Mutual fund and ETF providers must do a better job educating advisors on their retirement products and pushing the envelope in order to be successful, fund managers say.
Charles Schwab & Co. in February, for example, announced the long-awaited launch of its all-ETF 401(k) platform, representing the push among providers to offer ETFs in retirement plans and not just exclusively via a brokerage window.
"I think providers need to keep innovating when it comes to creative ways to offer retirement products," says James Carl, AdvisorShares' managing director.
In this Q&A for Money Management Executive, Tim Walsh, managing director of investment services at TIAA-CREF, talks about what his firm is doing to innovate, the obligation among providers to help abate the retirement crisis in the U.S. and why it's essential for providers to work closely with sponsors.
Q. As a large-sized provider that offers defined contribution retirement plans to employers and employees in the academic, research, medical and cultural fields, what's your view on some of the most popular retirement products providers are creating?
We're seeing an increased interest in products that provide a guaranteed income stream in retirement. Many boomers don't have the traditional pension plan that their parents may have enjoyed, and with people living 20, 30 or even 40 years in retirement these days, having a guaranteed source of retirement income, such as an annuity, is critical. A low-cost annuity option provides a floor of income that can't be outlived - to cover essentials like housing and utilities - and can be part of a well-diversified retirement portfolio.
Q. How do mutual funds play a role in the retirement crisis in the U.S.?
At TIAA-CREF we believe plan sponsors today carry a heightened responsibility in helping employees prepare for retirement. They continue to be stewards of the institution's retirement plans and the assets that are critical to their employees' future. Yet they must now do so with fewer resources of their own, in a tough new regulatory environment, under harsh economic conditions. It's important to note that protecting the plan's assets is only one part of the equation. As employees grapple with a challenging economy and the growing burden of retirement decisions, plan sponsors and providers should give equal attention to ensuring that employees will be ready for retirement.
Providers need to work closely with sponsors to not only ensure products and services meet the objectives listed above, but that they are providing a mechanism for ongoing dialogue and feedback so their plans and investment menus evolve along with the participant base. For providers, the key is to provide a simple menu, with basic building blocks, that reflect the way people make decisions and makes it easy for them to understand their options and make choices that make sense for them. This is an area where a strong communication and education program can help participants stay engaged and vigilant about their retirement readiness.
For our part, TIAA-CREF mutual funds are built on more than 95 years of investment experience and a commitment to helping clients achieve lifelong financial well-being. Ninety-seven percent of TIAA-CREF's funds and variable annuity accounts received a Morningstar overall rating of three, four or five stars across all asset classes. (As of Dec. 31, 2013, 43 percent have three stars, 37 percent have four stars, and 17 percent have five stars.). For the second consecutive year, Lipper has designated TIAA-CREF as the Best Overall Large Fund Group, highlighting the firm's commitment to offering best-in-class mutual fund products across asset classes.
Q. Are providers doing a good enough job creating retirement products?
Plan sponsors are striving to achieve retirement readiness for their employees while maximizing value and efficiency as they manage their plans. As plan sponsors monitor their plans every year to ensure that it is still meeting their organization's needs, it is helpful to examine the plan in light of four drivers:
1. Plan design that builds a strong foundation for the plan's structure and services
2. Investment solutions that provide participants with lifetime income
3. Employee engagement with a focus on outcomes-based education and advice
4. Plan management that helps mitigate fiduciary risk, drive efficiency and maximize value
Q. What in your view are the top trends among mutual funds?
There are two obvious trends and an emerging trend, and we see these as positive trends. First, the menus for DC plans are getting smaller. We're seeing menus with 15-20 options instead of 100+ mutual fund options. Those mega menus we saw earlier created confusion for participants, and then they tend not to save as much.
The second trend is this increased use of target-date mutual funds. We're seeing this dramatic increase in target-date funds.
Most participants would consider themselves investment novices, so the fact that menus are getting smaller helps participants make decisions. The third trend - more of an emerging trend - is that we're hearing a lot of discussion about -among our clients, advisors and lawmakers - is finding ways to make retirement savings last for a lifetime - and that's causing individuals to look more closely at lifetime income options such as annuities.
Q. Is there a need that's not being filled when it comes to retirement products?
By combining the annuity payments with other lump-sum or systematic withdrawals from their retirement plans - as well as Social Security benefits and other sources of retirement income - participants can create a customized income strategy. And research has shown that 72% of employees want lifetime income options during the accumulation phase of retirement savings, so providers should consider adding these options to their plans if they haven't already.
