MASTERCLASS: Guiding Retirement Journeys

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  • 58 mins 41 secs
Managing the financial and emotional aspects of each phase of the retirement savings journey for investors requires effective strategies to help plan sponsors and advisors. From accumulation, to transition and securing a long-term retirement, each step involves management of headwinds and savings habits.

Chris Augelli, Head of Retirement Channel Marketing, U.S. Intermediaries, QPFC, assesses the changing retirement landscape and evaluates the many aspects of retirement savings with 3 experts:.

  • Joe Martel, Portfolio Specialist, Multi-Asset Division, CFA, CAIA
  • Stuart Ritter, Retirement Insights Leader, U.S. Intermediaries, CFP(R)
  • Michael Oler, Retirement Income Product Manager, Multi-Asset Division

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MASTERCLASS: Guiding Retirement Journeys

Chris Augelli: Hello and welcome to our discussion today on effective strategies to help plan sponsors and advisors assist in managing not only the financial, but also the emotional aspects of the retirement savings journey for the plan participants with whom we work. My name is Chris Augelli and I'm the Head of Retirement Channel Marketing for T. Rowe Price, US Intermediaries Business. And I'm pleased today to be joined by several of my esteemed colleagues from T. Rowe Price, each of whom will be offering their own unique perspective and expertise to our conversation.

To my immediate left sits Joe Martel, a Portfolio Specialist within our multi-asset division with particular expertise in target date vehicles. Joe will leverage his extensive experience to discuss the continuing evolution of target date strategies and the importance of leveraging an intelligently designed qualified default investment alternative to maximize employee savings.

Next is Stuart Ritter, a Certified Financial Planner and the Retirement Insights Leader for T. Rowe Price Intermediary Business. Stuart helps develop the firm's position on major topics that impact the retirement savings journey. Today he'll be discussing the importance of non-financial considerations that impact an employee's transition to retirement. An aspect that is often overlooked, but ultimately no less important in supporting successful migrations to retirement.

And last, but certainly not least, we're also pleased to be joined by Michael Oler, the Retirement Income Product Manager within our multi-asset division. Michael will share with us some critical research on the changing perspectives around maintaining participants in plan after retirement, how to tackle employee questions that don't end when a career does, and insight into the impact of behavioral preferences in shaping retirement outcomes. In total, our goal is to provide you with effective strategies for every phase of the retirement journey from accumulation, to transition, to a secure long-term retirement.

Joe, let's start our conversation today with you. Why most people recognize the need to save for retirement. The more detailed aspects of savings such as how much should I save, where do I save? How do I get started with this? That can be challenging for a lot of people. What type of insights do you have on? How do you best address those hurdles and encourage successful retirement savings habits?

Joe Martel: Thanks Chris. Great question. Unfortunately, the reality is many investors are facing headwinds in making their savings last in retirement. The reality is as the retirement landscape shifts away from many individuals having a defined benefit to help them in retirement, they're now going to be more focused on supporting themselves with other sources such as social security or personal savings. And in fact, our research indicates that the defined contribution plan is growing in importance in terms of its ability to help investors save for retirement.

And the reality is that the defined contribution plan is well suited to help investors save for retirement, things like auto services. So automatic enrollment, automatic increase, really help investors save enough of their paycheck. QDIAs like target date funds are solving the asset allocation problem for investors. So those things together are really putting investors in a good place to save enough for retirement if they utilize the defined contribution plan appropriately. And as individual live longer in retirement, those types of repeatable savings methods are going to be required in order to help them have enough assets. So that they can live comfortably in retirement off of their defined contribution savings.

Chris Augelli: So interesting point there about living longer in retirement and with the expansion now of life expectancies that we've seen now around the world over the past two decades, would you say that the average plan participant, have they adjusted their savings behaviors accordingly?

Joe Martel: Actually, we still find that most participants tend to have an underfunded liability. Essentially, they're not saving enough to replace their income in retirement. And we also haven't noticed that investors have meaningfully increased their savings to account for the fact that they will be living longer and more reliant on the 401k plan than prior generations. A common rule of thumb is to save 15% each year in order to be on track for retirement, and that's 15% including what you contribute as well as what your employer contributes.

And when we look at data from our record keeping platform in terms of what participants are doing from a savings perspective, we tend to find that the majority of them are not hitting that 15% mark. We look at it across age cohorts. As you can see here, and no matter the age cohort you evaluate, investors simply aren't saving that 15%. Those that happen to be hitting that 15% mark or higher, they tend to be older investors, right?

Those that are getting closer to retirement, and unfortunately that rule of thumb doesn't say start saving 15% when you're close to retirement and you're starting to think about it, it’s start saving 15% from the day you start working. And when we combine savings data with the fact that investors today are living longer than prior generations, that's why we say we think investors have that underfunded liability. Essentially their assets which is their savings, are much less than their liabilities, which is representative by their income needs in retirement.

So, with assets less than liabilities, they have an underfunded liability and while you can't say invest your way out of a savings problem. The reality is you have to factor in that underfunded liability into your asset allocation as you save for retirement. You can't be overly conservative because you need to have enough growth in your portfolio to help your assets keep up with the ultimate liabilities that you're going to have to replace in retirement.

Chris Augelli: Thanks, Joe. That's some great financial perspective here, but I'd like to involve Stuart in the conversation at this point, and Stuart I know you have some complimentary insights in this whole notion of not being prepared for retirement, but from more of a nonfinancial aspect.

