DEFINED CONTRIBUTION

Participants count on yesterday’s
investment returns tomorrow

Are they confident – or kidding themselves?
Mar 10, 2017 / By Anne Ackerley

When it comes to retirement savings, there’s a new gap to worry about: the difference between low industry return forecasts and defined contribution (DC) plan participant expectations.

Survey says

BlackRock’s 2017 DC Pulse Survey found that plan participant confidence levels are up: 56% said they feel on track to retire with the lifestyle they want, compared to 52% last year. That’s good news, right? But here's what grabbed our attention: The survey found that 65% were not aware that investment returns are expected to be markedly lower going forward than they have been historically.

The gap between forecasts and expectations is not limited to participants. 70% of plan sponsors believe the annualized market returns for U.S. stocks over the next 10 years will be the same as or higher than the past. The same goes for bonds: 78% believe bond returns will remain consistent or be higher than they have been previously.

That’s a problem. As stewards of their employees' retirements, plan sponsors should look beyond historic returns to see the combination of long-term economic and demographic trends participants face. In addition to potentially reduced returns, the 65-and-over population will surge to 38.6 million by 2030 (a 78% growth spurt). Addressing the potential for an extended period of low returns ahead of that surge may be the most critical issue plan sponsors face.

The financial literacy mandate

When previously-unaware sponsors and participants were advised of the low return forecast, their confidence declined, and both reported being unsure about how to manage this new retirement reality. But some plan sponsors are ahead of the curve. Plan sponsors who say they were already familiar with the forecasted low returns are more likely to provide tools and resources to help participants prepare when compared to plans who are not aware. Among the most notable differences:

Plan sponsors who are aware of the low returns forecast are more likely to offer
the following resources to participants

Percentage of plan sponsors' awareness of the low returns forecast.

Source: BlackRock 2017 DC Pulse Survey

Not included on this list: Keeping participants abreast of return forecasts. In fact, our survey shows that while many participants want their plans to keep them informed about these forecasts, fewer than 15% of plan sponsors share this information. Sponsors should embrace this call for financial literacy – especially as participants have assumed greater responsibility through the shift from traditional pensions to DC plans.

Long-term planning

Plan sponsors have a range of solutions they can use to tackle the low return challenge.

Driving increased savings is one potential solution. When asked whether they’d prefer to work longer later or save more now to help make up for lower investment returns, the majority of participants chose the latter. And that’s something plan sponsors tend to agree with. In fact, 48% of plan sponsors and participants say saving more is the main step they would take to combat low returns. To encourage greater savings, plan sponsors should consider maximizing plan design tools (such as auto-enrollment and auto-escalation), tailoring strategic communications to participants at different life stages, and restructuring the company match.

Plan sponsors may also want to reevaluate the target date fund. Our survey found that 74% of participants believe the purpose of their retirement savings is to help them maintain their current spending in retirement. It’s a goal that target date funds are well-suited to deliver. But, not all target date funds are built the same. Plan sponsors should evaluate if their target date offering matches the specific needs and objectives of their participants. They can start by reviewing the fund’s objective and diversification, its glidepath’s maximum equity level, and how effectively the fund manages volatility as participants near retirement.

However plan sponsors choose to respond, the survey suggests that a gap has developed between consensus forecasts and potentially overoptimistic expectations. But this gap is not insurmountable. We have a wealth of tools at our disposal and now is the time to empower participants with the education and increased savings they need to achieve retirement security.

Anne Ackerley
Managing Director, Head of BlackRock's U.S. and Canada Defined Contribution Group
Anne F. Ackerley, Managing Director, is head of BlackRock's U.S. & Canada Defined Contribution (USDC) Group. She is responsible for the development and distribution of DC..