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Retirement Industry Poised for ‘Meaningful Change’ in 2020

With the SECURE Act recently enacted and several high-profile issues coming to the fore, 2020 has the potential to be a landmark year, according to a new white paper by MFS.
In “Retirement Outlook 2020,” MFS Senior Retirement Strategist Jonathan Barry and DC Strategist Jessica Sclafani warn that after a year of exceptional returns in 2019, “gathering headwinds” could hinder retirement plan returns in 2020 and beyond. 

Barry and Sclafani note that in their forthcoming “MFS Long-Term Capital Market Expectations” report, they forecast that expected returns for the next 10 years for most asset classes will be lower than those of the past 10 years. They estimate that a hypothetical portfolio of 60% equities and 40% bonds will have a 10-year annualized return of approximately 3.6%, compared with a return of 7.2% over the past 10 years. 

 
“In what we expect will be a lower-returning and lower-yielding market environment, asset allocation and active management could be important factors in helping participants to secure an adequate and sustainable retirement,” the authors note.  
 
Investment Strategies
 
To that end, they suggest that the new year presents an opportunity for participants to revisit their allocations to active investment strategies, which could offer additional returns in a low-growth environment and provide some level of risk management when the current cycle comes to an end. “These characteristics of active management will be particularly crucial for participants approaching retirement, who are vulnerable to sequence of returns risk,” Barry and Sclafani emphasize. 
 
Moreover, they note that from a DC perspective, persistently low interest rates suggest that “sponsors should take a fresh look” at the fixed income options available in the investment lineup, including the underlying strategies in a plan’s QDIA.
 
They advise that traditional U.S.-based core fixed income funds prevalent in DC menus may not provide sufficient return and diversification characteristics. As such, they suggest that sponsors may want to consider broadening participants’ fixed income exposure. 
 
Decumulation Strategies
 
Demographics will further drive the evolution of decumulation solutions for DC plans, but there is no one-size-fits-all solution, Barry and Sclafani observe. While the SECURE Act’s fiduciary safe harbor may help sponsors feel more comfortable offering lifetime income solutions, they anticipate that sponsors will “proceed cautiously” in 2020 as they explore adding annuity-type products to the menu. 
 
“We expect more sponsors will add managed account services to their plan’s offerings as an initial step in supporting participants at and near retirement,” the authors say. They add, however, that while in-plan retirement income products continue to evolve, the industry “has yet to identify a silver bullet solution” amid the varying needs of retired participants. 
Barry and Sclafani note that they do see an opportunity for DC plans to support the decumulation phase by revisiting the plan’s distribution options and offering participants access to advice, particularly for those near retirement. 

 
Serious about ESG?
 
The authors further predict that plan sponsors may finally get serious about sustainable investing. Barry and Sclafani observe that while sustainable-investing approaches that consider ESG factors are not new, they are now “making their way into the DC marketplace in a meaningful way.” In particular, they note that younger plan participants are expressing interest in these approaches, which is significant given that Millennials now represent the largest generational cohort in the workforce.
 
They explain that the two primary means by which sponsors may incorporate sustainable investing into a DC plan are through a “values-based” approach in which a sponsor provides ESG-themed funds on the plan’s investment menu or through a self-directed brokerage window, or by a “materiality-based” approach in which sponsors select asset managers that integrate ESG factors into their investment process. 
 
“While a values-based approach may initially appear to be the path of least resistance, we believe that long term, plans will embrace an integrated materiality-based approach and sponsors will view ESG as a direct byproduct of the active management process,” Barry and Sclafani write, adding that they believe the ESG conversation will continue to evolve in 2020 along with increased participant demand.