New Stuff in the Center for Retirement and Policy Studies: Morningstar’s Aron Shapiro on Research Surprises, and more.

We are ruthless in our search for truth! … about what’s going on in the world of retirement studies and public policy. Join us as we chat with Morningstar’s Aron Szapiro about fresh research and counter-intuitive findings on topics ranging from the retirement landscape to the racial wealth gap. The goods start here.

Aron, we’re interested to know: what has Morningstar’s Center for Retirement and Policy Studies got in the cooker right now.

It’s great to chat with you! We've got several things coming out in short order. I’ll start with our first look at the lifetime income landscape. We're calling it our ‘lifetime income assessment,’ and we're doing a few things in this paper that haven't been done before.

First, we're only evaluating lifetime income solutions that we see today in retirement plans. So they have to exist in the wild.

Secondly, we're looking at solutions from an age 55 perspective, with the idea that a participant would be about 10 years from retirement. Thirdly, we're applying a model that accounts for both expected and random post-retirement events, particularly health shocks. So we’re not just testing whether solutions enable you to meet a deterministic set of expenses. We’re also testing whether you can meet the expenses we think you'll have, plus other kinds of expenses that are brought on by health issues.

‘Surprise experiences’ are where some of these products are really supposed to shine. This especially includes annuity products that preserve some liquidity. We’re looking at, for example, in what cases do SPIAs do better than variable annuities. For what types of outcomes are variable annuities maybe going to work better. So I think that's going to be really interesting.

Got it. And for the benefit of our readers SPIA is?

Ahhh. It’s a Single Premium Immediate Annuity. In plain vanilla form, that’s when I give an insurance company, for example, $500,000 and they give me $2,000 a month for the rest of my life.

We were going to have to Google that. Thank you for the save. What else have you got in the hopper?

Shortly thereafter, we are doing a deep dive on Social Security bridging and under what scenarios would it stop working as well as it can under ‘model’ circumstances.

And then we also are going to have our first report using the Morningstar model of retirement outcomes.

We are looking across more than a hundred million people in America to understand who’s on track for an adequate retirement, and who's not, based on some demographic delineations.

I think this information will be really helpful to the retirement policy, retirement servicing community.

We'll also look at some of the policy solutions that have been proposed and/or are recently live and kicking around right now. We’ll be evaluating the degree to which those can or would help close some of the gaps we see between groups. So we’ve got lots of stuff coming this fall.

Early next year, we're going to follow up with the second iteration of our retirement plan landscape report which people have said was very helpful. We got tons of engagement and questions on this work. It's going to be even better next year because of expanded data collection that’s allowing us to go deeper in areas of interest, like actual plan use of ESG funds, and more.

Another thing that's in the works: we’re looking at defined contribution systems in eight different countries, including the US, to better understand what elements are working and what aren't.

Something I’ll say is that there's no country where everything is perfect, but you can see the elements in use across the world that could combine to make a system really good. Most of these systems work pretty well, but they could all learn from each other. Stay tuned.

From your work, what interesting findings are jumping out at you?

Here’s one. We look at stuff like “at what ratio of wealth to income needed, net of Social Security, do annuities stop making sense.” I can’t give away the answer before we publish, but I think that will be really interesting to people. Yes, it's pretty intuitive, and it has important implications for things like, should we do QDIA annuities?

Two more things jump out. I think a lot of people think of the racial wealth gap in 401(k) systems as a function primarily of access, or a lack of access. But among people who have access, you still see a pretty big racial wealth gap.

So people say, well then it's probably mostly a function of income, but you really don't see that as the biggest contributor either.

As we look more closely, the data does really suggest that, Yes, this is a policy problem, but there are also things plan sponsors themselves can do to make sure that everybody is using their 401(k) plan in a way that's going to result in adequate income to meet expenses in retirement. Larger companies, in particular, can play a bigger role here.

I think the conventional received wisdom, even among people who are pretty invested in improving retirement security, is not quite right.

And we certainly will be able to demonstrate that with the data we have and the results we are publishing shortly.

The last thing I’ll mention comes from a recent target date piece we did.  

We see that plan sponsors who offer a Defined Benefit plan typically select target date glide paths for their Defined Contribution plans that look quite different from the ones that are offered by sponsors who do not have a DB plan. And that makes a lot of sense. I mean, you would want it to be different because you expect the DB plan to make up a certain amount of your worker’s retirement income, and the DC plan is a supplement to that.

The less comforting finding (see exhibit seven) comes when we look at Defined Contribution plan sponsors by sector. Here, a great deal of participant savings goes into Target Date funds, but those funds show very little customization specific to a given sector. Some sectors have a very large proportion of workers working past age 65. Agriculture, Real Estate, and the Arts are three of these. And yet, you’ve got no variance on the equity allocation of the Target Date Funds offered to these workers.

That's not what you want to see.

I think you'd really like to see a lot more variation to reflect the realities of what workers are most likely going to need to support a shorter or longer working life. The target date fund is not going to solve everybody's problems perfectly, but the glide path should generally be calibrated to meet the population's needs.

Now, it could be that this is all happening on the custom side. But 60% of assets are invested through off the shelf target date funds. And off the shelf glide paths do vary. There are options for sponsors to pick from. We think it would make sense to see more variation than what they're currently selecting for their populations.

Let's talk about perspectives for 2023. Any specific areas on which you would like to see more policy or legislative focus?

Oh man, no one's ever asked me what I'd actually like to see happen.

If they don't get the Savers Credit expanded in this session, I'd love to see that be a continued focus in 2023. I think it's the biggest tool that could attain bipartisan support that could move the needle.

It costs money to expand the credit, to make it refundable, and to make it go directly into a retirement account.

But if we're framing the problem as the wealth gap between Hispanic and Black heads-of-households, that's a policy change that can make a big impact immediately on both retirement savings and on households’ likely ability to meet expenses in retirement.

So that's certainly one.

I think there is a bunch of housekeeping that needs to be done on the system. CITs should be available in 403(b) plans. If we're going to have private letter rulings that allow them plan by plan, let's just codify it, make sure that everyone understands the non-discrimination implications, and make them available.

The other big thing is – and  this is not going to happen, but you asked me about my wish list – if we could just get some  certainty on ESG, confirming ‘this is what ERISA means and this is what you can do’ – that would be amazing.

I think instead we're just going to see a final rule from the Department of Labor, and then more action on the SEC side. I think ESG has become deeply political among politicians, but among investors, it's really not. And most asset managers are thinking about ESG risk, and it would be nice if there was real clarity around what that risk is. So yes, I guess if we had a parliamentary system and I was prime minister, that's what I would do.

On the other hand, the Savers Credit could happen. It’s something that could even happen in the lame duck session. That'd be great.

Aron, we are rounding the corner. What is the best way for folks to get and stay connected to your work?

Just Google the Morningstar Center for Retirement and Policy Studies and bookmark us. You can also sign up to receive our latest research and insights at that same page.

Aron, we appreciate your perspective! We’ll be staying tuned to see more of the outcomes from this body of work soon.

The inimitable Aron Szapiro is head of retirement studies and public policy for Morningstar Investment Management LLC. Aron is responsible for developing research reports on policy matters, coordinating official responses to regulatory proposals, and providing investor-focused comments on policy issues to clients and the press. He also chairs Morningstar’s Public Policy Council and heads the Morningstar Center for Retirement & Policy Studies. Aron’s research has been covered in The New York Times, The Wall Street Journal, The Washington Post, The Journal of Retirement, and on National Public Radio. Impressive! You can connect with Aron on Twitter: @AronSzapiro

This piece was featured in the September 22, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.