Industry Views,
401(k)s: They’re Not (Necessarily) Just for Employees Any More
Among the things that a retiring employee could traditionally expect from his or her employer - gold watch, cakes, cards, and golf- or gardening-related gifts - they could also be pretty sure they'd soon be booted from the company 401(k) plan.
Since these retirement savings plans were introduced in 1978, companies generally haven't allowed non-employees to hitch a free ride, since the cost of keeping them in the plan outweighed the advantages of keeping their dollars in the plan.
More recently, however, the tide has begun to turn among employers, retirees, record keepers and regulators that could keep more retirees in their 401(k) plans well into, or even straight through, their retirement.
Anecdotal evidence certainly supports the notion that this will become a trend. At recent meetings PIMCO had with 18 large plan sponsors, a show of hands indicated that a decade ago, none of the plans would have considered keeping retirees. But today, all 18 say they want to keep retirees on the plan, and 16 said they are actively developing plans to retain them.
Though it's hard to know exactly how strong the trend will be, the stage is certainly being set for an increasing number of retirees to stick with their 401(k) plans. And it's nearly certain that at least some plans will start to do whatever they can to retain retirees' assets in the years to come, and that many savers will likely be attracted to the benefits of staying in a plan.
The Employer's View
Companies have traditionally wanted to get retirees out of the plan as fast as possible because they didn't want to foot the bill for administrative tasks, answering questions and dealing with ad hoc withdrawals for people who were no longer with the company. Compounding this was the even larger problem that they simply didn't have the administrative capability to write the regular checks that retirees often need to meet their day-to-day spending needs.
In recent years, however, record keepers have started developing technologies that can help 401(k) plan sponsors more economically meet retirees' needs, including installment plan methodologies that can efficiently make regular monthly payments. It's clear that all the economies and efficiencies aren't built in yet, but as the processes improve and become more prevalent, it will likely continue to diminish employers' aversion to keeping retirees.
As recordkeeping improves, other potential advantages of retaining retirees start to emerge, particularly the benefit of keeping assets - usually the largest balances in the plan - on the plan's books. The more assets in the plan, the more administrative costs are spread out, and the more economical it may be for all participants. Many plans are also finding that not all retirees start drawing money from their plans in the early years, as they rely on other funds such as Social Security or money they've already paid taxes on. So not only do the big balances often stick around longer than the employer might expect, but the retirees do not necessarily require much service beyond simple administration.
The Retiree's View
Just as plans have historically wanted retirees out, there is a whole industry made up of brokers, advisers, planners and certain mutual fund companies that are eager to acquire retirees by rolling over their 401(k) savings. PIMCO estimates that assets eligible for rollover out of defined contribution plans will be almost $400 billion this year alone, and it's clear there will be lots of players competing to manage that money.
For a retiree, this means the options are growing, and each has trade-offs that warrant consideration. On one side of the equation are retirees who don't have, or care to have a full-service financial advisor, whether for cost savings or other reasons. Typically the investment choices inside 401(k)s often have institutional pricing, which can carry lower expense ratios than share classes on other platforms. In an effort to retain retirees, some companies have also begun to build programs aimed at helping savers plan for retirement and offering guidance on how they can meet their goals.
On the other side of the coin, we feel it's abundantly clear why some retirees would want to leave the plan in favor of a full-service adviser relationship. While employers are offering guidance and other services, they are unlikely to completely capture the retiree's total financial condition and therefore are not likely to offer a comprehensive financial plan as a full-service adviser would.
Potential Policy Tailwinds
There also seems to be some political wind blowing in support of policy that makes it easier or more attractive for plan sponsors to retain retirees. Recently, the Treasury Department and the Department of Labor sent a request for information to a broad swath of the financial services industry, looking for feedback on the variety of methods of offering guaranteed lifetime income benefits inside 401(k) plans. Since this was simply a request, it's hard to know if it will lead to regulatory or legislative outcomes. Nonetheless, by canvassing the industry on the subject, the government is showing a clear interest in finding new ways for retirees to get guaranteed lifetime income options, including within employers' 401(k) plans.
