Both retirees and their employers can benefit from combining conventional DC-type savings plans, designed to be spent down in the early part (say, the first 20 years) of retirement, with a DB-like or deferred life annuity component guaranteeing income for the rest of the retiree’s life in order to hedge the risk of living too long. Earlier authors proposed to do this using a riskless investment strategy, and we build on their work by asserting that the DC-type investment will (and should) include equities. Through simulation, we show that either a high-risk (equity-heavy) or low-risk (fixed-income-heavy) DC component plus a deferred annuity component dominates a conventional DC spend down, from the standpoint of generating sustainable retirement income in most states of the world. TOPICS: Retirement, portfolio construction, legal/regulatory/public policy
{"title":"Combining Conventional Investing with a Lifetime Income Guarantee: A Blueprint for Retirement Security","authors":"T. Totten, Laurence B. Siegel","doi":"10.3905/jor.2019.1.047","DOIUrl":"https://doi.org/10.3905/jor.2019.1.047","url":null,"abstract":"Both retirees and their employers can benefit from combining conventional DC-type savings plans, designed to be spent down in the early part (say, the first 20 years) of retirement, with a DB-like or deferred life annuity component guaranteeing income for the rest of the retiree’s life in order to hedge the risk of living too long. Earlier authors proposed to do this using a riskless investment strategy, and we build on their work by asserting that the DC-type investment will (and should) include equities. Through simulation, we show that either a high-risk (equity-heavy) or low-risk (fixed-income-heavy) DC component plus a deferred annuity component dominates a conventional DC spend down, from the standpoint of generating sustainable retirement income in most states of the world. TOPICS: Retirement, portfolio construction, legal/regulatory/public policy","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"45 - 59"},"PeriodicalIF":0.0,"publicationDate":"2019-03-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49053146","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Conflicts of interest can arise when financial advisors and brokers have a financial incentive to recommend certain products to investors. Identifying the effects and quantifying the costs of conflicted advice is a challenge for researchers and regulators alike. In this article, the authors build on the methodology developed by Susan Christofferson, Richard Evans, and David Musto and employed by the US Department of Labor (DOL) in its regulatory impact analysis of the fiduciary rule, a package of rules finalized in 2016 that has since been vacated in a court challenge. The authors examine data from public filings and Morningstar to quantify how payments to brokers drive fund flows and affect investor returns and to determine the extent to which regulation has been effective in mitigating conflicts of interest. Earlier research found that funds that paid higher-than-expected loads to brokers reduced investors’ returns, but the authors’ research finds that after the passage of Dodd–Frank, this relationship weakened, and advisors and brokers are more rigorously screening the products they recommend to investors. Funds that pay higher-than-expected loads to brokers continued to see higher inflows, but this effect diminished around the time the DOL proposed the fiduciary rule, likely because firms took additional steps to facilitate recommendations of lower-cost funds (generally without loads) to retail retirement savers in anticipation and as a result of the rule. The authors interpret this evidence to suggest that the passage of Dodd–Frank and the proposal of the fiduciary rule prompted changes that mitigated the distortionary effects of conflicted advice. They conclude that targeted regulation of financial advice has benefited investors, even if it has not been fully implemented.
{"title":"Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?","authors":"Jasmin K. Sethi, Jake Spiegel, Aron Szapiro","doi":"10.3905/jor.2019.1.044","DOIUrl":"https://doi.org/10.3905/jor.2019.1.044","url":null,"abstract":"Conflicts of interest can arise when financial advisors and brokers have a financial incentive to recommend certain products to investors. Identifying the effects and quantifying the costs of conflicted advice is a challenge for researchers and regulators alike. In this article, the authors build on the methodology developed by Susan Christofferson, Richard Evans, and David Musto and employed by the US Department of Labor (DOL) in its regulatory impact analysis of the fiduciary rule, a package of rules finalized in 2016 that has since been vacated in a court challenge. The authors examine data from public filings and Morningstar to quantify how payments to brokers drive fund flows and affect investor returns and to determine the extent to which regulation has been effective in mitigating conflicts of interest. Earlier research found that funds that paid higher-than-expected loads to brokers reduced investors’ returns, but the authors’ research finds that after the passage of Dodd–Frank, this relationship weakened, and advisors and brokers are more rigorously screening the products they recommend to investors. Funds that pay higher-than-expected loads to brokers continued to see higher inflows, but this effect diminished around the time the DOL proposed the fiduciary rule, likely because firms took additional steps to facilitate recommendations of lower-cost funds (generally without loads) to retail retirement savers in anticipation and as a result of the rule. The authors interpret this evidence to suggest that the passage of Dodd–Frank and the proposal of the fiduciary rule prompted changes that mitigated the distortionary effects of conflicted advice. They conclude that targeted regulation of financial advice has benefited investors, even if it has not been fully implemented.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"46 - 59"},"PeriodicalIF":0.0,"publicationDate":"2019-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47797695","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-02-09DOI: 10.3905/jor.2019.6.3.060
J. Turner, Saisai Zhang, G. Hughes, D. Rajnes
An extensive amount of literature examines the impact of expectations on economic behavior at both the micro and macro level. In the area of individual financial security, research taking into account the difference between rational expectations and actual behavioral expectations regarding asset returns, inflation, savings, and spending has contributed to better understanding and improved program design. In contrast, relatively little attention has been paid to workers’ expectations of their future Social Security benefits. Because Social Security benefits are an important source of retirement income for most workers in many countries, future Social Security benefit expectations presumably play an important role in their consumption, saving, labor supply, and portfolio investment decisions. This article surveys the literature relating to these expectations and presents evidence of workers’ expectations of future Social Security benefits in Canada, Ireland, and the United States. In all three countries, with differing systems of financing and differing politics concerning the programs, surveys find a surprising degree of pessimism and lack of trust in Social Security programs. Although rhetoric in the United States about Social Security being “broken” may be part of the explanation there, such rhetoric is not present in Canada and Ireland.
