Nate Miles speaks with Ron Cohen on the maturing of the defined contribution marketplace and key trends that he’s seeing in the space.
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Ron Cohen: I’m Ron Cohen, head of Defined Contribution Investment Only Distribution at Allspring Global Investments, and you’re listening to On the Trading Desk®.
Today, we’re talking about key trends that we’re seeing in the defined contribution space. Maybe some trends that don’t get a lot of play, but things that you should be aware of. And joining us today is Nate Miles, who’s head of Retirement here at Allspring Global Investments, who’s going to provide his insights on various topics. So, Nate, thanks for being here.
Nate Miles: Thanks for having me, Ron. Always great to chat with you.
Ron: So, let’s get right into it. You’re on the road a lot, right? You’re talking to plan sponsors. You’re talking with their consultants, advisors. What have you been hearing? What are some of the topics? And what are some of the changes that you’ve been hearing in terms of those conversations, right? Because I know they’re different from what they were, let’s say, pre-pandemic.
Nate: One of them is really around this idea of the maturing of the DC (defined contribution) marketplace and this evolution from an accumulation focus to a market that’s both focused on accumulation and decumulation. So maybe just chat about that a little bit.
And the other one really is inflation. It’s probably been 12 years since the DC market really talked about inflation at all. And given where we are in 2022 with inflation, hopefully peaking at around 8%+, it’s become topical again. And maybe we can just share some color on that topic.
Ron: That sounds great. Why don’t we jump right into it?
Nate: Yeah. So, maturing of the DC marketplace. There’s a stat out there that says that two-thirds of all DC assets are owned by people that are 50 and older. And I think that progression and that slow evolution of asset shift in the industry is really bringing to the fore a new topic of discussion and that is the retirement tier.
And so maybe just to define loosely what the retirement tier is, it’s really things that are or can be encompassed, I should say, by thinking through kind of a range of products, solutions, tools, and services, all of which allow the DC plan sponsor to really shift its goal away from one that’s really focused on accumulation to one that also supports participants who are near entering or in that retirement phase. So, kind of that drawdown era.
And given the kind of wide breadth of that definition, there are any number of ways to really think through the retirement tier. And so maybe I’ll just summarize a couple of key items of consideration.
The first is, I think, just getting a handle on what’s currently being offered by your plan. And the best way to do that is just experiencing it as a near retiree, somebody who’s actively looking to retire, and an existing retiree. What is that experience like? What options are offered to me? How easy is it to navigate? Keeping assets in the plan or rolling over? Or thinking through how to actually get money out of the plan, either on a regular basis or annually, either on a percentage basis or a hard-dollar basis?
The second thing is really, as you go through this process, it will help you identify what your goals should be. What do you as a plan sponsor want to achieve? Do you want to keep money in the plan? Do you want money to roll out of the plan? Do you want to help provide certainty of income for your participants or not? And we think that’s a really important aspect that often gets overlooked.
Finally, that process of walking through the experience as a participant will help understand really what’s missing and/or what can be improved.
All of that being said, there are really three, we would say, impactful changes that we’ve noticed quite frequently as we’ve been on the road.
The first is really simple, but it’s critical. And that’s really just modifying plan guidelines to accommodate partial withdrawals. Believe it or not, that’s not something that every DC plan allows today. But if you want to keep assets in the plan it is imperative. And so that’s the first thing for plan sponsors to check and update.
The second is really around Social Security and optimization tools for Social Security. Our annual Allspring Global Investments Retirement Study identifies how important Social Security is to current retirees. Not only is it providing them with the majority of their in-retirement income, but it also makes them happier and believe that they’re going to get through retirement in a better place.
And then, finally, we would suggest looking at the investment options that are needed to facilitate common in-retirement drawdown strategies, right? So as participants enter retirement, we often see a shift of their goals. One that’s really focused on, let’s say, accumulation and protection to one that’s more focused on income and protection. And while there still might be some growth that participants are seeking, I would say the balance or the mix shift of those goals changes.
And to the extent that participants are not in the default fund, you want to make sure that there are ample investment options in your menu to accommodate each of those goals. And more often than not, that means adding in one to three new investment options to really facilitate the better drawdown of assets.
Ron: And, Nate, what’s the appetite from these plan sponsors around really two things? First, their appetite around wanting to keep retirees in plan. And then number two, if they do want to, what’s their appetite around the investment options, right? What are you hearing around that piece?
Nate: Yeah, I mean, I would say the appetite is certainly shifting in favor of trying to keep assets in plan. And partly, that’s a result of really just the growth of the industry, right? We’ve really benefited from previously tenured participants in the DC market having smaller balances because they didn’t start saving in the DC market until their careers were quite advanced. And, so, as they were rolling over or moving to retirement, the loss of those assets in plan were dwarfed by the sheer size of the contributions coming in from existing participants.
