For many US workers, the single largest asset they own—aside from their home—is their workplace retirement savings plan. We believe retirement plan solutions thus far have not enabled for a high level of personalization, but they should—both in the asset accumulation phase and in decumulation once one decides to retire. Plan sponsors need to start looking at participants as individuals (and often as part of a household)—not just as a certain homogenized demographic. Participants’ goals and needs within retirement are not always determined by their age. Today, through new technology and employer and participant regulations, personalized solutions are available to plan participants.
- Key factoids about the need for personalization:
- A recent PLANSPONSOR survey showed only 36% of plan sponsors agree that employees will achieve retirement goals by age 65.1
- According to Franklin Templeton’s Voice of the American Worker Survey, 77% of workers indicated that a more personalized 401k investment option will encourage broader participant plan participation and contributions.2
- Participants in their 50s and 60s hold some 63% of retirement plan assets.3 These individuals are likely to be more interested in income solutions that align with their individual demographics.
- While most target-date funds (TDFs) tend to be held by the expected age group, data suggests that 77% of assets in a 2065 TDF are outside the intended age group4—so they are using the incorrect vintage.
We also need to change how plan success is measured. As an industry, we should try to migrate away from participation rates, average account balances and average deferral rates as the only measures of success, and instead ask whether participants have the appropriate asset allocation for their situation, and if they are able to meet retirement income replacement ratios.
We think of personalization as a solution, not just another investment option. It should be tailored to each participant, should ensure that asset allocation is based on individual goals, and leverage employee- and employer-provided information in asset allocation decisions.
In our view, the retirement plan industry also needs to do a better job helping individuals reduce the risk of running out of money during retirement. An individual’s net worth, guaranteed income (such as Social Security payments), risk tolerance and life expectancy are integral to the solution.
A decumulation strategy should incorporate personalized advice to improve the probability of lifetime solvency, considering unique consumption needs and allowing the individual to plan for specific goals, such as bequeathing assets. Monitoring the individual’s financial position and adjusting asset allocation and spending advice is crucial.
Following are highlights of a discussion our retirement specialists had on this topic, which included Kevin Murphy, Head of Workplace Retirement Distribution, John Kutz, National Retirement Plan Strategist, and Drew Carrington, Institutional DC Market Segment Leader.
Drew: We make a lot of assumptions about retirement. Not everybody immediately stops working and starts drawing down retirement assets on their 65th birthday. And not everyone is single. They are often part of a household, and we have to think about that broader context—are others in the household still working, and do they also have retirement income plans that fit into the household income pie?
John: There’s also this assumption in the industry that participants are engaged and understand the vernacular, and that’s often not the case. Participants are often not engaged and don’t know what an annuity is, for example.
Kevin: The point is, your essential expenses at retirement are going to be different than mine. I might have a part-time job, you might not, or vice versa. Everyone’s situation is going to be different, but I agree the nomenclature around consistent monthly income and solutions like annuities is extremely important.
Drew: Specifically on the annuity point, there is a lot of survey data asking individuals if they would be interested in a financial product that guarantees a steady paycheck for the remainder of their life. Most would say “yes.” But then you ask them if they would like to buy an annuity and they say, “Oh no! Not that.” People understand the concept of pensions and how they work—which is at the core a similar idea to an annuity. But there’s a stigma—not always fair—around annuities. We need to use language that is understandable, and our messages must be personalized as well, depending on an individual’s goals, risk tolerance, etc.
John: You hit the nail on the head. I would add that since inception, the defined contribution industry has been centered around accumulation and getting to that magic number in retirement, whatever that is. You get to the number, and then the question is, how do you turn that into an income stream?
Drew: We need a more realistic assessment of how people approach saving for retirement and then transitioning into spending in retirement. There’s also a tendency to describe retirement income in binary terms—if your target spending in retirement is $5,000 a month, then spending $5,001 or $4,999 in any month equals failure. But spending isn’t exactly the same for every household, or in any given month. Some months we may take vacations or eat out more—or maybe the roof needs repairing. And in some months, expenses are less. And some people either go back to work or they may continue working into their 80s, by circumstance or by choice. I think we need to think more about financial independence than retirement.
John: I agree, we need to retire the word “retirement.” But people need help from a financial professional. This is sophisticated financial planning, and we know that financial advisors are not attached to all plans, and that not all participants are actively engaged with a financial advisor. I would advise individuals nearing retirement to take advantage of advisor assistance. And, for plan sponsors and employers, it’s more than just creating and offering products. Rather, it’s about engagement, and education.
Kevin: We must also consider if we are solving the right equation for the right people within the wealth management business. Are we catering to the retired couple arriving at their vineyard on their private plane? Or, are we building solutions for the majority of Americans that have worked their whole lives to save hopefully some money, and where Social Security is an important component of their post-retirement income?
John: Many people get stuck in the wrong kind of product. They sign up for something earlier in their careers through auto enrollment, and as they approach retirement, needs and goals change. Target date funds have been a great innovation, but I think the industry needs to overhaul how to approach the individual that’s maybe 50 to 55 years old and needs solutions that can address both longevity risk and sequence of returns risk.
Drew: We don’t see the whole picture for those folks. Increasingly because of the auto enrollment John alluded to, people have likely been auto enrolled in multiple plans as they change jobs. By the time they get older, they change jobs less frequently. But household retirement income may mean delaying claiming Social Security. It might include a spouse’s assets. It might mean work in “retirement.”
John: Absolutely. Our Voice of the American Worker Survey reinforces the idea that people want engagement from a financial professional, particularly those nearing retirement age. So, as an advisor, I would coordinate some specific engagement meetings, conversations with that specific population to begin to lay out for them this notion around guaranteed and non-guaranteed products. I think advisors do need to look closely at the income series solution.
Kevin: I think the overall message to advisors is that you can’t put your head in the sand. If you want to continue to grow your business and differentiate yourself and your practice as a place where plan sponsors will come work with you, you need to understand it’s not about products.
Drew: Bringing it back to personalization, we are not going to solve everybody’s entire retirement challenge with only a piece of the puzzle. Individuals are looking to their employer for solutions, but all-or-nothing or binary sort of solutions are just not going to appeal to people.
Kevin: It’s about understanding the complexities and being able to simplify it in a way that’s going to resonate with the end user, who we are all trying to take care of—the working American.
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1. Source: PLANSPONSOR 2022 Defined Contribution (DC) Survey. Valid through December 2023. © Asset International, Inc. 2022.
2. The Voice of the American Worker survey was conducted by The Harris Poll on behalf of Franklin Templeton from October 28 to November 15, 2021, among 1,005 employed US adults. All respondents had some form of retirement savings. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. Findings from 2020 reference a study of a similar nature that was conducted by The Harris Poll on behalf of Franklin Templeton from October 16 to 28, 2020, among 1,007 employed US adults. Franklin Templeton is not affiliated with The Harris Poll, Harris Insights & Analytics, a Stagwell LLC Company.
3. Source: ICI Research Perspective, May 2022 (Vol. 28, no. 4).
4. Source: Investment Company Institute Research, as of September 2021.
