Retirement Readiness – Income as the Outcome November 18, 2016 Ashish Shrestha, Vice President This information is provided for registered investment advisors and institutional investors and is not intended for public use. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. This information is intended expressly for discussion purposes and should not be misconstrued or otherwise interpreted as legal or tax advice. Please consult with qualified legal or tax professionals regarding your individual circumstances.
Agenda 1. DC Landscape and Opportunities 2. Building a Solution 3. Appendix
DC Landscape and Opportunities
Focus Group 3
Retirement Assets Total $24.5 Trillion in Q2 2016 US total retirement market in trillions of dollars; end of period, selected periods IRAs DC Plans Private DB Plans Government Plans Annuity Reserves 24.0 24.5 24.1 24.0 23.3 22.7 2.0 2.0 1.9 1.9 1.9 1.9 19.7 5.2 5.1 5.2 5.1 17.7 5.0 1.7 4.9 1.5 4.3 2.8 2.8 2.9 3.0 13.9 2.8 2.9 4.3 1.2 11.6 2.7 0.9 7.0 3.5 6.8 6.7 2.6 6.6 6.5 6.2 3.0 5.3 2.0 4.6 2.0 3.6 3.0 7.4 7.5 7.3 7.3 7.1 6.8 5.8 4.7 3.7 2.6 2000 2007 2008 2012 2013 2014 2015:Q3 2015:Q4 2016:Q1 2016:Q2 Data is estimated. Components may not add up to the exact total because of rounding. Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income Division. Numbers may not add due to rounding. 4 #34909-0813
Opportunities for Advisors Growth of the RIA CHANNEL TRENDS IN THE 401(k) MARKET—PRIMARY AFFILIATION as Plan Advisor 2008 2013 30% • Since 2004, RIAs have grown 28% from 2% of all active 401(k) 25% advisors to 20%. 20% 20% • The growth of RIA activity has 20% 18% been most prevalent in the 17% 16% 15% 401(k) plan market, followed by 15% the 403(b) and 457 10% 10% opportunities. 10% 8% 7% 7% 7% 7% 5% 5% 5% 0% RIA Wirehouse Insurance Independent Financial Regional TPA/ Other Broker- Planning Broker- Fee-based Dealer Co. Dealer Benefits Consultant 5 Source: SPARK 2014 Marketplace Update, Brightwork Partners, LLC. #32681-0413
Regulatory Reform 2006 Pension Protection Act 2012 Fee Disclosure Regulations 2016 DOL releases final Fiduciary Rule “Memo to Industry: Get Behind Fiduciary Rule” —Morningstar , April 17, 2015 “Memo to Industry: Get Behind Fiduciary Rule” Morningstar, April 17, 2015. “Financial planners foresee little disruption to practices from DOL fiduciary rule” Investment News, April 11, 2016. “Post-DOL fiduciary rule, Schwab dumps load funds as advisers yawn” Investment News, April 28, 2016. “Insurance groups opposed to DOL Fiduciary Rule step up campaign spending” Investment News , May 5, 2016. 6
Regulatory Reform 2006 Pension Protection Act 2012 Fee Disclosure Regulations 2016 DOL releases final Fiduciary Rule “Insurance groups opposed to DOL fiduciary rule step up campaign spending” —Investment News , May 5, 2016 “Post-DOL fiduciary rule, Schwab dumps load funds as advisers yawn” —Investment News , April 28, 2016 “Memo to Industry: Get Behind Fiduciary Rule” Morningstar, April 17, 2015. “Financial planners foresee little disruption to practices from DOL fiduciary rule” Investment News, April 11, 2016. “Post-DOL fiduciary rule, Schwab dumps load funds as advisers yawn” Investment News, April 28, 2016. “Insurance groups opposed to DOL Fiduciary Rule step up campaign spending” Investment News , May 5, 2016. 7
Regulatory Reform 2006 Pension Protection Act 2012 Fee Disclosure Regulations 2016 DOL releases final Fiduciary Rule “Financial planners foresee little disruption to practices from DOL fiduciary rule” —Investment News , April 11, 2016 “Memo to Industry: Get Behind Fiduciary Rule” Morningstar, April 17, 2015. “Financial planners foresee little disruption to practices from DOL fiduciary rule” Investment News, April 11, 2016. “Post-DOL fiduciary rule, Schwab dumps load funds as advisers yawn” Investment News, April 28, 2016. “Insurance groups opposed to DOL Fiduciary Rule step up campaign spending” Investment News , May 5, 2016. 8
“In Labor Department’s fiduciary proposal, a nod to passive investing” Investment News, April 17, 2015 “Facilitating investments in such high-quality, low-fee products would be consistent with the prevailing (though by no means universal) view in the academic literature that posits that the optimal investment strategy is often to buy and hold a diversified portfolio of assets calibrated to track the overall performance of financial markets,’ according to the proposal .” “Agency wants to offer regulatory ‘safe harbor’ for advisers who sell ‘high-quality, low-fee’ funds ” FEES FUNDS FIDUCIARY “In Labor Department’s fiduciary proposal, a nod to passive investing,” Investment News , April 17, 2015. 9
