Employers are in a unique position to significantly improve the quality of life their employees enjoy in retirement. By providing defined contribution (DC) plans, many offering auto-enrollment and auto-escalation features, plan sponsors endow their employees with what may be their only opportunity to save enough for their golden years.
But plan sponsors can do so much more for employees by reimagining their approach to three areas shaping DC plan design: accumulation, decumulation/retirement income and purpose.
Accumulation: Be in it to win it
The accumulation phase mandate is clear: grow assets. It’s critical that plan participants understand the long-term growth benefits of investing in the equity markets and the power of staying invested. Unfortunately, volatility can often shake investor confidence, driving participants to sell at the wrong time and wait too long before jumping back in. They may even reduce DC contributions due to fear of uncertainty.
The 2022 Schroders US Retirement Survey reveals that plan participants keep over 23% of their assets in cash on average as of late February 2022, when Schroders received the feedback of 1,000 US investors. Cash on the sidelines does not contribute to asset growth and negatively impacts retirement savings over time.
To help investors remain invested during periods of volatility, extend to them diversification options among strategies that could be poised to outperform, especially those with a history of delivering consistent returns to potentially mitigate volatility and smooth the ride.
Actively managed international stock strategies could present one such solution. Since 2012, an average of 82% of the highest performing stocks worldwide have been based outside of the US.
Figure 1: Even today, the US isn’t necessarily the best
Percentage of world’s top 50 stocks that are non-US
Source: Hartford Funds and FactSet, 2/22. Past performance does not guarantee future results. Forward-looking views may not be realized. Indices are unmanaged and not available for direct investment. As of 12/31/21. Based on calendar year returns of the 50 highest-performing stocks of the MSCI ACWI Index. For illustrative purposes only.
As Figure 1 illustrates, most of the world’s top equity opportunities exist beyond US shores. Additionally, international equities may be better positioned to withstand rising inflation as international indices are generally weighted to cyclical companies, i.e., those that can pass along price hikes to customers.
Figure 2: International equities may be poised to outperform in a cyclical recovery
Source: Schroders and Refinitiv Datastream, 2/22. As of 12/31/21. Cyclical includes energy, industrials, materials, financials, real estate, and consumer discretionarysectors. Regions are represented by the following indices: US (MSCI USA), Europe(MSCI Europe), Japan (MSCI Japan), Emerging Markets (MSCI Emerging Markets). For illustrative purposes only.
In Figure 2 we see that non-domestic stocks may also be likelier than US stocks to advance in a cyclical economic recovery, which may inspire the confidence of nervous investors who are shaky in their potential recession and recovery strategy. Indeed, an allocation to international equities has proven over time to improve the risk/return outcomes of portfolios.
Figure 3: International stocks enhance long-term risk/reward outcomes
Finding the optimal risk/reward balance between international and US equities
Source: Hartford Funds and Morningstar, 2/22. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. As of 1/1/70-12/31/21. US is represented by the MSCI USA Index; International is represented by the MSCI EAFE Index. Allocations annually rebalanced. Risk is represented by standard deviation, a measure of the portfolio’s total return volatility. A higher standard deviation indicates greater historical volatility. For illustrative purposes only.
Figure 3’s review of US and international equity combinations, spanning a spectrum from 100% US/0% international to 0% US/100% international over the last 50 years illustrates the optimal balance between risk and return: an allocation of 60[(-70) was not found] US equities/30[(-40) was not found] international equities.
Effective due diligence may uncover active international equity funds that not only generate consistent, top quartile returns, but also high active share with a clear, disciplined approach to finding superior companies. The funds, e.g., international value stocks, should also present non-correlating characteristics and factors relative to US growth stocks to potentially dampen the blow of market volatility to investor confidence.
Decumulation/Retirement income: Because reaching retirement is only half the battle
The retirement industry has made accumulation its highest priority because without sufficient assets, plan participants will lack retirement income.
However, the industry’s lack of focus on how to generate retirement income has created a problem; according to the Census Bureau, by 2030 every baby boomer will be at least 65 years old. And the 2022 Schroders US Retirement Survey demonstrates that 87% of 401k plan participants are concerned that they don’t know how to generate retirement income or draw down their assets in retirement. The number of plan participants who lack direction has achieved a critical mass. Nearly 9 in 10 (89%) plan participants who receive an in-plan retirement income strategy say they are likely to use the product when they retire, keeping assets in their employer plan.
According to the 2022 Schroders US Retirement Survey, the top five features plan participants seek in an in-plan retirement income solution are:
- Lifetime income (52%)
- Consistent, monthly paycheck-like income (49%)
- Low fees and costs (42%)
- Liquidity and access to money whenever they desire (40%)
- Protection from market corrections and down markets (39%)
By providing education, access to advice and strong in-plan retirement income solutions, employers can deliver a much-needed answer to participants’ challenges in reaping retirement income and consequently benefit their lives.
Purpose: Give plan participants what they need as well as what they want
Due to regulatory review, for the past few years plan sponsors have been in “hurry up and wait” mode as they seek to satisfy plan participant interest in environmental, social, governance (ESG) investment options.
On October 13, 2021, the US Department of Labor released proposed rules indicating, “climate change and other ESG factors are often material and that in many instances fiduciaries should...consider [such] factors in the assessment of investment risks and returns.” If these rules take hold, this proposal would mark a compelling catalyst for greater integration of ESG funds into DC plans for decades to come. A final judgment is due shortly, but in essence, the cloud of uncertainty appears to be lifting regarding rules and regulations pertaining to ESG funds in DC plans.
And that’s good news for many plan participants because they clearly desire ESG options in their plans. The 2022 Schroders US Retirement Survey indicates that 9 out of 10 plan participants who are aware of the ESG options in their plan say they invest in them. The vast majority (87%) of plan participants say they want their investments to align with their values. An even more compelling finding of the survey is nearly three quarters (74%) of plan participants say they would consider increasing their 401k contribution rate if they had ESG options. Providing ESG options may actually inspire plan participants to increase their savings rate.
Helping participants invest with purpose gives them what they desire. Helping them invest with purpose while also delivering exceptional performance provides them with what they need. It is critical for plan sponsors to manage DC plans successfully while also meeting the varied investment goals of plan participants.
Plan sponsors can make all the difference
The retirement readiness of American workers needs to improve. The 2022 Schroders US Retirement Survey finds that just 22% of workers nearing retirement feel they have saved enough. This number is down from 26% one year ago. By reconceiving how a DC plan handles accumulation, decumulation/retirement income and purpose, plan sponsors can make a world of difference in the lives of plan participants.
About the survey
The Schroders 2022 US Retirement survey was conducted by 8 Acre Perspective among 1,000 US investors nationwide ages 45 –75 from February 17 – February 28, 2022. The median household income for working Americans surveyed was $75,000. The survey included 317 respondents with employer-provided defined contribution retirement plans.
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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.