{"title":"Irrational Expectations, Future Social Security Benefits, and Life Cycle Planning","authors":"J. Turner, Saisai Zhang, G. Hughes, D. Rajnes","doi":"10.3905/jor.2019.6.3.060","DOIUrl":"https://doi.org/10.3905/jor.2019.6.3.060","url":null,"abstract":"An extensive amount of literature examines the impact of expectations on economic behavior at both the micro and macro level. In the area of individual financial security, research taking into account the difference between rational expectations and actual behavioral expectations regarding asset returns, inflation, savings, and spending has contributed to better understanding and improved program design. In contrast, relatively little attention has been paid to workers’ expectations of their future Social Security benefits. Because Social Security benefits are an important source of retirement income for most workers in many countries, future Social Security benefit expectations presumably play an important role in their consumption, saving, labor supply, and portfolio investment decisions. This article surveys the literature relating to these expectations and presents evidence of workers’ expectations of future Social Security benefits in Canada, Ireland, and the United States. In all three countries, with differing systems of financing and differing politics concerning the programs, surveys find a surprising degree of pessimism and lack of trust in Social Security programs. Although rhetoric in the United States about Social Security being “broken” may be part of the explanation there, such rhetoric is not present in Canada and Ireland.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"60 - 68"},"PeriodicalIF":0.0,"publicationDate":"2019-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42654988","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-02-09DOI: 10.3905/jor.2019.6.3.034
Sudipto Banerjee, Brian Bankert, Joshua Dietch, Sudhir Nanda, Anthony Zhu
It has long been argued that 401(k) plans provide a variety of benefits to the employers that sponsor them, such as helping to attract and retain employees. The financial benefits for employers are often difficult to quantify, however. The authors investigate the potential for a correlation between 401(k) plans and corporate financial performance by using a well-known external data and ratings system (BrightScope Rating) as a measure of success. They find significant correlations between measures of 401(k) plan design and corporate profitability across all sizes of companies within and across industry sectors. Correlation is not the same as causality, but they show that better plans and more-profitable companies go together. They cannot say that better plans cause more profits, but their findings point to a symbiotic relationship between a company’s 401(k) plan and its financial performance.
{"title":"Correlation between 401(k) Plans and Corporate Financial Performance","authors":"Sudipto Banerjee, Brian Bankert, Joshua Dietch, Sudhir Nanda, Anthony Zhu","doi":"10.3905/jor.2019.6.3.034","DOIUrl":"https://doi.org/10.3905/jor.2019.6.3.034","url":null,"abstract":"It has long been argued that 401(k) plans provide a variety of benefits to the employers that sponsor them, such as helping to attract and retain employees. The financial benefits for employers are often difficult to quantify, however. The authors investigate the potential for a correlation between 401(k) plans and corporate financial performance by using a well-known external data and ratings system (BrightScope Rating) as a measure of success. They find significant correlations between measures of 401(k) plan design and corporate profitability across all sizes of companies within and across industry sectors. Correlation is not the same as causality, but they show that better plans and more-profitable companies go together. They cannot say that better plans cause more profits, but their findings point to a symbiotic relationship between a company’s 401(k) plan and its financial performance.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"34 - 45"},"PeriodicalIF":0.0,"publicationDate":"2019-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44416110","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-02-09DOI: 10.3905/jor.2019.6.3.023
Benjamin Goodman, David P. Richardson
This article develops a four-part framework for assessing the effectiveness of a retirement plan administrative fee structure. An administrative fee structure should satisfy three efficiency standards: (1) adequacy, (2) transparency, (3) administrative. It should also satisfy (4) a fairness standard based on both horizontal equity—participants with similar levels of assets pay similar levels of fees—and vertical equity—participants with a higher level of assets pay at least the same proportion in fees as those with lower asset balances. Using administrative data from a large plan, we demonstrate that an administrative fee structure charging a flat pro rata fee can satisfy all four standards. By contrast, we show that a pure per capita administrative services fee can satisfy the three efficiency standards but will fail the fairness standard. Indeed, our plan analysis shows that a flat per capita fee is highly regressive, with the lowest-asset participants paying equivalent pro rata fees that may be thousands of times larger than the highest-asset participants. A hybrid fee structure that uses a combination of per capita fees and pro rata fees, or capitates total fees paid by any individual, can reduce the unfairness of a pure per capita fee but will also weaken the efficiency standards because it is more complex to understand and administer.
