Ready photographed by Bruce DeBoer;Johnson photographed by Todd Winters
The world of automatic plan design solutions and investment options has done wonders to help Americans save in their employer-sponsored defined contribution plans. Although those in the industry have embraced such elements and are generally in agreement about what the right goals for most people are, there can be some discomfort in making decisions for people about how their retirement contributions should be allocated. This has led to an increasing number of discussions and a variety of plan options about how to better personalize plans and investment solutions.
PLANSPONSOR recently sat down with Joe Ready, executive vice president and director of Wells Fargo Institutional Retirement and Trust, and Brock Johnson, head of global retirement and workplace solutions for Morningstar, to talk about how to better personalize participant investment solutions through Wells Fargo’s new managed account solution called Target My RetirementSM, powered by Morningstar Investment Management. This new solution combines the investment simplicity of a target-date fund with the more personalized approach of a traditional managed account.
PS: What’s the landscape of national retirement policy today?
Joe Ready: We’ve moved from where everything was done for you, in a defined benefit [DB] environment, to a defined contribution [DC] environment where you largely own your own outcome as a participant. People now have to engage more in order to succeed. Along with that, the DC space is projected to grow to almost $7 trillion in assets by 2020, leading to heightened sponsor focus and regulatory scrutiny. At the same time, we’ve also seen tremendous innovation, to give participants the tools and plan design to drive better results.
Brock Johnson: I agree, I think engagement in DC plans is a major issue that we have to address. The 401(k), for example, can be a great way to save for retirement, but it has created millions of accidental investors—people with limited interest, experience or time to prepare financially for retirement. As an industry, we need to keep innovating, developing solutions that will help people make informed decisions.
The landscape needs to be about saving more and spending less. As a nation, we simply aren’t saving enough—only about 5% of our disposable income, according to the Federal Reserve Bank of St. Louis. Additionally, we are accumulating too much debt. People are often spending more than they earn. This pattern is our biggest obstacle to getting people to meet their retirement goals.
Ready: There has been much negative discussion about whether or not 401(k) plans work. We know they work if people get into them early on and develop savings habits that get them to a savings rate of around 10%. The next biggest driver of success is how they allocate and invest. Leveraging the latest in technology, personalization, advice and tools can really help participants maximize their savings and ultimately the quality of life they can enjoy in retirement.
PS: As an industry, how far have we come in the 10 years since the Pension Protection Act [PPA] was introduced?
Johnson: We’ve come a long way. One of the success stories has been the introduction of target-date funds [TDFs] and the improvement they’ve provided to investment diversification in DC plans. But we now need to embrace solutions that offer a more complete, holistic approach—ones that address not only diversification, but also provide recommendations on savings rates and retirement age, and give participants an idea of how on-target they are to achieving their retirement goals. That is what a managed account offers.
At one point, the technology solutions and cost structure of managed-type products weren’t there. But technology has advanced to where providers can deliver such solutions in a much more scalable, efficient and cost-effective way.
Ready: The PPA has affected the DC industry more than anything in its history, especially as it pertains to auto-features. Success depends on getting people into the retirement plan, which plan sponsors now can do thanks to auto-enrollment; on getting them to save, which is the auto-deferral component; and on getting them invested appropriately—the auto-invest feature, which commonly defaults into target date funds as a qualified default investment alternative [QDIA].
Those steps have accelerated the level of saving and driven better outcomes for employees in workplace plans. However, evolution is ready to leap to more personalized and tailored solutions. “Auto” provisions have done a great job helping younger participants, but for those later in life, they’re looking for help beyond the auto solutions.