Gillian Kemmerer
Anchor, Asset TV
Welcome, I'm Gillian Kemmerer. And today we are joined by Michael Doshier, senior retirement strategist in the U.S. Intermediaries division at T. Rowe Price. Michael, pleasure to have you in the studio today.
The convergence of wealth and retirement is not a new topic, so why is it heating up right now, and what are the implications for the industry and specifically for advisors?
Michael Doshier
Thank you for having me, Gillian. I think there's three big drivers why it's different now than it has been for the last 10 years. I mean, for 10 years, we've been watching all the announcements from a mergers and acquisition standpoint that, clearly, advisors are buying each other up.
One of those reasons is scale, right? And I think it's we're finally at that point where we're achieving scale and we're thinking more broadly about the participant and investor’s needs, right? These firms have figured that out. If they're gonna reach more broadly to achieve scale, they've got to be thinking both wealth and retirement. So I think we’ve moved from a phase of a bunch of announcements of acquisitions to an actual point where they're starting to put those products and service delivery models together.
The other one is demographics, right? I mean, we think about it and talk about it all the time. If you're in the retirement business, you can't help but notice that 10,000 people are retiring every day. These firms have figured that out, right? If they wanna have that relationship on the accumulation side as well as the distribution or decumulation side, now is the time to act. The longer they wait, I think the more they put themselves at a disadvantage.
And the other one is the need for more holistic services. I think we have chopped up the marketplace, unbelievably so, as the financial services industry has grown up, based on tax codes—401(k), 529. Right? Now we're starting to think about younger investors versus older investors, whether it's in the 401(k) or outside of the plan, how does that all come together to give them solutions they need for the problems or challenges they face at the time. So all of these large national retirement plan advisory firms that figured out the need to kind of cross over, i.e., convergence of wealth and retirement.
Gillian Kemmerer
Your colleague Rachel discussed the need for financial wellness to create the ability to save for retirement. How have you seen advisors evolve financial wellness?
Michael Doshier
Yeah, I think leading advisory firms are leading the way on financial wellness getting kind of a new positioning. I think prior to the pandemic, for sure, the feeling of financial wellness was somewhat vague, and it felt like some kind of add-on to this retirement workplace offer. I think the more forward-thinking and innovative firms now have shifted, and they've actually said financial wellness is really nothing more than a broad wealth offering—retirement, debt, short-term savings—all the things that, if you were to walk away from a 40(k) plan environment, you would see them on a traditional advisory checklist. We're packaging up the retirement plan offer at the plan sponsor level and at the participant level now that way. And again, I'll cite some recent research I've seen. I've seen stats now that 67% of the advisors with these more innovative leading advisory firms feel like the value proposition they have to plan sponsors and plan participants is inclusive of a quote-unquote wealth offer in the core of what they do. So I think we've shifted from it being this add-on thing to a central value proposition element. Not all firms. Many consultant and advisory firms are still staying with the tried-and-true kind of plan-centric world, but I think the world is quickly shifting on that front.
Gillian Kemmerer
We've heard a lot about a growing focus on retirement income from your colleagues who focus on the needs of participants and plan sponsors. So what are advisors considering when it comes to retirement income and, in particular, regarding in- and out-of-plan solutions?
Michael Doshier
Yes, and that last statement is the most important, right? If you're an advisor in the U.S., your world, from a retirement income perspective, it's not new, but it has been vastly out of plan.
So, one stat I see here is we talked to the 32 largest advisory and consulting firms last year in a ongoing annual study we do, and a third of them have now either built out or are committed to building out a specific process for helping plan sponsors evaluate and select retirement income products in plan, right? Two-thirds of plan sponsors have now articulated that they're interested in keeping retired participants in plan, which is a sea change from five to 10 years ago where most of them said gold watch, rocking chair on the porch, take your money with you, right?
So I think the plan sponsor mindset is shifting. The advisors are adopting a mindset that isn't, I would say, shifting but adding, right? I think most of these firms still think that there is a very valuable marketplace in the Rollover IRA because of breadth of offering and other services that they can bring to the table. But accommodating the in-plan environment, I think, is becoming a critical addition to their service model.
The other thing that they're watching is all of the legislative and regulatory activity, right? I mean, SECURE 1.0, SECURE 2.0 both made very poignant moves at making retirement income portfolios inside of DC plans more amenable to plan sponsors, an easier decision for them to make. So I believe that they're following along there and making sure they're ready, whichever way those winds of change blow.
The other one is really about the more holistic view of how they're thinking about their client, right? So, at the participant level, as well as the plan sponsor level, making sure that they've got a holistic way of treating all of those fiduciary decisions—rollover or plan design and investment lineup. All are getting encapsulated together as convergence, which we talked about earlier, becomes more of a reality of in- and out-of-plan activities for all these retirement plan advisors.
