Best Practices: What’s New in the Private Sector Space

Anna Fang, Senior Analyst, Cerulli Associates

We met Anna Fang in the early days of the state Auto IRA programs – in fact, when the programs were an interesting curiosity and none of them had yet gone live. In her role as a Senior Analyst at Cerulli Associates, Anna focuses on the retirement markets through a private sector lens. What’s on offer? What do adoption rates look like? What do plan sponsors and employees need – and how can providers meet those needs effectively? Come with us behind the scenes as Anna shares some of her recent findings and next research.

Anna Fang, it's so exciting to have you here with us. Cerulli Associates is well known for its research in the retirement markets. Tell us more!

Thank you! I'm one of three members on the retirement practice at Cerulli, a global research and consulting firm. Our practice publishes three annual syndicated reports that analyze market dynamics and product distribution trends in the U.S. – including defined contribution (DC), individual retirement account (IRA), and defined benefit markets.

Our DC research covers plan design, qualified default investment alternatives (QDIAs), retirement income, financial wellness, participant and plan sponsor behaviors, HSAs, and retirement legislation and regulation. To support this, we conduct executive and senior level management interviews with retirement plan providers. These would be asset managers, recordkeepers, advisors, and consultants. These folks are often also the consumers of our research.

It's an interesting time. What are you focusing on in 2021?

Yes it is. You caught us as a really good time – we recently completed our Retirement End Investor report. This report includes a deep dive on how the industry can make DC plans more retiree-friendly and covers some of the intricacies of the conversion from asset accumulation to the decumulation, or spend-down, phase.

We also include coverage on the IRA market, such as IRA rollover assets and accounts and assets by type of account Additionally, our IRA research addresses IRA owners’ decision making process in selecting an IRA provider and establishing an IRA. The report also includes our eleventh annual survey of retirement investors, focusing on 401(k) participants’ attitudes and behavior related to saving and investing for retirement, and other more short-term financial goals and obligations.

Can you share some of what you are learning?

We have about 1,500 participants in our retirement investor survey. These are mainly 401(k) participants, but this year we included about 300 IRA-only respondents who haven't had a 401(k) before. In the survey, we ask retirement investors about their primary sources of income, relationships with financial advisors, how they use IRAs, how they engage with their 401(k) recordkeeper, and much more.

We also split our panel between active workers and retirees. For example, our data shows active workers are often financially stressed about not having enough saved for retirement, while retirees are more stressed about healthcare and long-term care expenses.

We also looked into what separated and retired DC participants are doing with their balances. This survey shows that nearly three-quarters of assets, in the year they became eligible for distribution, stay in the DC plan, either with the previous employer or by movement to a new employer. So these assets have stayed in the DC system. It’s worth noting that sometimes participants won’t take action on those assets until years after separation.

The remaining quarter are rolling over to an IRA, or cashing out. On the positive side, we gauge that cash outs aren't significant.

And throughout the years, we have seen an increasing plan sponsor sentiment toward keeping separated employees and retiree assets in their 401(k) plans. Retirees tend to have the larger balances after years or decades of work. Keeping these balances “in plan” helps plan sponsors increase scale, and also allows a plan to potentially negotiate better pricing arrangements with retirement plan providers, including asset managers, recordkeepers, and intermediaries. This is useful at a time when plan sponsors are quite fee-sensitive.

A major advantage for those participants who choose to leave assets in the plan include that they still have access to institutionally priced investments, something that isn't available in the retail account.

However, there's also the argument that an IRA has more investment options, like ETFs and individual securities.

Anna, are you seeing an increase in plan sponsors allowing employees to aggregate plan assets from elsewhere?

Definitely. We are hearing about more holistic approaches to retirement planning, meaning capabilities that allow near-retirees to aggregate their assets in fewer accounts for easier management. Plan consultants will generally work with plan sponsors to consider whether they are comfortable enabling that feature and allowing in assets from third-party plans and accounts for purposes of consolidation. We haven't explored this area closely, but it’s something to keep an eye on as the U.S. markets continue to evolve.

Account fragmentation is a conundrum. Are you seeing other thorny issues in retirement security that we're not solving very well yet?

Yes. What comes to mind is the advice gap, which Cerulli refers to as the portion of individual investors without access to professional investment advice.

The retirement investor survey data show that 48 percent of retirees had access to professional retirement advice. That may be a financial professional or other advice services offered through a 401(k) or IRA provider. Ten percent of retirees rely on online media, friends, or family, so unofficial advice. And 39 percent indicate they have no source of advice at all.