{"title":"Assessing Fee Fairness: Characteristics of an Effective Plan Fee Structure","authors":"Benjamin Goodman, David P. Richardson","doi":"10.3905/jor.2019.6.3.023","DOIUrl":"https://doi.org/10.3905/jor.2019.6.3.023","url":null,"abstract":"This article develops a four-part framework for assessing the effectiveness of a retirement plan administrative fee structure. An administrative fee structure should satisfy three efficiency standards: (1) adequacy, (2) transparency, (3) administrative. It should also satisfy (4) a fairness standard based on both horizontal equity—participants with similar levels of assets pay similar levels of fees—and vertical equity—participants with a higher level of assets pay at least the same proportion in fees as those with lower asset balances. Using administrative data from a large plan, we demonstrate that an administrative fee structure charging a flat pro rata fee can satisfy all four standards. By contrast, we show that a pure per capita administrative services fee can satisfy the three efficiency standards but will fail the fairness standard. Indeed, our plan analysis shows that a flat per capita fee is highly regressive, with the lowest-asset participants paying equivalent pro rata fees that may be thousands of times larger than the highest-asset participants. A hybrid fee structure that uses a combination of per capita fees and pro rata fees, or capitates total fees paid by any individual, can reduce the unfairness of a pure per capita fee but will also weaken the efficiency standards because it is more complex to understand and administer.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"23 - 33"},"PeriodicalIF":0.0,"publicationDate":"2019-02-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43287873","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Bipartisan Budget Act of 2015 made significant changes to the rules affecting Social Security benefits. Some people think that these rule changes made it relatively easy to determine when someone should claim their Social Security benefits. In this article, the authors explain the rule changes and provide 10 reasons why making an optimal Social Security claiming decision is still complicated, even if we knew how long the single claimant or each partner in a married couple will live. Deciding when to claim Social Security benefits remains a complex decision.
{"title":"Optimizing Social Security Benefits Is Still Complicated","authors":"William R Reichenstein, W. Meyer","doi":"10.3905/JOR.2019.1.043","DOIUrl":"https://doi.org/10.3905/JOR.2019.1.043","url":null,"abstract":"The Bipartisan Budget Act of 2015 made significant changes to the rules affecting Social Security benefits. Some people think that these rule changes made it relatively easy to determine when someone should claim their Social Security benefits. In this article, the authors explain the rule changes and provide 10 reasons why making an optimal Social Security claiming decision is still complicated, even if we knew how long the single claimant or each partner in a married couple will live. Deciding when to claim Social Security benefits remains a complex decision.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"69 - 79"},"PeriodicalIF":0.0,"publicationDate":"2019-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41790070","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
R. Clark, Steven A. Nyce, Beth M. Ritter, J. Shoven
Economists and public policy analysts have devoted considerable research to examining the work and retirement decisions of employees. Much less effort has been spent on understanding the concerns and challenges of employers if their workers delay retirement and remain on the job until older ages. In this study, we report findings from three employer surveys with the objective of learning how organizations are responding to the aging of their workforces. The surveys provide several important observations. First, employer concerns about workforce aging vary considerably across the economy. To some firms, these demographic changes are of immediate concern and are viewed as a significant risk to the organization, while other firms remain more concerned about the potential productivity and cost effect of an older labor force. Second, most employers expect the importance of workforce aging to increase in the next five years. In response, a significant proportion of organizations are making changes to working conditions and compensation policies. Third, firms remain reluctant to adopt formal phased retirement policies but are more willing to offer part-time employment, return to work, and other policies on a case-by-case basis. TOPICS: Retirement, legal/regulatory/public policy
{"title":"Employer Concerns and Responses to an Aging Workforce","authors":"R. Clark, Steven A. Nyce, Beth M. Ritter, J. Shoven","doi":"10.3905/JOR.2019.1.049","DOIUrl":"https://doi.org/10.3905/JOR.2019.1.049","url":null,"abstract":"Economists and public policy analysts have devoted considerable research to examining the work and retirement decisions of employees. Much less effort has been spent on understanding the concerns and challenges of employers if their workers delay retirement and remain on the job until older ages. In this study, we report findings from three employer surveys with the objective of learning how organizations are responding to the aging of their workforces. The surveys provide several important observations. First, employer concerns about workforce aging vary considerably across the economy. To some firms, these demographic changes are of immediate concern and are viewed as a significant risk to the organization, while other firms remain more concerned about the potential productivity and cost effect of an older