Man: Welcome to the Center for Investment Excellence, a production of JP Morgan Asset Management. The Center for Investment Excellence is an audio podcast that provides educational insights across asset classes and investment themes. 

Jennifer Archer: Welcome everyone. Thank you all for taking the time today to join us. My name is Jennifer Archer and I run the Institutional Defined Contribution business at JP Morgan. 

I’m pleased to be joined by Katherine Roy, our Chief Retirement Strategist, and Dan Oldroyd, Head of Target Date Strategies and Portfolio Manager, for a discussion on retirement income. 

With that let’s get started. Dan, what are some of your thoughts as you look across the retirement landscape as it relates to the shift from traditional DB plans being the primary savings vehicle for employees to DC plans? How did we get here and how should plan sponsors be thinking about this? 

Daniel Oldroyd: Great question and a great one to lead off with Jen, and thank you so much for having me and best wishes to everyone listening. You know, it’s been quite a journey. 

Feels like yesterday but if we all can take the Wayback Machine, Pension Protection Act kind of came into being 2006 and sort of started the trend and really put in motion the defined contribution plan becoming the main driver particularly for the corporate sector. I want to clarify that – main driver of retirement savings for American workers and with that the big shift being that you work for a firm. 

If they had sponsored a defined benefit plan for you, you would receive some form of income stream at retirement based on a formula and that big shift has been to, “Okay, with a defined contribution plan you’ve got to invest the money on your own.”

You sort of end up with a lump of money at the end as you approach retirement, and you kind of have to make decisions among what to do with it. So I think really what we’re all circling back to is getting back to how do we translate what people have accumulated over their working careers potentially across multiple firms and employers into an income stream, right? 

And that’s the stage of the industry that we’re really starting to move faster and faster into, and we certainly saw more and more nudges from a regulatory perspective with the SECURE legislation. But what I want to get through is the top right there and leave it at that. 

Katherine Roy: Yes. I would actually chime in. A demand is only going to increase, right, so I think we’re finally at this inflection point. And if I do take your advice and go into the way – Wayback, I was reflecting on the fact that in 2003 I began focusing on retirement income and trying to build a strategy at that point, and we really was just thinking strategically about this idea that baby boomers would eventually retire and need to figure out how to draw down the wealth that we were helping them accumulate way back when. 

And in 2020 I think what I’m reflecting on is that that strategy has really become reality, and so just to maybe put it from a participant perspective, the Silent generation who are currently 73 plus – they had more than a 50-50 chance if they had some sort of DB plan to tap into to get that kind of steady stream of income. 

The leading boomers aren’t that far behind so they’re 62 to 72 right now. They are at a 47% likelihood but we’re really going to be at this tipping point, and if you’re under 62 you’re a trailing baby boomer. 

You have a less than a one in three chance that you have any sort of DB plan to be able to tap into. So this kind of decline in access to that DB plan with the rise of DC as you mentioned Dan I think is very much at that crossroads right now. 

And we have to remember that baby boomers are a generation that’s backloaded so the next ten years we’re going to go from maybe 3 million to 3-1/2 million baby boomers turning 65 each year to the next decade. 

Every year is going to be more than 4 million so a big-time jump up in demand as well. And so I think the other driver here is obviously the 401(k) is a net redemption and so more withdrawals of those larger balances later on, and I think our view is that certain participants leaving the plan - that might be the best choice for them given the access they might have to sizes of solutions outside of the plan. 

But for many participants the solutions that could be offered to an employer with the scale of that employer and a fiduciary oversight, you know, likely could provide a better outcome for many of those participants if they are able to access those in a meaningful way in plan. 

So I think with those drivers, increased demand of those plan participants, it’s not surprising to your point Dan that plan sponsors and providers are feeling that demand and getting serious about potentially evolving their plan to address not just accumulation years but that full lifecycle of the participant through retirement as well. 

Jennifer Archer: Thanks. And that’s really a great segue Katherine, because participants are at the center of everything that we do. Dan, we have a large pool of data around participants going back over 20 years from our records using relationships. Why is that data set important for DC plans? 

