaches to helping people spend down their savings would be very effective, such as income-generating or decumulation products, or partial distribution plan design features. Target-date funds [TDFs] are also designed to be effective decumulation vehicles.”
In the US, JPMorgan has launched a new strategy that works like a TDF, but for the decumulation phase. “Data from the JPMorgan Institute show that people getting older spend less because they are afraid to finish their savings too soon,” says Anne Lester, global head of retirement at JPMorgan Asset Management. “Our role is to work with advisers and individuals to help retirees spend their savings in a smart way, not running out of money if they live longer than 85 years old, and not taking out too little money, not under-consuming. It’s a very delicate balance to find, between enjoying the money and not outlive your savings.”