But now that the DC plan in general has matured, what you’re seeing is that those large balances as they move into that retirement phase, if they leave, the total DC balance of my DC plans is no longer growing. In fact, as an industry, we’ve actually started to see more outflows than inflows over the past couple of years. And that’s certainly a trend that we expect to continue going forward.
And the importance of that is, what we’ve seen, and we felt certainly, is that fees have really been on a one-way street lower over the past several years. And that’s facilitated or made easier because of asset growth. And, so, the reason I say the appetite is changing is because as those assets stopped growing, it becomes, I think, more difficult to negotiate lower fees. And therefore, plan sponsors are potentially more interested in keeping assets in the plan so that their assets stay of a large enough or significant size to continue to benefit from the economies of scale on the fee end.
One thing that we’ve seen change on the plan sponsor side in terms of offering retirement income options has been a very slow progression over the better part of really 15 years, I would say. We started having this conversation 15 years ago. And we’ve joked previously that the industry used to believe this was kind of a Field of Dreams–type approach where, if you build it, they will come. In other words, if you build these retirement solutions, the market will come to you and adoption will rise. And I think what we’ve noticed is that’s not entirely true.
And, so, we think that the way it progresses eventually is that we’re going to have more options on the drawdown side. But we haven’t seen a tremendous amount of movement to date. I would say it’s been more at the margin. And, certainly, interest is growing around the topic of retirement income. But we haven’t seen really a groundswell of support. And that’s typical, I would say, of the DC market that it tends to take a meaningful minority of plans to start to do something before peers start to really catch on and adoption starts to rise.
So, we think we’re still in that kind of innovation, that experimentation phase of the market. And the evolution that we’re seeing is that we expect it not to be a single product at an industry level or even at a plan level, but rather, multiple solutions to help meet the needs of very different participants in that retirement phase.
Ron: What’s the success metric? What are the conversations you’re having when talking to plan sponsors? What do they deem as success with a participant when they get to that decumulation phase, right? What’s the goal there?
Nate: I’m not sure that the market at large has really thought through what is that success metric beyond getting people on the plan, getting them saving more, and getting them investing better. And part of that is this discussion of really who owns participant outcomes.
The individual certainly has an incredibly large role to play in that in this defined contribution system. But what role should the plan sponsor play in that? And I think the jury’s still out on that topic of discussion.
What we’ve started to think through and talk about is something called a shortfall risk. Meaning, if a participant does everything right, they started saving at age 25 and they save for the next 40 years and they start saving, say, 6%, with auto-escalation up to 10% over the first five years of their career, they’re getting a nice match from their employer of say, 50 cents on the first 6%, and they invest in a an appropriately diversified portfolio, what will that look like for them at retirement? How large will their balance be? And, importantly, how much will that balance actually purchase? So, it’s an asset hurdle that we’re thinking about relative to the amount of income that your assets will purchase at the point of retirement.
And it’s a somewhat complicated discussion, but essentially, it boils down to shortfall risk. People do everything right based on what I just outlined, saving for 40 years, saving more, saving better inside of, let’s say, a target date fund, are they achieving success? Yes or no? And once we understand what that percentage is we can start to talk through not only what can we do to improve that metric, really to lessen that shortfall risk, but also, what is the shortfall risk measured against and how likely is it that my participants will make decisions that are consistent with the assumptions built into that shortfall risk? So, it’s not the easiest conversation to have.
But we think it’s important because whether or not plan sponsors think through this decision, we know that individuals must because they are ultimately responsible for their retirement. So, shortfall risk is kind of that new metric that we’re thinking more and more about and we’ll be reporting on it back to the industry over the coming months. But I think it’s a great question and one that we’ve spent a lot of time thinking about here over the past couple of months.
Ron: Got it. Look, in the interest of time, I know you talked up front about inflation. Nate, a key takeaway?
Nate: So, I guess the takeaway for us is really for plan sponsors to think about their plan menu today to consider what asset classes or what options they have that might provide some protection against the risk of inflation and consider making changes to your lineup. We would expect that history is going to repeat this time and that we would see many plans adopt kind of these real asset-type portfolios over the coming years in light of today’s inflation.
Ron: Got it. Nate, thank you so much for taking the time today.
Nate: Thanks for having me, Ron.
Ron: Absolutely. That wraps up this episode of On the Trading Desk. If you would like to read more market insights and investment perspectives from Allspring Global Investments, you can find them at our firm’s website, allspringglobal.com.
To stay connected to On the Trading Desk and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you get your podcasts. Until next time, I’m Ron Cohen and thanks for listening.
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