Daniel Oldroyd: It’s critical I’d argue but just to sort of fill that in -- how’d and why did we get there -- starting in the multi-asset solutions business many, many moons ago well, we specialized in defined benefit plans. 

We’d often been sort of the outsourced DB plan, spent a lot of time thinking about liabilities and a lot of times thinking about funded status. What’s the right asset allocation? 

And then as we did more and more work around, you know, how do we approach the defined contribution space, the thing that really jumped out at us is this concept of outcomes and individualized outcomes that sort of are embedded with DC plans. 

And I think the simplest way is if you have a DB plan the whole portfolio is run and you’re sharing in the overall return and volatility of that portfolio. Then that’s translated to an income stream for you. 

With the DC plan, you know, everyone’s different and that’s where the research and that pool of data helped us think this through, trying to get down to at the end of the day what are savings rates? 

What are contributions in? How frequently are they occurring? At what level are they occurring? Are they constant? They sort of constantly move up over time and do they correlate to shocks in the market? 

Do people take loans? How long do people stay in the plan? When do they start to take withdrawals, to Katherine’s point, right, people perhaps accessing advice. 

What do those participants look like? So all of that really brings it back to this concept of it’s about thinking through the ranges of outcomes as you design solutions. 

It’s not that there’s a median participant out there, right. We need to think through what’s the potential? Everyone’s going to have their own savings journey. 

Everyone’s going to have their own sort of different things that happen to them in life. Everyone’s going to have different markets in which they retire in. 

So with all of that making sure that we’re grabbing that data and studying that and incorporating that – any solution has been something that’s key in how we’ve tried to think about approaching the ultimate distinction around defined contribution plans, which is you have ranges of individual outcomes. 

Jennifer Archer: And Katherine, how are we evolving our data set and what are some of the ways that that differentiates us? 

Katherine Roy: Having all the data that Dan cited is incredibly rich and detailed in terms of the in plan experience. And so about five to seven years ago we started to tap into what is a tremendous resource at JPMorgan Chase, and that is the fact that we have a relationship with half of America from a banking or credit card perspective and can start to look at the other side of the coin and get smarter about in particular how do individuals spend, you know, plus retirement in terms of what that liability looks like. 

If you have 30, 35 years’ worth of spending behavior that is really critical to get right in anything that we do, and so being smarter about that we’ve been evolving towards really doing a lot of analysis there to understand those spending behaviors and that’s first and foremost. 

And kind of looking at other side of that participant, how are they spending but also to Dan’s point are they taking on additional debt outside of the plan, so overall maybe their financial wellness or retirement preparedness isn’t as good as we might think if we just looked at the 401(k) plan, for example, or what does their balance sheet look like? 

How many participants actually can or do save outside the 401(k) plan as well and get smarter about that, because I think when we think about measuring the retirement system in the United States I think we’re all over the map in terms of is it a crisis, is it not because we always look at kind of these individual variables in isolation. 

And our hope really is to bring this all together and get smarter about the whole picture, and so not only are we leveraging our JPMorgan Chase proprietary data set to be able to gain insights around spending behaviors and withdrawal strategies, but also our partnership with the Employee Benefits Research Institute really to tap into a massive amount of participant data, link it up with that holistic household view and hopefully gain some insights that can really influence public policy and sponsors feeling comfortable or more comfortable with plan design decisions that they’re making, because we can hopefully present that whole household view of how that household is preparing for retirement and the dynamics that they are dealing with and how critical that 401(k) plan is within that picture. 

Jennifer Archer: Katherine, you mentioned briefly this Chase data. Last year you and the team analyzed the spending patterns of more than five million households. From that research can you share any surprises that you might’ve found? 

Katherine Roy: We found several that were quite surprising and I think - I’m a CFP. I come at this from a planning perspective. And the first surprise really goes at this kind of idea of what is that spending target that participants or individuals need to be planning for? 

And the philosophy has always been that individuals need to plan for constant purchasing power over 30 years, and that means that a 65-year-old is buying the exact same basket of goods that a 95-year-old does. 

And what we know for sure is that 95-year-old is spending a whole lot more on healthcare than that 65-year-old is, but we didn’t really glean an understanding before we were able to look at this data set to say, “Well, what is behaviorally what they’re doing in the other categories? 

