by Nick Nefouse, Blackrock
Sleepy. That’s the rap retirement investing typically gets. With its long investment horizon and stay-the-course mentality, it’s easy to see why. But from my perspective, as someone who oversees lifecycle solutions all around the world, I think we’re entering a pivotal era. Here are three things that I bet will shape retirement in 2022.
1. Season 3 of “Unprecedented Times”
Pandemic buzzwords continue to prevail in the markets, renewing concerns around volatility and inflation.
With inflation, the debate has been: Is it transitory or permanent? While I expect the word “transitory” to become permanent, I don’t know if inflation will be or not. No one does. The fact is, we don’t know what the future will hold. Let’s accept that now and use what we do know.
Looking at the data helps. Research BlackRock did in 2019 found that wages, especially for younger and lower-income workers, have historically outpaced inflation. Even now, as the Consumer Price Index jumped 7% in December from a year ago,1 the U.S. Department of Labor reports that real earnings in sectors like leisure, hospitality, transportation, warehousing, and retail have all matched or exceeded inflation.2 Our research also shows that most asset classes overcome inflation shocks, given a sufficiently long investment horizon. Translation: Younger retirement investors, who have decades of earnings ahead and are primarily invested in growth assets through a target date fund, shouldn’t be as concerned.
The importance of inflation-hedging assets really comes into play for retirees and investors approaching retirement. They no longer have wages to off-set their spending needs and rely, instead, on what they’ve saved. Meanwhile, their biggest expenses (i.e. healthcare, which accounts for 13% of elderly households’ total expenditures vs. 8% of the general population’s) have been hardest hit by inflation. Since 1982, medical care inflation has risen more than 1.5X the inflation for most other goods and services.3 This is, in part, why we maintain higher equity allocations, versus our peers, into retirement.
These dynamics are central to how we’ve structured our target date funds at BlackRock, and we’ll see this approach in action over the course of the year – especially as anticipation of market volatility and rising rates loom.
2. All eyes on retirement income
The need for lifetime income in retirement is felt around the world, with increasing intensity, and it’s something our industry needs to get right.
Consider the latest longevity figures in the U.S., for instance: As of 2018, the average 65-year-old American could expect to live to 85.4 And, as lifespans increase, so does the average length of retirement. Further complicating matters, for 50% of couples, one spouse (women, especially) will outlive the other by 10 years or more.5 People’s fear of outliving their retirement savings is real, and the stakes are getting higher.
Guaranteed forms of income are designed to mitigate this risk, and new solutions are being designed to supplement the existing toolkit investors have at their disposal. True, defined benefit plans, or pensions, are facing generational decline. As of 2020, just 39% of Boomers still had access to pension income, with the numbers dwindling from there for future generations.6 But, Social Security remains intact and, when combined with low-cost retirement income solutions and other tech-enabled tools, can provide retirees with greater peace of mind that they won’t outlive their savings.
Last year, we announced our new LifePath Paycheck solution, which is designed to address this issue. Already, we’ve seen strong interest from plan sponsors on this front, and we expect to see an acceleration in employer engagement in the years to come.
LifePath target date strategies are invested mainly in U.S. and global stocks early on, shifting to more conservative investments, such as bonds, as investors get closer to retirement. The target date is the approximate date when investors plan to start withdrawing their money.
3. Regulation on the regular
Regulation and retirement – it’s not just good alliteration. They often go hand-in-hand. As we look across the globe, a few consistent priorities stand out.
Access is a big one. In the U.S. only about half of private sector workers have access to a workplace retirement plan.7 Yet, we know that when people do have access, they’re 15 times more likely to save.8 Make that savings automatic, and that likelihood shoots up to 20 times.
2021 ushered in a few different proposals in the U.S. that would expand access to retirement savings vehicles. We view this as complementary to measures in the SECURE Act of 2019, and we expect similar provisions to reemerge as Congress evaluates SECURE 2.0, potentially later this year. Similar activity is taking root across the pond. Proposals from think tanks in the U.K. focus on expanding provisions for auto-enrollment – again, with the aim of encouraging people to save more, earlier in their careers.
Across the board, I hope there’s more action taken to reduce the burden for smaller employers to establish plans and enhance ERISA protections for all plans. Taking it a step further, I hope to see these efforts re-applied to the emergency savings space. I’m a huge believer in needing to expand people’s short-term savings, and the public sector could play a significant role in advancing new solutions (like side-car accounts, for instance).
Sustainable investing is another hot topic. While ESG-optimized retirement solutions are gaining traction in Europe and the U.K., interest from U.S.-based companies has been more muted, due in large part to pending regulatory clarity.
The DOL is expected to release a final rule this Spring or Summer providing clearer guidance for plan sponsors looking to integrate sustainable investing strategies into defined contribution plan design. Having been on the forefront of the sustainable transition in other countries, we’re excited to bring this experience to bear in the U.S., as well. In 2020, we launched LifePath ESG mutual funds, the industry’s first index-based target date offering.
Retirement’s not so sleepy after all, now is it? Lots of moving parts here, so let me leave you with three things you can do this year:
- When it comes to inflation and volatility, employers and individuals alike should consider the investment philosophy behind the vehicles they’ve chosen. As we’ve seen, not all target date funds are created equal.
- It’s time to leave the idea of “nest eggs” in the past. What we really care about is retirement income – how you’re going to generate it and how much it will be. Employers can consider adding low-cost investment solutions at the company plan level, and individuals can make us use of tools (like this one) that are designed to help answer these questions.
- Keep an eye on retirement news coming out of the public sector. From access and emergency savings to ESG, I expect 2022 could turn out to be a watershed year.
Nick Nefouse, Head of Retirement Solutions and Global Head of LifePath
Nick Nefouse, CFA, Managing Director, is the Head of Retirement Solutions in BlackRock’s Multi-Asset Strategies & Solutions (MASS) team and Head of LifePath
