Technology, managed accounts, and the retirement industry: Innovation in a time of uncertainty

When talking about changes in the retirement industry in 2020, the effects of the pandemic are front and center. But it’s also true that trends we saw in 2019 — personalization of the participant experience, evolving technology, concern for workers who have no retirement savings – continue to be important.

Looking for some perspective on these trends, and the effects of the pandemic on employers and participants, we consulted Brock Johnson, president of global retirement and workplace solutions at Morningstar Investment Management.

BenefitsPRO: What has been your impression of the retirement industry’s response to COVID-19? 

Brock Johnson: We have been really happy with how the retirement industry responded to the pandemic. From the data we’ve seen, it doesn’t appear that participants panicked as much as they did in 2008. This is a testament to some of the innovation that has occurred in the retirement industry since the Great Recession in 2008, broader adoption of automatic features such as auto-enrollment, and industry-wide participant education efforts.

In our own managed accounts service, we also have seen much fewer investors leaving the service in order to flee to cash or to move into more conservative investment strategies. In fact, research from Morningstar Investment Management found only 5.7% of participants enrolled in a 401(k) plan as of December 31, 2019 changed their portfolio allocations during the first quarter.

Investors who used professional advice generally stayed the course during the first quarter volatility; only about 2% of participants in target-date funds and managed accounts changed their portfolios while over 10% of participants self-directing their portfolio did.

We also didn’t see as many companies slashing their matching contributions as we did in 2008. Additionally, we don’t seem to be seeing as many participants taking significant loans from their retirement accounts. That doesn’t mean we aren’t worried about the long-term impact of the pandemic on the retirement industry.

Access to retirement plans is something I spend a lot of time thinking about. For instance, we don’t anticipate seeing as many new startup plans created next year. That’s not good for employees or the industry as the percentage of employees without access to an employer-sponsored retirement plan is still way too high.

Personally, I would like to see the industry get to the point where every worker in America has access to a high-quality employer-sponsored retirement plan. As the economy continues to struggle, we also expect to see more participants taking loans, especially as layoffs continue. We also worry about those who are near-retirement, especially if we see more volatility in the markets.

We are worried that some participants will stop saving for retirement entirely. And we are worried about the long-term effects on retirement savings caused by college graduates not being able to find jobs. That was a significant issue for millennials in 2008 and now is becoming an issue for Gen Z one generation later.

If you could have forecast trends in the retirement industry for 2021 and there was no pandemic, what would have been some of the top ones?

We would have seen a lot of discussion and activity around income solutions in retirement plans for near-retirees and perhaps great adoption of these types of solutions in 2021. I also think we would have seen a wider adoption of the use of Pooled Employer Plans (PEPs).

We still feel that PEPs will take center stage in 2021, but perhaps fewer startup plans taking advantage due to economic uncertainty. We also think that some PEP providers may hold off launching their PEPs until the economy stabilizes a little.

I also think we would have seen a lot more resources going toward innovative ideas and concepts in 2021 had the pandemic not hit. I think most companies in the retirement industry will be holding off on those types of investments in 2021.

And lastly, I think we would have seen a lot more adoption of managed accounts as a QDIA or Dynamic QDIA in 2021 had the pandemic not hit. That’s because we don’t think plan sponsors will make making major changes to plan design next year as the result of the economic uncertainty caused by the pandemic and the challenge of rolling out new plan features with a remote workforce.

What about the impact of technology in the workplace retirement space?

Technology is rapidly transforming our entire industry. One of the largest examples of technology’s transformative effect in our business can be seen through our digital advice, or managed account, offering. Managed accounts help individuals prepare for retirement by building a highly personalized retirement strategy for them. This strategy includes recommendations on how much to save, when to retire, when to take Social Security benefits, and how to invest. Another example is a solution that helps advisors build and manage a retirement lineup. Several years ago, these solutions would not have been possible because the technology infrastructure that powers them didn’t exist.

Ultimately, the winner in the retirement space is going to be the one who is able to connect and transmit data seamlessly between entities – recordkeepers, services providers, plan sponsors, participants and advisors.

As we look further into the future, we see technology continuing to be a disruptive force. I believe technology will allow us to continue helping investors and offer them expanded services at a reduced price point. We are very interested in technology disruptors like quantum computing and artificial intelligence.

How will technology change the advisor role?

We are seeing increasing interest on the part of broker-dealers to implement platforms that make it easier for advisors to manage and sell their retirement plans, especially wealth managers whose focus isn’t 100% on retirement.

I think finding better ways to help advisors receive pricing proposals from recordkeepers is also going to be important. Technology can really help streamline the pricing proposal process and ensure that employers—especially smaller employers—have access to the best investment options from recordkeepers and in turn, the best pricing. There is a real opportunity to change the way retirement plans are sold in the small-and micro-plan market and to further strengthen the advisor-plan relationship.

Our research indicates that smaller 401(k) plans using an advisor tend to have much better plans than those who don’t.  Additionally, we see increasing demand from advisors for ways to offer personalized advice in a scalable way through solutions such as managed accounts. We see this as a big growth area for us.

When people talk about “personalization” in this space, what do they mean?

Every participant should have access to solutions that help them build an investment portfolio and savings strategy that is designed specifically for them. We don’t believe every 30, 40, 50 year-old, for example, should be treated the same and should get the same investment strategy.

For us personalization means giving participants the ability to interact with a simple interface that allows them to tell us more about them—when they expect to retire, any loans they have, if they have other retirement savings outside the plan, if their spouse has retirement savings, etc. And as they input that data, the more they can get a personalized investment strategy designed for them.

For instance, if a participant wanted more exposure to ESG in their retirement portfolio, we should be able to accommodate that. That personalized investment strategy also has to be married with savings advice and guidance on how to save more in retirement. And it needs to help the participant determine how to transform those savings to income as they get closer to retirement as well as to provide guidance on when to take Social Security.

There is still a lot more innovation that can be done in this space. We have only just scratched the surface of the potential we can bring on the personalization and managed accounts front, and how platforms like managed accounts can become the center of a person’s financial life—used to manage their other investments and savings and provide personalization across multiple savings and investment goals.

We have worked with our recordkeeping partners to get a significant amount of initial data on each participant in order to personalize our advice. We continue to look for new ways to get the data into the platforms that doesn’t require as much participant interaction. Those are all things that we are working on.

Is cyber security a consideration in using data to personalize the experience?

Yes, it is always a consideration when you are collecting personal data, and we take it very seriously at Morningstar. I think there is heightened concern across the industry on this front and a lot of resources dedicated toward it.

What is the top concern about DOL regulation at the moment?

The DOL’s position on ESG is our biggest concern. As we said in Morningstar’s comment letter, the DOL’s approach is out of step with the increasingly mainstream practice of incorporating ESG considerations into investment research. We believe ESG considerations belong in modern retirement plans, and that analysis on mitigating ESG risks is good for retirement investors. The DOL’s stance on ESG is short sighted, and it hurts investors.

Will ESG investing still be part of employer-sponsored retirement plans? Is there a role for technology to play?

I don’t think the DOL and current administration will be able to stop the ESG train. It has already left the station, and participants want it and need it, as do plans. As Morningstar’s head of policy research Aron Szapiro recently wrote, the DOL may slow the adoption down, but they won’t be able to stop it. I think a change in administration would obviously speed up things on the ESG front. But we aren’t worried. Consumer demand will win over the long run.

We have a lot of different plans in the works on the ESG front, and we will be ready when the floodgates open. In terms of technology, I think we will start seeing the ability for platforms like managed accounts to construct portfolios that take into account a participant’s ESG preferences. That would be a very powerful solution.