Do they spend less on those other categories which offsets that rise, et cetera?” And so the first surprise is that, one, there is a lifecycle of spending curve so there’s a spending curve over the course of an individual’s lifecycle. 

Not surprisingly, as income increases from 25 to 45 or 50 in terms of age, not surprising that spending grows really hand in hand with income rising, which is why auto escalation is so important to interrupt that additional income going to the paycheck, because we know that once it hits the paycheck people’s lifestyle naturally kind of grow to spend that money and so auto escalation - and I think it reinforces how important that is. 

But around the age of 50 and again depending upon wealth level and income level – but really at 50 in real terms spending declines so older households in the same year spend less on everything but healthcare, and actually giving to others is another category but everything else – it declines in real terms and so I think we need to factor that in that it is inflation. 

Inflation will be experienced but we have to also incorporate this behavioral trend. Some of that behavioral trend is related to household size and some of us who’ve had children come home from college during the COVID crisis – I can attest that I was shocked by the amount of food I was buying to now re-feed my son and the amount of water I was - going through my house. 

And so we have to kind of reflect the fact that some of it’s household size-related, but we do know for sure that when household size are the same at those ages there is this overall decline in real terms in spending. 

So factoring that curve in as we think about that spending liability and that finish line that we’re trying to get participants across I think is really important. 

And the other two quickly are just trying to isolate what actually happens at retirement. And it was really surprising to us to see that at the point of retirement, at a point in time when an individual starts some sort of retirement income whether that be social security, an annuity, a pension, you know, something of that sort, that there is this surge. 

There’s this surge of spending up to the point they start that income and retire, and then that surge continues about a year to two years on the other side as they acclimate to this new life stage. 

So this idea that the more liquidity as they transition and need to think about that particularly in the context of market volatility is important, and managing that volatility particularly at that point in time as they’re surging is going to be critical. 

And then lastly, there’s volatility around the point of retirement. So our data set right now is about six or seven years. We don’t have a really long time period to look at but when we just isolate those six years around that retirement decision, we see only one in five individuals really stay at a comparable level of spending than they spent before they retired. 

And really 56% of them vacillated quite a bit, right. They would go up one year, buy a lot and they’d come down the next year, buy a lot and they’d go back up so think of it as quite a model chart. 

And what it lends itself to us to believe is that a lot of people don’t quite know what their retiring to, and so those first several years again as they’re trying to figure out this new life stage there is this spending volatility as they figure it out, which, you know, has implications for liquidity, right. 

You want to be able to have a cushion to be able to handle that volatility should it be occurring within that particular participant’s life stage. So think it lends itself to, you know, you can’t annuitize everything because it’s not this steady stream of income that’s coming to you every year, a steady stream of spending that that individual’s doing. 

We need to be able to adapt and have solutions in the lineup that help people be able to tap that liquidity should they be volatile or surging around that timeframe. 

So I think the lifestyle, the surge and the volatility were quite surprising to us in terms of how the participants actually behave. 

Daniel Oldroyd: Could I just jump in for a second? You know, I think what we said for years was we see in retirement plans - in defined contribution plans we see the money coming out. 

And the question is what’s happening to that money, right? Is it, you know, that’s got to be rollovers and maybe they’re just consolidating accounts or things like that. 

So what’s happening? And actually what we saw is higher balances, you know, were more likely to roll over but more people were withdrawing and starting those withdrawals right at around 59-1/2. 

And then when we tracked and said, “Okay, once you – retired how long were you going to be? How long did you keep your assets in the plan?” You know, it’s generally like three years, right. 

So what I find really interesting about the work that Katherine and team did is looking at the spending side it matches up. The volatility of the spending, you know, where that money’s coming from and all of those things - you’re getting another data point to corroborate all of this. 

And then we actually do have and have been working on, you know, linking all this together and getting down to a set of participants where we see the whole picture and that’s exactly what’s happening. 

Jennifer Archer: Great. So retirement income is certainly a hot topic. I think everyone’s trying to think about how to solve the generation challenge. Katherine, could you talk a little bit about why an effective withdrawal strategy is so important for participants to have? 

