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Retirement Planning > Retirement Investing > Income Investing

4 Trends Shaping Up in 401(k)s

By John Manganaro

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What You Need to Know

  • As more and more wealth is generated in workplace retirement plans, new innovations are needed to serve plan participants.
  • Wealth managers and insurance carriers will have a key role to play in the emerging world of DC retirement plans.
  • Industry executives see a fast-growing need for trusted, fiduciary advice about retirement income.

On Thursday, the Employee Benefit Research Institute hosted its 2022 Retirement Summit in Washington, D.C., featuring representatives of the U.S. Department of Labor and the U.S. Chamber of Commerce.

During the event, Labor Secretary Marty Walsh laid out his department’s priorities for 2023, stating: “Retirement security is a fundamental need that all working people have, and it’s part of our mission at the Department of Labor.”

The day-long policy event also featured a panel of top-level executives from across the defined contribution retirement plan industry, during which each was asked to offer up their biggest and boldest ideas for advancing retirement outcomes among U.S. workers.

While many of their ideas are ostensibly focused on workplace DC plan issues, the panel agreed that wealth management professionals (and the insurance industry, too) have a key role to play in the effort.

The speakers included Anne Ackerley, managing director and head of BlackRock’s retirement group; Dan Houston, chairman, CEO and president at Principal; Ken Mungan, chairman of the board at Milliman; and Rich Nuzum, president of investments and retirement at Mercer.

Collected below are highlights from the panelists presentations. While each shared their own unique perspective, there was clear agreement among the panelists that all financial professionals must do their part to help the U.S. retirement system solve its various challenges — especially when it comes to improving access to lifetime retirement income solutions and expanding access to savings opportunities in the workplace.

1. 401(k)s as a Guaranteed Income Source

“My big vision is that everyone should be able to generate a paycheck, for life, from within their 401(k) plan, and in a manner that is optimized to meet their personal situation,” Ackerley said. “This may be a bit controversial, but I do think many people will be best served if their income is coming from the 401(k) plan system.”

According to Ackerley, the workplace DC plan system already has critical infrastructure in place and an important degree of baked-in trust among American workers.

“The DC system benefits from the inherent trust and connection that people have with their employers,” Ackerley said. “The system also delivers economies of scale that allow people to benefit from lower fees and from fiduciary oversight.”

In Ackerley’s view, the next frontier for the DC plan system, which is already being worked on, is solving the challenge of delivering guaranteed lifetime income to people who have much or all of their wealth within a 401(k)-style retirement account.

“My personal view is that guaranteed income should be an option today within 401(k) plans, and personally, I would go so far as to say it should be an element of the default investment,” she said. “When I say ‘guaranteed income,’ I am thinking of solutions with three primary components. They must be affordable, understandable and easy to use.”

In an ideal world, Ackerley said, private market financial advisors with income planning expertise would be made available to every single retirement plan participant as they reach the end of their career and start planning for life after work. Unfortunately, that is an unrealistic expectation, she noted, given the bespoke nature of the work of the best wealth managers.

“I believe that tech-based, mass market solutions can provide a lot of support for those who aren’t able to work with a wealth manager,” Ackerley suggested. “As people get close to retirement, we must at least make sure that everyone has some kind of tech-enabled tool kit or support that helps them avoid mistakes and hopefully optimize their income approach.”

2. Employers Looking for More

In Houston’s experience, today’s employers deserve a lot of credit for their commitment to the provision of DC-style plans to their workers. Many people tend to focus on the demise of pensions, Houston says, but the rise of the DC plan system is an equally compelling and far more positive story.

“In 2022, the majority of employers want to be able to say that they have put some solution in place that has allowed their people to fund their retirement goals,” Houston said. “As a result, employers and employees as well are so much more interested in collaborating with us to solve their problems in a more holistic manner.”

Houston said this is a marked change from even a decade ago. His vision of the future, as such, is one in which the DC plan system plays a fundamental role in both the short- and long-term financial stability of all Americans.

“Employers are no longer giving us the Heisman Trophy stiff arm and telling us to stay away from everything that isn’t just the 401(k) plan investments,” he explained. “In fact, many employers are demanding that we provide more comprehensive services and support, including with lifetime income and emergency savings.”

3. Annuities as a Default Investment

“My bold idea would be to propose that we add retirement income as a default in DC plans,” Mungan said. “How would the new default work? It could be very simple.”

Mungan proposed that, when an investor in a 401(k)-type plan turns 55, he would automatically have 3% of their overall balance moved into an annuity that pays out guaranteed lifetime income starting at age 80. A similar transfer would then happen each year after 55 until the person retires.

With this approach, the typical retiree would have some 25% of their 401(k) plan balance moved into an annuity, with 75% of their money remaining invested in traditional mutual funds and bonds. The person could opt out of these incremental annuity purchases, Mungan suggested, but there is substantial research evidence showing the vast majority of people tend not to go against the default approach in the context of workplace retirement plans.

“This approach would be built on simple, wholesale annuity products with very low fees and a simple structure that will pay you for life,” Mungan said. “I like to call it a divide and conquer approach. The person can plan to make withdraws from their bonds and mutual funds to get them from the retirement date to age 79, and then the annuity would take over from there, with everything complemented by Social Security payments.”

4. Holistic Advice Could Become the Norm

“I think we are heading towards a world where there is a more unified, trusted, holistic and digitally enabled consumer experience around financial advice,” Nuzum said. “And, by ‘trusted advice,’ I mean advice that is going to be delivered under a broad fiduciary standard.”

Given his role at Mercer, Nuzum has had a lot of experience working in other marketplaces such as the United Kingdom and Australia. Those jurisdictions don’t have a U.S.-style fiduciary standard, per se, but financial professionals in those nations are universally required to act strictly in the best interest of their clients. Nuzum said the U.S. appears set to follow in those footsteps.

“With the regulatory changes we have already seen and those that are anticipated, right now is the time for financial professionals to get their practices in line,” he suggested. “My personal belief is that all financial professionals should be careful to act in our clients’ best interest — even if that standard has not been totally codified in law or regulation today.”

Beyond being willing to act as fiduciaries, Nuzum said, financial advisors must be ready for discussions that go well beyond which mutual fund to select or which bond fund to buy.

“Holistic advice is going to be about helping the client manage their full financial life. More than picking investments, you will be fielding calls from clients who have a kid that gets into a great college that has sky-high tuition,” Nuzum said. “The advisor will be called upon to adjust the overall plan to help meet short-term priorities without risking their long-term stability and retirement security.”

As Nuzum pointed out, Americans’ consumer lives have changed so fundamentally over the past two decades as digital technology has become a central part of our everyday lives.

“Outside the world of financial advice, people have created very experiential and trusting relationships with all sorts of companies and professionals,” Nuzum warned. “The advisory industry and the retirement industry must move in this direction as well if we want to keep being successful and ensure good client outcomes.”

John Manganaro

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