[This article appears in our October 2018 issue of ETF Report.]
It’s easy to look at the incredible growth of the ETF industry—$3.7 trillion, versus just $600 billion 10 years ago—and forget what the rest of the markets look like.
A little context: The U.S. retirement market (according to the Investment Company Institute) has $27 trillion in assets—almost 10 times the size of the ETF market. That huge pool of assets includes about $9 trillion in IRAs, $8 trillion in defined contribution plans and the remainder in defined benefit plans.
For most Americans, the IRA and the 401(k) plan will be an important source of retirement income, along with whatever Social Security might provide. And the majority of those assets are in traditional mutual funds. According to a recent study by Callan, 99% of defined contribution plans have a “default” option for enrollees, and for 85% of them, that default is—you guessed it—a target-date fund.
It’s understandable. TDFs are the ultimate fire-and-forget weapon for retirement savings. They may not be “one size fits all,” but they’re definitely “one size is better than having no clothes” for most investors. I’d argue that the TDF may in fact be one of the great financial innovations of a generation, effectively solving the accumulation problem for a huge swath of the population.
While this is great for the ETF industry—and individual retirement savers—it’s omitting a critical component of the picture: decumulation. This “what to do in retirement” problem is so critical it’s nearly the “grand challenge” of finance.
Studies show that as we get older, our ability to make solid financial decisions declines rapidly. And we’re not talking octogenarians and Alzheimer’s patients here—by the time most people hit retirement age, their ability to perform even basic math is significantly eroded.
Fostering Good Results
This confluence of timing can lead to terrible outcomes—but companies and investment consultants have been responding. Callan found that while just three years ago, only 45% of plans offered any kind of post-retirement income solution to their employees, today that’s shot up to almost 70%.
That solution can come in the form of drawdown-plans, managed accounts or even a defined benefit plan. And 8% of firms explicitly offer annuities to their retirees now—up from almost none a few years ago.
For the ETF-focused advisor, the phase shift that happens when a client retires is one of the most critical moments in your relationship.
But surprisingly, most advisors I talk to don’t have a great story to tell their clients. Sure, they research income-focused investments and talk about lowering the risk of the portfolio. But great advisory firms go beyond that, rolling the complex tax challenges of required minimum distributions, rollovers, insurance, annuities and estate planning into a complete “retirement date +1” plan.
And they don’t wait until their clients turn 65 to roll it out.