Katherine Roy: It’s so hard to do and I tip my hand towards – I’ve been focused on this for almost 20 years, which mortifies me but, you know, there’s no silver bullet. It’s not as simple as getting a participant to save as much as they possibly can into a well-diversified solution that’s working for them. 

Their spending behavior is going to be different. Their priorities may be different. The balance of what they’ve been able to accumulate and how it relates to that as well as their sources of income that might be available to them – it really is a unique equation that – it’s hard for a participant to navigate because I would argue…

…over the 20 years I've been looking at this Americans are as equipped to be their own personal pension manager as, you know, I might be to wire my house for electricity. It's just not something that is easy to do.

And so I think we can simplify it to some degree and when we look at the types of participant profiles or outcomes that we see at the end of retirement using some of the planning scenarios that we look at, we see four very distinct participant profiles that have different retirement income needs and solutions that could help them efficiently build a retirement income strategy. 

And so the first profile is a profile that is - has rising wealth through their retirement and this is a profile that likely has a significant amount of wealth. Their spending is less than that wealth might be accumulating and, candidly, that's a profile that in plan I don't think we need to worry about. That's a profile that likely is going to roll out to an advisor and is really best suited working with estate planning attorneys and CPAs to figure out how to transfer that rising wealth at some point in the future to the next generation.

But I think the next three very much are in need of help and, again, an in-plan solution can be critical to helping them figure out how to translate an account balance into sustainable income that can last as long as they do. And so those three are the first of the preserve principal type of individual. So that's a household or an individual that is very nervous about tapping any of their wealth. They're really striving to get as much income as they can off of that wealth and will do everything they can to adjust their spending to align to that free cash flow.

And we see that as really typical of a really good saver. Your best savers in your 401(k) plans are the ones that have great habits and behaviors to align their spending to the cash flow that's coming in and dedicate a portion of that to saving first and foremost and modulating their spending off of that. And so we see that good saver being a person who might be in that preserve principal type of profile.

But we think that there are probably many participants that are trying to operate that way out of fear of using any of their principal when they really should be the next profile which is that partial drawdown, that a portion of their account value, a portion of their wealth they should be figuring out how to systematically build a withdrawal strategy to augment any other sources of income they might have like social security really to use the wealth they've accumulated. The intent of that wealth was to support them in retirement if it's in a retirement account yet they're very nervous about tapping at it all.

And so we think that's where solutions that provide a mechanism to be able to give that cash flow out to that participant once that participant decides, “This is the amount I'm comfortable withdrawing,” or maybe, “This is the amount I need to dedicate to a systematic withdrawal plan,” having solutions that do that with liquidity or an asset management solution, that's where annuities can play that role, helping participants not only have access to those types of solutions but also guidance in terms of how much they might want to direct to that.

And then unfortunately the fourth profile is that participant who may be struggling to save and unfortunately be long-lived and has a high likelihood that they will run out of money. And from that perspective, the annuity is going to be the most efficient way to get them the most income as possible but that also brings illiquidity so that if they do have unexpected expenses, you know, that's something they need to be thinking about.

So I think those four profiles, or at least the last three, lend itself to certain solutions where it's income-generating or a distribution mechanism or efficient income that should be thought about in terms of options within the menu for a participant to access but I think as we've already talked about it's very difficult for that participant to figure out now how do I actually operationalize that. 

So whether it's tools or guidance from an individual to help them understand how to do that based upon their unique circumstances or whether an embedded solution in terms of embedding that advice within the solution for a group of participants to make it easier for them, we think that's critical really to make it doable for that kind of participant who doesn't come to the table with the skills to be able to be that cook effectively in terms of building their own personal pension.

Jennifer Archer: Thanks, Katherine. You know, all of this data and the various profiles really point to the need for flexibility. Dan, maybe with that as a backdrop, how do you think about (the accumulation) strategies?

Daniel Oldroyd: It certainly does point to flexibility and it certainly points to I think a multitude of solutions. Putting my target date hat on, you know, target dates are incredibly efficient vehicles to help people get into the plan, keep default down, keep them diversified, keep them on the path and I think what we're seeing now is they can serve a purpose, whether it's a through fund or a fund that's managing two retirements. 