Active workers share a similar story, with the exception that 17 percent report no source of advice.

In today’s world that feels like a lot of folks out on their own.

Yes. So, what can the industry do to address and narrow the advice gap? There are services like managed accounts, which offer a personalized, comprehensive approach to retirement planning. Most mid-sized and large recordkeepers now offer managed accounts on their platform. And then it is up to plan sponsors to actually add managed accounts to their plans as options for participants to select.

The good news is that managed accounts have come a long way in terms of fees, and offer lower investment minimums than traditional financial advisors.

“Robo advice” is another service – generally available at a lower cost and normally offered on an online basis only and with more self-service when it comes to inputting assets, goals, and other relevant information.

There are options out there to help close the advice gap. But that's something the industry continues to address. Just recently, the DOL said they're going to revisit the Conflict of Interest Rule, so that's also back on the table. It will be interesting to see how that evolves and changes how participants are receiving advice either in-plan or out-of-plan.

What do you find most promising about the way the US retirement markets are changing?

In addition to solutions for the advice gap, I think recent regulatory and legislative changes are also promising. The retirement market moves pretty slowly relative to other markets! But passage of the SECURE Act in 2019 introduced the option of pooled employer plans (PEPs), which allow multiple employers to join one plan without needing to fulfill the previous common nexus requirement. SECURE also included the provision to help with the adoption of lifetime income products in DC plans.

We’re seeing progress relative to the coverage gap, which is most apparent in the micro and small employer segments. But not because there's a lack of retirement options. There are plenty, including 401(k)s, SEP and SIMPLE IRAs, Association Retirement Plans, as of January this year, PEPs, and then, of course, there are the state-sponsored plans.

Within the micro plan 401(k) space, there is a mix of established retirement plan providers, newer tech-forward providers, and a few payroll providers that offer retirement plan services.

I think some of these newer tech-forward providers view the coverage gap in the small business space as a potential opportunity. While the 401(k) market is largely advisor-intermediated, some of these providers have experienced success distributing their solutions directly to plan sponsors, offering simple onboarding experiences geared toward the startup plan market.

Then, for lifetime income products, which are probably most important to those near or in retirement, we have seen several asset managers launching target-date products with an annuitization component. Some of these are existing products are getting new focus. And there are just more of these products being launched. What’s important about guaranteed income products? They have to be simple, low cost, streamlined,

 and portable. They have to have flexible withdrawal options in order to make themselves well suited for the DC market.

Let’s talk about advice again. Participants need guidance on how much should they annuitize, when should they annuitize, and whether they even need to annuitize. If they have a small balance, they probably don't need to annuitize but they may need alternate strategies to bridge their savings to a maximized Social Security payment.

Then, as we discussed, we need to think about consolidation so that savers can have that full picture of their assets. Let's help them navigate the decumulation phase.

What’s next for you?

We continue to watch out for changes in regulation and legislation. We know there’s SECURE 2.0 legislation on the books and so we are keeping our eyes and ears on what's happening out there. So these are definitely exciting times… exciting may be a good or a bad thing. (mutual laughter)

Our next research will be less focused on retirement security, and more about the distribution of existing financial products. This is where we help providers with the “rubber hitting the road.”

It’s one thing to design great solutions, and another thing to have them be adopted and used.

Yes, we’re taking a look at the evolution of retirement income offerings and provider distribution strategies. It’s important in the market to work our way to a place where the plan sponsor and participants are comfortable selecting and using retirement income solutions. The research explores what plan sponsors or plan fiduciaries seeking to retain participant assets in-plan can implement or consider decumulation-focused plan design changes. We don’t believe there’s a one-size-fits-all retirement income product or solution. Instead, decumulation calls for a personalized experience involving a comprehensive financial plan, and investment and withdrawal strategy designed to meet the short- and long-term retirement objectives of retirees.

Final – fun -- question! What do you expect some of your highlights to be from the Summer of 2021?

Hopefully COVID is settling down and we’ll be able to make some travel plans. I haven't flown in a long time and I love to travel. I haven’t traveled much domestically. I’d like to check out Houston, I know it’s scorching in the summertime! So, we’ll see about that. Maybe check out San Francisco. And the national parks, Yellowstone, I like the idea of spending some time getting in touch with nature.

Anna, thank you for sharing some of your recent findings and focus areas! Readers – do you have some hot travel tips and good suggestions for Anna Fang? You can email her here and you can connect with Anna on LinkedIn here.

This piece was featured in the July 29, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.