“Advisers must go beyond the three Fs to compete for retirement-plan business” Investment News, October 2, 2015 “In addition to fees, funds and fiduciary, specialist defined-contribution advisers are raising the stakes with conversations around plan health and design. … improving retire retirement readin readiness s and preparing employees for retirement was sponsors’ No. 1 goal, with 35% of Fidelity survey respondents indicating as much. According to a new plan sponsor survey conducted by Fidelity Investments, 17% of sponsors are actively looking to switch advisers, up from 13% last year and 10% the year before.” http://www.investmentnews.com/article/20151002/FREE/151009984/advisers-must-go-beyond-the-three-fs-to-compete-for-retirement-plan?issuedate=20151015&sid=RPAEMAIL 10
Defining Retirement Readiness What does retirement readiness really mean? Participation rates Deferral rates Why do people save and invest for retirement? Account balances – what’s your number? Investments To maintain a standard of living in retirement 11
SAVE INVEST CONSUME “If you don’t know where you’re going, you’ll end up someplace else.” – Yogi Berra 12
Focus on Income in Retirement Participant view RETIRMENT PLANNING PERSPECTIVES Not knowing Not being able Not leaving a Dying before I how much I can to live my large enough can spend all spend safely desired lifestyle inheritance my savings What is your greatest fear about managing your 5% 40% 43% 11% finances in retirement? Very Somewhat Moderately Not very Not at all How important is knowing what your income will 1% 63% 23% 13% be in retirement? True False When thinking about retirement income, income certainty is more important than the performance 76% 24% of my investment portfolio. Source: Texas Tech Retirement Spending Survey, 2015, sourced from www.onefpa.org/journal/Pages/FEB16-Spending-in-Retirement-Determining-the-Consumption-Gap.aspx. 13
The Need for Consumption in Retirement Industry experts agree that now is the time to focus on retirement income “88% of plan participants “S&P DJI believes there is “Showing participants their find information regarding room in the target date retirement plan account how retirement savings industry for a new category, balance as level monthly can last throughout because it is possible to payments for their lifetime retirement valuable.” combine a glide path with a will help them assess their risk management framework, retirement readiness and where the risk that one seeks plan for their retirement.” —2014 EBRI Retirement Confidence Survey 1 to manage is the uncertainty of future income.” —US Department of Labor 3 —Philip Murphy 2 Vice President S&P Dow Jones Indices 1. Survey funded in part and underwritten by Dimensional Fund Advisors. Used with permission of EBRI. 2. Dimensional Fund Advisors LP worked collaboratively with S&P Dow Jones Indices (S&P DJI) to develop the S&P Shift to Retirement Income and DEcumulation (STRIDE) Index series and receives compensation from S&P DJI in connection with licensing rights to the same. 3. www.dol.gov/ebsa/regs/lifetimeincomecalculator.html. 14
Building a Solution
Risk-Return Tradeoffs If the goal is retirement income… What is the right measure of risk? Uncertainty about retirement income What is the right tradeoff? Retirement income risk management vs. opportunity of growing income 16
Managing Income Uncertainty Risk Interest rates, inflation, and income INTEREST RATES 3.5% = $10,500 in income per year $300,000 $300,000 CD 1.0% = $3,000 in income per year (a 71% drop in income) INFLATION 2% = $271,719 (a drop of 9% in real value in wealth and income) $300,000 4% = $246,578 (a drop of 18% in real value in wealth and income) 5 Years Managing income uncertainty risk means protecting savings against changes in interest rates and inflation. Notes: Hypothetical scenarios for illustration purposes only. Under the “Interest Rate” chart, interest income is calculated multiplying $300,000 times the interest rate shown. Under the “Inflation” chart, the value of wealth after five years of 17 inflation at an the shown rate is calculated by dividing $300,000 by (1.0x)^5 (e.g., for 2% assumed inflation, dividing $300,000 by (1.02)^5).
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