A Changing Perception
Since their introduction more than three decades ago, 401(k) plans have been almost exclusively a tool for the accumulation phase of retirement savings, but there is growing momentum towards efforts to make them a credible choice for the decumulation phase as well. As employers make efforts to push the trend forward, advantages are emerging for both the retiree and the plan. With defined benefit plans and Social Security unlikely to be primary sources of retirement income in the future, policymakers are also taking measures to determine whether 401(k)s present a potential platform for distributing lifetime guarantee benefits to retirees.
It's unlikely that plan sponsors will supplant the holistic advice offered by the financial advisory industry, but they do represent an emerging alternative for delivering retirement income.
© 2010 PIMCO, Inc. All rights reserved.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.©2010, PIMCO.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.
Industry Views,
The Future Of Online Customer Feedback Has Arrived
Financial services firms have always coveted feedback and opinions about their websites and online services. This information offers an invaluable blueprint for improving the user-experience for three key audiences—prospective investors, clients and financial professionals. It also sheds light on the practices of competitors.
Unfortunately, convincing visitors to provide constructive feedback online has proven to be a challenge. Firms have tried many ways to connect with online users online, with most yielding lukewarm results.
Online surveys offered by third-party vendors, such as Foresee, are the most popular. These typically pop up without notice and promise to take only a moment to complete. Universal links to dedicated feedback pages are also featured on many websites.
We have seen firms, perhaps in desperation, offer small rewards such as gift cards, donations and even petty cash in return for our time. A major financial services firm once mailed us a ten-dollar bill for completing their survey.
Last month, TIAA-CREF introduced the innovative sitelet, TC Listens, an online community that allows clients to offer feedback and suggestions for enhancing the firm's Web offerings. The sitelet was created with Digitas, an interactive marketing agency.
TC Listens resembles TIAA-CREF's other progressive client-focused social media endeavor, myretirement.org. When clients register for access to this sitelet, they create a unique username and furnish personal details such as email address, home address and favorite websites. They are also invited to share their thoughts on retirement and financial planning.
The TC Listens homepage features a welcome video, an interactive site tutorial and a section called Community Activities that displays current threads regarding site improvement or retirement topics. The site's five main sections—Discussions, Activities, Resources, Sessions and People—are all accessible from the main navigation menu at the top of the homepage.
TC Listens Homepage
The five sections allow registered members of TC Listens to communicate with each other and the firm in a variety of ways. The Discussions forum's message board allows users to respond either to topics posted by a moderator or to the comment of other members within the thread. The page also uses the popular Like or Dislike option for fast, comment-free feedback.
TC Listens Discussions Page
On the Sessions page, members can participate in live chats, provided by a moderator. The Activities section accepts specific feedback requests and contains an assortment of polls, surveys and other feedback-oriented discussion topics. A search of member profiles can be initiated from the People tab, and there's a library of Flash videos and presentations at the Resources tab.
TC Listens People Page
Financial services firms have generally been slow to establish a social media presence. Many are still scrambling to reap the benefits of popular third-party sites like Facebook and Twitter. But with its own gated community, so to speak, TIAA-CREF can mine valuable data from a focused, high-value audience. Between its new TC Listens website and its retirement-focused online community, myretirement.org (with over 10,000 members), TIAA-CREF has established itself as a leader in social media in the retirement space.
© 2010 Corporate Insight, Inc. All rights reserved.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.
The Decumulation Beat,
RIJ Receives a Tough-Love Letter
A few weeks ago, when Cogent Research sent me survey results showing that Americans have negligible interest in retirement income products, it perplexed me. I seemed to remember hearing exactly the opposite from Cogent in the past.
But, as blind as Justice Herself, I published the news in our March 3 issue, under the headline, “Not Much Interest in Income Products: Cogent.”
The terrible swift sword of retribution quickly followed. It came from my good friend Garth Bernard, whom many RIJ readers know as the former MetLife retirement executive and ardent immediate annuity advocate who since 2008 has been president and CEO of Sharper Financial Group.
