4 Forces Driving Retirement Industry Trends

Going forward, Bearden said, lifetime income illustrations, lifetime annuities and the fiduciary rule will work together to improve retirees’ outcomes.

“These regulatory efforts create opportunities for asset managers and plan sponsors alike to be creative with annuities and investment strategies within DC plans,” Bearden said. She noted that the DOL’s requirement that plan sponsors include lifetime income illustrations on participants’ statements can improve behavior, including increasing deferral rates, signing up for auto-escalation or deferring retirement.

She said that safe harbor protections for plans that default investors into products with lifetime income streams may have only a “nominal” immediate impact for boomers due to low adoption so far, retirement outlooks for Gen X and Y may “drastically improve” by those defaults.

On the fiduciary rule, Bearden said “the impact […] can only be assumed right now, though it is likely that assets in employer-sponsored plans may remain there just a little bit longer” instead of being rolled into IRAs due to the lower costs and vetted investments that may be available in a DC plan and not in an IRA.

Another reason, though, has to do with advisors themselves. “Distribution advice, such as a rollover, could be viewed as fiduciary advice under the proposed rule. Therefore an advisor, bound by the standard to place his clients’ interests ahead of his own could be committing a prohibited transaction if he were to recommend a rollover resulting in higher commissions and fees,” Bearden said.

The biggest areas where plan sponsors and asset managers can improve retiree outcomes is in investment strategy and product innovation, Bearden said.

These innovations working together can “vastly improve outcomes,” according to Bearden: asset allocation solutions, alternatives, open architecture, retirement income and annuities. “Some of these ideas can yield immediate positive developments, but other ideas require a longer term outlook for their full benefits to be realized.

Bearden said TDFs are a clear favorite of regulatory agencies as identified by their spotlight as the strategy for life are most likely to benefit from regulatory changes. She said that today, target-date mutual funds account for over $700 billion, and she predicts they reach $1.4 trillion by 2020. Funds with target dates of 2020 and beyond are driving the majority of inflows, she said.  

Institutional DC investors are fond of liquid alternatives for five reasons, Bearden said. They have the potential for improved total return performance. They provide reduced reliance on traditional equities and bonds. They provide incremental portfolio diversification. They can lower volatility and they can provide increased consistency of returns.

“With trends toward automation and the rise of the default investment, the most effective method of bringing alternatives into DC [plans] is likely through the qualified default investment alternative, which is increasingly going to be a target-date fund,” she said.

Robert Muse, senior vice president of SEI Trust Company, discussed innovations investment packaging.

Muse said there’s been a “resurgence” of collective investment trusts and separate accounts in “mega” retirement plans, those with more than $1 billion in assets. They resemble mutual funds, but are regulated differently and are less expensive. There are multiple fee classes, with a sliding fee schedule, and can be brought to market between 30% and 50% faster than mutual funds.

CITs are available in the DC and DB market, Muse said, and in fact, “have special appeal to Taft Hartley plans, government plans, that are very focused on fiduciary oversight. You’re not only getting the fiduciary oversight of the investment manager, you’re also getting the fiduciary oversight of the trustee.”

Although CITs are “heavily available” in the qualified retirement plan market, they’re not available in IRAs, Muse said. “That portability that some providers might tout, that you can roll over from your DC plan immediately in IRAs of the exact same funds is not available in CITs.”