But just thinking back to Katherine's profiles, I mean this is very different needs. Now if I were to stop and take a moment and sort of say, look, you're trying to help people make the most of their retirement and ultimately you want to make sure you get as many distributions, right, from your retirement pot without losing money. And, you know, the considerations on all of that are, you know, some of this stuff is really hard to think through, particularly for participants, right? 

You're going to have to make a judgment on how long you think you're going to live, what is your risk tolerance, are you okay eating into your principal and also, as with anything, facts and circumstances change all the time, particularly around that. Now I think the thing is really can you build flexibility into a solution.

And so for me thinking sort of at the 64,000 foot level (unintelligible) Protection Act really set the target date funds up and there was a lot of momentum behind that. Secure is setting up the retirement income elements but I don't think there's sort of the one-size-fits-all winner for decumulation. 

So going through that it's all about flexibility I think. Even if you do incorporate some sort of guarantee, I think products that can have degrees of it's not 100% of a guarantee or it's not 100% of a market-based solution I think will be the ones that are popular but I also think you're just going to have multiple items and sort of made available to participants who are staying in the plan, right? 

And, you know, this is where sort of the concept of the retirement income tier comes from. I do think you'll see this develop more and more but if I had to sort of put it all back to one thing is, you know, can you build in some flexibility into this to help people meet their spending needs.

Jennifer Archer: As you think forward over the next few years, what are some considerations plans should think about?

Daniel Oldroyd: Sure. You know, it's - what's interesting is I think I'm on like multiple virtual industry panels over the next couple months and almost every single one of them is the evolution or future of the target date fund. So with that lens in mind, I do think you will definitely see QIAs to have much more of an emphasis on the back half, right, on the spending elements. And I think that'll be fairly explicit.

You can think about it as a target date fund and as you get closer to retirement, you know, the emphasis is more around okay, now we're going to help you spend, right? We launched a spending strategy three years ago. We're starting to get great traction around it but it is a separate strategy, you know. So I do think ultimately you'll start to see those be embedded into target date funds.

I think the other one is guarantees have a role to play but I think it's less about what guarantee with what bell and whistle to it and advice and guidance around helping people come up with how much do they put into a guarantee versus how much should sort of sit in the market-based solution, right, and going back to that concept of flexibility, especially around liquidity.

So if I put sort of the future hat on, I think that's the direction and you'll see a lot more two, three years ago. I'd say that's five years out now. That feels like it's one to two years out in terms of products and solutions that are out and entering the marketplace.

Katherine Roy: Yes. And so my idea here is probably a little further out. I think Dan did an excellent of what plan sponsors need to be evaluating and where that's trending going forward in the near term. I think what we're seeing in some of our data that I am excited about is this idea that from a household perspective there's a surprising number of households that transition into retirement. 

And we're terming it something like partial retirement, this idea that an individual in the household might go from working to turning on retirement income, but for many households there's another spouse that's continuing to work and is a source of income through a period of time. And as we do qualitative research, that's the plan for many households who've accumulated less in their 401(k) is to have that element of kind of partial retirement for a period of time or maybe one spouse is retired and the other isn't or a person is working somewhat but not fully retired.

And what surprised us is how long that transition time period can be. We looked at five-year window and there was still about 50% of the households had some sort of mixture of retirement income and earned income through that period of time. 

So nothing concrete yet from the research to drive product innovation but just raising the idea that while we're at this precipice of accumulation to decumulation and finally getting put together in a seamless way for participants, I think ultimately there will be this transitional component as well, at least at the household level that we'll need to think about really to deliver solutions that meet all three of those phases that participants are likely living through the help meet their investment as well as their saving and spending objectives to make a holistic retirement picture successful. 

Jennifer Archer: Thanks so much. On behalf of the JP Morgan team, we hope you enjoyed today's call and thank you as always for your partnership and participation. As Katherine alluded to, if you all need any information on anything that was discussed today, please reach out to your JP Morgan client advisor.

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