Gillian Kemmerer
We can't have a conversation about retirement plans without talking about QDIA, or qualified default investment alternative, trends. What are the key drivers of change that you're seeing in this space?
Michael Doshier
So, the first thing that people look at when they think about that fiduciary decision and the oversight is cost, right? So one of the big drivers right now is continuing to bring those average price points down. One of the biggest tools that’s happening there is actually a shift over to collective investment trusts, or CITs. We have now seen we've hit a point where about 48% of the assets inside of the QDIA space are actually in CITs. CITs, historically speaking, were a playground of kind of the larger plans. There was all kinds of minimums from an asset standpoint. All of those are coming down. There's lots of product innovation happening in that space.
The other one is a little bit more innovation in the design of the product, and that is moving from an active or passive to an active and passive mindset and taking active and passive one step further than not just having certain active products and certain passive products in your lineup but actually having blended products in the lineup. I think we all inherently believe that the default, QDIA, which is by and large a target date series, is one where you have to think the most deeply about it. And thinking about it deeply leads you to think about what am I doing with all of the different sub-asset class categories.
Gillian Kemmerer
Your colleague Rachel touched on personalization earlier today. What are some of the implications on this topic?
Michael Doshier
Yeah, they're huge actually. The constant innovation that the industry sees on these products, given the importance of qualified default investment alternatives, QDIAs, is how do I make personalization come in at the appropriate time and place inside of the DC plan. For younger investors, I think we all agree that the average target date for your average 25-year-old is good enough to get them savings early and on the right kind of asset allocation path. As participants get older, they need more, right? So one of two things is gonna play out, and they're both happening simultaneously right now.
We'll take the later stages of the glide path of a target date and add some personalizing factors beyond just age. And then there's also managed accounts. Managed accounts have been around for a long time, but right now, the advisor community is really getting enthusiastic about using managed accounts as a way to personalize portfolios for older participants, yet still be able to achieve some level of technologically enabled scale from a delivery standpoint inside of the retirement plan.
Gillian Kemmerer
Where do you think interest rates are headed, and what impact do interest rates have on fixed income securities?
Michael Doshier
Well, my crystal ball is a little fuzzy on where interest rates are heading. I think the easy answer is we all know that it's gonna be higher for longer. I think the real question we need to ask ourselves is what's the shape of that curve And how much can I predict its length, its duration, the height. Have we, in fact, passed the height? I, knock on wood, hope we have. But what's the most important thing for advisors to think about is has it shifted the operating environment for running fixed income inside of your plans and inside of your participant accounts? And I would argue that it has to have, right? For 30 years we were in a low, lowering to low, to almost no rate environment. And in one 18-month period, everything has changed, right? So my guidance to advisors is go back, look a little deeper in two ways when you're dealing with your retirement plan clients. Look at the lineup itself and what are those fixed income options that you have available to those participants. And take another deeper look inside of the multi-asset product, that’s likely your QDIA, and make sure you understand how well fixed income is being used as a diversifier inside of that glide path, which everybody knows the glide path and the equity fixed income, but when you do the double-click, you need to understand whether it's just a Bar Cap Agg representation of the fixed income instrument or is it something with some more nuanced diversifiers and enhancers.
Gillian Kemmerer
With 62% of retirement plan assets held by investors nearing retirement, what role should fixed income play in a retirement portfolio?
Michael Doshier
Yeah, I tell you what some research we've done lately shows me that plan sponsors and advisors both are starting to think about this and one more level of sophistication than they used to. It used to be a question of what does fixed income do. And then all of a sudden you woke up and went well I've got 62% of those assets belong to people that are 50 or older or approaching retirement. Are their needs for fixed income different than your average 25- or 30-year-old? And I think we quickly woke up to the fact that the answer to that is yes, right?
So I think the answer is twofold. I would make sure that you continue to think about your broad, mostly younger and middle-aged type of participants and think about the fixed income need primarily from a diversification and a total return perspective. But for older participants, especially if you believe that retirement income inside of DC plans is a growing desire and need, you should think about that from a slightly different perspective. Diversification, yes, but more from a capital preservation perspective and generating income. If these products—whether the money market or the stable value product that's already in a plan lineup or some short-term debt instruments, some short-term fixed income—are gonna play a role in a retired person's portfolio that they're driving income out of the paycheck replacement and retirement, then you've got to be thinking about it in a fairly nuanced fashion for that group.
Gillian Kemmerer
Well, we've covered a lot of ground here today, Michael. Thank you so much for taking the time to decode the landscape here for our viewers.
Michael Doshier
Thanks for having me.
Gillian Kemmerer
And thank you for tuning in. You just heard from Michael Doshier, senior retirement strategist in the U.S. Intermediaries division at T. Rowe Price.
