Ensuring members engage in effective decumulation practices and spend retirement assets effectively is the “hardest problem in financial planning”, according to Christine Benz, director of retirement planning at Morningstar.
Benz is also author of ‘How to Retire: 20 lessons for a happy, successful, and wealthy retirement’, and is focused on the US market.
Speaking to Corporate Adviser, Benz identified that fully assessing what the safest withdrawal amount for retirees was a core part of the challenges in the pensions sector.
Benz says: “It’s the hardest problem in all of financial planning, because you’re trying to figure out how to make your money last over an unknowable time horizon, plus not knowing what market returns might be, and not knowing what inflation might be.
“People really need the help and need some guardrails. One trend we’ve been seeing in the US is that more and more participants are staying in plan post retirement,” she continues.
An area of connection between the US and the UK is a top-down desire for more retirement assets to be diverted towards private markets. In the UK this has taken the shape of the Mansion House Accord to push large schemes further towards the asset class, and the Pension Schemes Act has made clear that the government will mandate schemes to do so if the shift is not taken voluntarily.
In the US, President Trump has signed an executive order that helps facilitate US pension funds — including the popular 401ks — to boost investments into private market assets, including cryptocurrencies.
Of move to this asset class within retirement assets, Benz says: “It’s a solution in search of a problem. We’ve made some really wonderful strides in 401ks, mainly towards simplification. After all these steps in the right direction I am concerned about the possibility that 401(k) participants will lose transparency, they’ll potentially lose liquidity, and their costs could go up.”
American 401(k) plans are also invested heavily in US equities, which have seen remarkable gains since 2009. However, in the wake of geopolitical headwinds such as the war in Iran, economic experts including Bank of England deputy governor Sarah Breeden have predicted a market correction.
Of the risk of an equities crash impacting US retirement portfolios, Benz says: “There likely will be some type of a correction at some point. For US investors who have over concentrated, who haven’t diversified into non-US stocks, or the ones who haven’t diversified into safer fixed income assets, and they’re getting closer to retirement, those are the ones I’m most worried about. This is because there’s a perverse effect where people get most comfortable taking equity risk at the time they should feel the most uncomfortable making such an investment, because valuations are high.”
However, Benz also stressed that many target date funds in the US were already diversifying assets effectively behind the scenes.