The low-interest-rate environment “has an extremely large impact on failure rates,” according to a soon-to-be-finished study by the Employee Benefits Research Institute.
EBRI research director Jack VanDerhei discussed the research, which he plans to finish within a month, on Thursday at the group's policy conference in Washington. Other retirement planning experts also gave their takes on how the current interest rate environment is affecting workers’ retirement savings.
While there’s a “limited impact” on retirement income adequacy for those in the lowest income quartile and a "very significant" impact for the top three income quartiles, VanDerhei said that overall, “25% to 27% of Baby Boomers and Gen Xers who would have had ‘adequate’ retirement income under historical averages end up running ‘short’ of money in retirement if today’s rates are assumed to be a permanent condition.”
Granted, he added, "this assumes retirement income/wealth covers 100% of simulated retirement expense."
Indeed, Stacy Schaus, an executive vice president at PIMCO and leader of the firm’s Defined Contribution Practice, noted that consultants surveyed by the bond giant this year predicted that the low-rate environment could likely last for at least the next two years—with some saying it could drag on for 10 to 15 years.
Now is a good time for plan sponsors to revisit their plan’s offerings, Schaus said. “Plans that just offer money-market funds may want to revisit that,” she said. It’s now time to “put some inflation hedging into the plan, and broaden out to income commodities or real estate, which may bring more returns.”
She also noted that 30% of plans’ defaults were going into target-date funds, so making sure target-date fund plans were “structured right” should be plans’ “No. 1 priority.” Indeed, PIMCO’s consultants survey revealed a surprising outcome: the majority of consultants viewed target-date funds as their preferred retirement income solution, with insurance products at the bottom of the list.
While the movement to “defaults is positive,” Schaus added, “the investment management we have been asking people to do is far too difficult; it’s like driving a car, you can’t change your own brake pads; people can’t do this [retirement planning] on their own, they need much more professional oversight on all fronts.”
Michael Davis, head of stable value for Prudential Retirement, noted during the EBRI event that stable value became a “safe haven” for millions of retirement savers during the financial crisis. Since the 2008 crisis, the retirement market has grown “dramatically,” he said, currently holding $19.5 trillion in assets. Assets in stable value grew from $595 billion in 2008 to now reach more than $700 billion, he said.
While Davis said he “wouldn’t advocate for participants to leave all their money in stable value, it’s part of a suite of products” retirement savers should have, “especially those who are reaching retirement.” Stable value, he said, “is increasingly important in what an aging population is going to need.”
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