The drive to help workers with their financial well-being and retirement readiness will intensify in 2019, predicts the Institutional Retirement Income Council (IRIC).
The IRIC expects a growing number of plan sponsors and industry stakeholders to evaluate retirement income solutions and de-accumulation strategies for their defined contribution (DC) plans.
The council identified these trends for 2019:
Retirement legislation. The IRIC expects to see some provisions in the Retirement Enhancement Savings Act (RESA), the Family Savings Act and for the Automatic Retirement Plan Act to gain additional attention in the 2019 legislative agenda. The enactment of legislation could usher in greater interest and adoption of guaranteed income options for 401(k) and other DC retirement plans.
“All of those have some or all of the original RESA provisions and that’s what we keep coming back to,” said IRIC executive director Bob Melia. “Somehow something’s got to emerge where it finally gets to a vote and finally passes. Whenever there’s smoke, there’s usually fire.”
Industry Consolidation. As Baby Boomers continue to withdraw assets from their DC accounts, record keepers will be under increasing pressure — especially those record keepers whose revenues strongly depend on assets under management. Record keepers could improve their revenues and increase the security of participants by offering institutional income solutions as part of DC record-keeping services.
“What was little reported back in 2016 was that we had our first year where there were more outflows from the defined contribution system than inflows,” Melia explained. “So, the money coming out of DC plans with Baby Boomers reaching retirement is now exceeding the money flowing in, but the bull market and equity market increases made the overall industry assets continue to grow.
“Think about what’s happened in the stock market over the last four weeks — we’re kind of getting into correction territory. So, DC providers, more than ever to maintain their revenues, will have to redouble its efforts to think about how to preserve money in the DC system and how to make it last longer for plan participants.”
Comprehensive view of retirement security and further integration of health savings accounts (HSAs) and 401(k) plans. IRIC thinks HSAs will continue to maintain their spotlight on retirement security as high-deductible plans become more popular. DC record keepers that integrate with HSAs will have an advantage as the definition of retirement security broadens to include health-care costs late in life.
Both HSA contributions and withdrawals are tax-free, Melia pointed out. “If you think about that logically, when do you think most of your health expenditures are going to occur? For most people, they occur late in life. So, what the DC industry has to do is instill in people a better sense of using HSAs, if possible, as a retirement security vehicle.”
Additionally, the further integration will reinforce open-enrollment trends, including 401(k) plans, giving participants better tools for deciding how to invest HSA assets while encouraging accumulation of HSA savings for retirement. Ultimately, the broader and comprehensive view of retirement security can also help DC providers consolidate retirement assets in participants’ DC plan and offer drawdown strategies that increase the security of participants who take advantage of such services.
Market conditions and corrections. As the market continues to seek direction after 10-plus years of a bull market, participants could face difficult investment decisions if a market correction occurs. A more challenging stock market along with steadily rising interest rates would cause even well-diversified portfolios to decline in value. How participants react could drive greater proliferation of, and demand for, products offering downside protection, stable value contracts, insurance products such as deferred annuities and guaranteed income benefits, alternative funds and real asset funds.
“Participants are getting better at this,” Melia said. “They’re certainly getting educated, but for many there’s still a follow-the-market mentality. We’ve seen it for decades, but if you look back over the last several years, people were getting more and more comfortable with equities and risk leading up to 2006 and 2007. After the market went down, many of them sold their equity positions in favor of stable value or money market funds as it was going down. Equity markets have come roaring back and we’ve had a 10-year bull market and who knows if they jumped back in, but they at least missed part of that ride.
Service providers and asset managers are being more innovative, Melia observed. “They are creating different products that really help diversify and protect participants’ nest egg and retirement income during a down market. What I worry about is the value of these products will now show itself through a market correction or a downturn, but plan sponsors and participants may not offer and may not invest in such products and protections until they feel the pain like they did before.”
About the Author
Brett Christie is a staff writer at WorldatWork.