Art by Jasu HuAfter you’ve
done it all in defined contribution—mutual fund management, big bank product
design, annuity overhauls, fiduciary legal eagle—what’s left? Retirement? Not
until the rest of America’s defined contribution (DC) participants are on
track. Elvin Turner, now president of Turner
Consulting, debates big ideas with CIO.
CIO: There seems to be so much low-hanging fruit in the DC system that just… keeps hanging there. Academics, plan sponsors, even regulators support features like guaranteed lifetime income options for DC retirees, but no one implements because of liability risk. Is the absence of a first-mover advantage for sponsors killing innovation in defined contribution?
Turner: I was with you until your last statement: I do think there is a first-mover advantage. Some bold companies are out there truly innovating, but in general sponsors are looking over their shoulders for the Department of Labor.
CIOs have to put on their fiduciary hat. And they’ve done so. Broadly, this is a sophisticated group. To put it in shorthand, they are not the ‘dumb’ money whose notions of investing are totally disconnected from reality. Plan sponsors are constantly probing providers’ motives and decisions to make sure any decision is a prudent one for a fiduciary. And frankly, that’s why they’re the hardest folks to sell to. “What is the third-order motive behind this product?” “Am I setting myself up for a lawsuit in 2025?” That’s a totally different mindset than retail or almost any other industry. And it makes CIOs tough to sell to. Rightly so.
CIO: You mentioned exceptions to this prevailing conservatism. Who are they and what are they doing differently?
Turner: Some of the big Silicon Valley tech companies would be in this category. These firms can be very demanding and tough places to work apparently, but they think of the entire lifestyle of their participants, not just a narrow sliver of their benefits package. They are thinking beyond a 401(k) balance and savings rate: they’re considering health care, work-from-home policies, parental leave. Should you put employees on a bus to the gym after work? They can see things in participants that employers focused just on retirement accounts cannot. These employers are in the best position to connect that slippery term ‘retirement outcomes’ to their employees’ lifestyles in retirement. The notion is simple: Help employees retire and be able to afford the same house and the same lifestyle as they had while in the workforce. If employers achieve that, their employees will be happy.
CIO: Not to be crass, but why does it matter? Once an employee retires, does a company have any (financial) reason to actually care if they’re happy?
Turner: Happy people don’t sue you. Happy people tell other people, who may become your clients, customers, staff, shareholders. Think back to the holistic view these bold companies take: Someone who’s going to be happy in retirement is going to have been happy while they’re working for you.
Furthermore, influential employees don’t work on a Thursday and become retirees on Friday. They become consultants for their employer—doing the same job, just 25 hours a week. We’re increasingly entering that world where the old rules of thumb for a career lifecycle are becoming obsolete, but we still design plans around them. Think about mandatory retirement ages, for example: Doesn’t that sound crazy now? Imagine a Home Depot with a mandatory retirement age. They’d have to fire half their clerks.
CIO: But maybe if people could actually survive on their 401(k), they wouldn’t have to work at Home Depot.
Turner: To be fair, there are many, many reasons someone might work at Home Depot as a senior, not all of them related to their account balance at retirement.
PricewaterhouseCoopers showed me a fascinating chart recently of average household income by age cohort over the last several decades. Thirty years ago, the typical American’s household earnings peaked in their early 60s—income had a linear relationship with age, increasing up to retirement. That’s part of the reason why traditional defined benefit pensions got themselves into trouble… but back to DC.
Today, many households’ highest earning years are their late 40s. So why are people working at Home Depot? Many new retirees never got the salary increases that used to regularly come to 50-year-olds, primarily due to restructuring, downsizing, etc.
If the incomes of participant households are spiking in the late 40s rather than the early 60s, that’s an important detail for sponsors to know. Many DC marketing plans are built around the notion that 50-year-olds and other empty nesters will invest part of their salary increases in their DC plans. In theory, these participants will never miss the new money from their higher salary because it is not yet part of their household spending. But this theory falls apart if incomes are going down; money invested in DC plans has to come from a participant’s lifestyle.
I think that this is where we are now. DC plans need to give many participants in this age group a reason to save money—money that can only come out of their families’ way of life.
Can we be wild and crazy for a minute?
CIO: That’s essentially our editorial mission here at CIO. If you want to swear or something, we’ll totally print it.
Turner: I will not be jumping with excitement if you tell me that I can increase my monthly income by $1,500—20 years from now—if I increase my contribution rate today from 3% to 5%. The extra $1,500, without context, does not move me. But imagine my plan sponsor, or a vendor working for it, partnered with the National Association of Home Builders. On my computer screen, they could show me a series of incrementally better houses afforded by every two-percentage point increase in my contribution rate. Of course, it will come with a load of assumptions, but now I am engaging with something visual: At a 9% contribution rate, I am in a nice suburban home. Two-car garage, green lawn. Raise it to 15%, and it’s a place in Greenwich Village. But drop to 3%, and it puts you in, well, not a dump, but…
CIO: New Jersey? It’s definitely putting you in New Jersey.
Turner: You get the picture. The point is, people aren’t moved by dollars. Are the processes to do this kind of thing impossible? No. Big data makes a lot of this very possible.
CIO: I forgot to mention one other little feature of your résumé—which to be fair is buried on roughly page five: You are a graduate of Harvard Law School. So my final question: Name the one area of legal liability that plan sponsors underestimate their exposure to, but probably shouldn’t?
Turner: That is not fair. Just one? There are so many.
CIO: One!
Turner: You are tough. OK, this whole proposal that the Department of Labor regulate individual retirement assets for retail investors as well as DC assets. My gut would tell me that most CIOs think it’s a non-issue or, in fact, to their benefit.
I totally disagree. One of the outcomes of this regulation—imposing a fiduciary standard on retirement advisors—would be that many advisors would no longer serve an entire segment of investors whose assets they deem too small. An advisor would look at a potential client and think, “It’s not worth the paperwork.” And remember, these are the investors who most need sound financial guidance; they’re the vulnerable population.
I do believe the proposal is going to go through—there’s no way to stop it now. Many people who will no longer be able to find affordable retirement advice work for some company. CIOs will see a wave of un-served participants within their own plans, and have to manage this population as they turn to their DC systems for help. Company-sponsored DC schemes can in no way serve the personalized needs of all of these people. The resources just aren’t there.
So then it becomes the CIO’s problem.