labor force. Second, most employers expect the importance of workforce aging to increase in the next five years. In response, a significant proportion of organizations are making changes to working conditions and compensation policies. Third, firms remain reluctant to adopt formal phased retirement policies but are more willing to offer part-time employment, return to work, and other policies on a case-by-case basis. TOPICS: Retirement, legal/regulatory/public policy","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"82 - 99"},"PeriodicalIF":0.0,"publicationDate":"2019-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46951511","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investors who are about to retire are first and foremost concerned with supporting their spending needs throughout retirement. But they also derive satisfaction from growing their wealth beyond what is needed to support consumption in order to leave a bequest to their heirs or chosen charities. The predominant metric for evaluating retirement investment strategies is the failure rate. However, it doesn’t distinguish between strategies that fail early in retirement from those that fail near the end of retirement, and it doesn’t account for potential bequests. To overcome these shortcomings the authors propose a new metric, the coverage ratio, which is more comprehensive and informative than the failure rate. In addition, they propose a utility function to evaluate the coverage ratio, which penalizes shortfalls more than it rewards surpluses. Finally, the authors use their proposed framework to determine the optimal allocation to stocks and bonds using historical and simulated returns. TOPICS: Retirement, quantitative methods, portfolio construction
{"title":"Toward Determining the Optimal Investment Strategy for Retirement","authors":"Javier Estrada, M. Kritzman","doi":"10.3905/jor.2019.1.052","DOIUrl":"https://doi.org/10.3905/jor.2019.1.052","url":null,"abstract":"Investors who are about to retire are first and foremost concerned with supporting their spending needs throughout retirement. But they also derive satisfaction from growing their wealth beyond what is needed to support consumption in order to leave a bequest to their heirs or chosen charities. The predominant metric for evaluating retirement investment strategies is the failure rate. However, it doesn’t distinguish between strategies that fail early in retirement from those that fail near the end of retirement, and it doesn’t account for potential bequests. To overcome these shortcomings the authors propose a new metric, the coverage ratio, which is more comprehensive and informative than the failure rate. In addition, they propose a utility function to evaluate the coverage ratio, which penalizes shortfalls more than it rewards surpluses. Finally, the authors use their proposed framework to determine the optimal allocation to stocks and bonds using historical and simulated returns. TOPICS: Retirement, quantitative methods, portfolio construction","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"7 1","pages":"35 - 42"},"PeriodicalIF":0.0,"publicationDate":"2018-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48621924","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-10-31DOI: 10.3905/jor.2018.6.2.061
C. Weller, M. Tolson
Unpaid caregiving has always been widespread in the U.S. and is a growing phenomenon, especially in response to an aging population. Unpaid caregivers can experience adverse labor market outcomes such as less pay, fewer hours at work, and greater job instability. These negative labor market outcomes could translate into lower retirement savings. Our analysis of the Federal Reserve’s Survey of Consumer Finances indicates that unpaid caregivers have lower retirement savings because they are less likely to participate in retirement plans at work and have lower contributions relative to pay. Single women, in particular, see declines in retirement security associated with unpaid caregiving. That is, caregiving further exacerbates an already existing retirement income security gap by gender. The data thus lend support to efforts to increase access to retirement savings plans for people with less job stability and fewer hours and to give more people paid sick leave at their job.
{"title":"Do Unpaid Caregivers Save Less for Retirement?","authors":"C. Weller, M. Tolson","doi":"10.3905/jor.2018.6.2.061","DOIUrl":"https://doi.org/10.3905/jor.2018.6.2.061","url":null,"abstract":"Unpaid caregiving has always been widespread in the U.S. and is a growing phenomenon, especially in response to an aging population. Unpaid caregivers can experience adverse labor market outcomes such as less pay, fewer hours at work, and greater job instability. These negative labor market outcomes could translate into lower retirement savings. Our analysis of the Federal Reserve’s Survey of Consumer Finances indicates that unpaid caregivers have lower retirement savings because they are less likely to participate in retirement plans at work and have lower contributions relative to pay. Single women, in particular, see declines in retirement security associated with unpaid caregiving. That is, caregiving further exacerbates an already existing retirement income security gap by gender. The data thus lend support to efforts to increase access to retirement savings plans for people with less job stability and fewer hours and to give more people paid sick leave at their job.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"6 1","pages":"61 - 73"},"PeriodicalIF":0.0,"publicationDate":"2018-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47775898","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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