Garth wrote to me: “I wanted to express my great disappointment that the RIJ is part of perpetuating this type of nonsense. Yes, strong words, but I want to be very clear that that is what this type of survey is: garbage passing for science.”
This was a stern rebuff, daunting even for a former beat reporter who has, both literally and in the perusal of mortality tables, looked death in the face.
“The issue with surveys of this type is that they ask the wrong questions,” Garth continued. “Cogent itself apparently doesn't get the point that the way you serve up a question in a survey heavily influences the answers you get.
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“It is like reporting on a survey which asked respondents, ‘Would you use an mp3 file?’ vs. ‘Would you use an iPod?’ I'll bet that most of the folks who own an iPod may not even know what format the files are in, nor do they care!”
Garth furnished evidence that the “framing” of questions about annuities determines the answers. In closing, he wrote, “I believe that as the editor of such a fine and valuable publication in this area, you would appreciate this pointed feedback.”
I thanked him. Then I wrote a note to Cogent saying that some of my readers—assuming that a single vocal critic stands for a dozen silent ones—seemed to be confused by the apparent inconsistency of Cogent's data.
Cogent project director Carrie Merrick responded within a day. The apparent contradiction in reports was superficial, she said.
“I think your readers may be referring to Cogent's 2010 Investor Brandscape study which reported that ownership of annuities (including fixed and variable) is on the rise across all age and wealth segments, particularly Silent Generation investors. Gen X investors are also far more likely to own annuities in 2009 compared to just three years ago,” she wrote.
“We also found that allocations to annuities have increased significantly since 2006, primarily driven by an increased commitment to the products among existing owners.
“In contrast, the retirement income research referenced recently in our newsletter was about ‘retirement income products’ as a whole—with no specification of product type. The low 15% who reported owning ‘retirement income products’ simply highlights the need for more education and understanding on what these products are and the benefits they provide.
“For example, not all people who own annuities said they own a retirement income product—which means they either don't understand that it is or don't want to use it in that way. Either way, more education is needed. These themes are explored in detail in our report and will be highlighted in the news release we plan to send out.
“In fact, our retirement income research does complement our Brandscape results in two ways:
“Our findings show that the level of interest in retirement income products—reported in our article at 38%—is on par with, if not higher than, annuity/retirement income product usage levels overall. In addition, our retirement income research shows that this interest is much higher among pre-retirees than those already retired—which is in line with our Investor Brandscape data showing increasing trends in annuity usage.
“Both trends are likely the result of increased risk aversion based on the recent recession and people ‘waking up’ to the idea that they'll need help to guarantee their income stream in retirement. It's just that the idea today of a ‘retirement income product’ per se is not well understood or positioned to maximize appeal (we find that investors prefer strategies over products), and our report attempts to address this disparity.”
There you have it. Case closed and off to the morgue.
We received another letter recently, thanking us for amending an error in our feature article, “Easing a Widow's Hardship” (RIJ, February 10, 2010):
“I did not purchase your article but I was pleased to see that you have issued a correction. My 35 years of experience with the Social Security Administration taught me one lesson above all others: Avoid making sweeping generalizations about how much a widow or widower can expect to receive upon the death of their spouse. The computations are complex and subject to too many variables to simply say that a surviving spouse will always get the higher of their own retirement or the widow's benefits.
“While it is important to understand that taking reduced retirement benefits can adversely affect the amount payable to the surviving spouse, I recommend couples seek expert advice based on the specifics of their relative ages and benefit amounts before deciding whether to apply at 62 or wait until their full retirement age.
“Now that I have retired from Social Security, I offer this expert analysis to help people maximize their income from Social Security. My web site, www.StepUpSocialSecurity.com, explains the services I provide.
By Diane Owens, speaker and consultant, founder of Step Up Your Social Security.
Much appreciated. Please send your remarks, questions, criticisms, or story suggestions to kerry.pechter@retirementincomejournal.com.
© 2010 RIJ Publishing. All rights reserved.