Stuart Ritter: Absolutely. People think about the financial part and that's a great starting point. At the same time, there's another side to that coin and that's the non-financial, the emotional side of what people need to be thinking about, so it's not just being financially prepared, it's also being emotionally prepared and our research has shown that while three out of four people have done some of that financial modeling as they're thinking about transitioning into retirement, only one out of three have done any thinking about the emotional side and the transition into retirement and how that might affect them. Let me give you a story that illustrates this.

Chris Augelli: Sure.

Stuart Ritter: My son plays youth soccer and his soccer coach came onto one of the fields during practice one day and he was looking pretty glum, and I went up to him. I said, "You're looking kind of sad. What's going on?"

He said, "Well, I coached the local high school soccer team and last night I called everybody who made the team." And I was a little surprised. I said, "Well, that sounds like a really great thing to do. Why are you looking so sad?" He says, "Because tonight is when I'll call everybody who didn't make the team, and in one phone call I'm going to tell somebody who's been a soccer player for more than half their lives, where that defines who they are. It brings structure to their day, it gives them relationships, it provides for social interaction and in one phone call, I'm going to say it's over, it's done."

And that is a really hard thing for a lot of people to transition into, and I was realizing he wasn't just talking about youth soccer, he was talking about people moving into the next phase of their life when they go into retirement, and very often there are people who've thought about that financial side but haven't looked on the other side in terms of their emotional aspects and who they're going to be.

Let me give you a more practical example that has implications for advisors who are helping people with this transition. We did a focus group recently and we had recent retirees on that side of the glass, and we were in the darkened room with the peanut M&M’s on the other side and the moderator was simply going around asking people to introduce themselves and talk about what their experience was transitioning into retirement. And one of the gentleman used a phrase I had never heard anybody use. He said, I failed retirement. I never associated that word with retirement. And he went on to explain how he'd gone into his advisor one day and the advisor said, congratulations, you made it. We looked at your social security, we looked at your DB plan, because he had a small benefit. We looked at your defined contribution plan and the assets you've built.

And we've modeled the spending and the longevity, and a lot of the things Joe talked about and the numbers work, you can retire. And the guy told us. So, I went into the office the next day and I did. I was done and I was miserable. I was moody. I started fighting with my wife. She started fighting with me. It was a disaster. I failed retirement. And he went on to say I did two things, now the first you probably expect, but the second surprise me, the first one was he went back to work. I mean here was a situation where somebody’s identity was wrapped up. Everything I talked about with the soccer, he had that issue. That was part of the reason he was so depressed as he put it and going back to work, help solve that. But the second thing he did, he fired his advisor.

Now I was stunned by that. So, the moderator fortunately pressed him on it, and he said, well, here's the deal. I had been working with this person for 20 years, and if after 20 years he didn't know me well enough to know that emotionally I wasn't ready for retirement, that I didn't have a plan, then that was someone who didn't know me well enough. I didn't want to work with him anymore. And honestly, I felt sorry for the advisor because I got to believe from his perspective, it was success. His job was to help this guy save what needed to be saved and invested appropriately and model all the potential outcomes and say, okay, you got to that financial success point and he got fired for his troubles. And that was because he hadn't paid enough attention to the other side of the equation, the emotional side, and helping one of his clients recognize that not only is that an important thing to pay attention to, but help him go through some of the things he needs to, to prepare for that transition.

Chris Augelli: So let's pivot back now to the financial aspects of this conversation. Joe let's assume we have an individual investor who has done everything right. They've been incredibly diligent in mapping out their future. They've gone through all of the non-financial considerations that Stuart was just talking about. They're aware though of this increased longevity. Now what should they be thinking about in terms of how they should be investing in the context specifically of targeted investments?

Joe Martel: Sure. At T. Rowe Price, Chris, we address these challenges head on through our target date, research, and glide path design. All of that's underpinned by the longstanding belief that the risk of running out of money or set another way, not being able to maintain your standard of living or purchasing power in retirement, should be the key driver of asset allocation designs for retirees. And this foundational belief in the research that we do really is why we believe that you should maintain a meaningful allocation to growth seeking assets within any asset allocation, so things such as equity because you're going to need that growth to address longevity in order to have enough assets to retire and to maintain your spending in retirement.

I think you can think of it this way. The cost of things that people want to buy in retirement, so the cruises, the trips to see the grandkids and probably most importantly healthcare, right? The hip replacement over a long time horizon that many investors are going to live in retirement. Those things can go up in price by meaningful amounts, even with very moderate inflation over a 30 year horizon. The cost of those types of things could potentially double. And historically growth seeking assets like equities have been the best asset class of keeping up with inflation and ensuring that individual's purchasing power is maintained over a long time horizon.

The alternative is to decide what part of your lifestyle that you want to give up as your purchasing power decreases over time. The compounding of the equity risk premium or effectively the additional growth that you get from stocks over bonds is extremely powerful and just like interest, that additional growth compounds over time, so over long horizons of accumulation, so saving up to retirement and even in retirement, that additional growth that equities afford, you can have meaningful differences in the amount of assets that individuals have to live on when they retire and it can make up for unexpected cost increases that many individuals will face over a potential 30 year retirement horizon.

Chris Augelli: So if I'm hearing you properly then to make sure that individuals are able to meet their retirement income goals and also to maintain their spending throughout retirement. We need to be changing the way we think about this. This isn't really just about the appropriate exposure to equities through the accumulation phase. It's about the appropriate exposure to equities throughout the retirement journey, including at the point of retirement and then beyond.

Joe Martel: Absolutely. As we look before, longevity is a reality. Investors are going to absolutely experience a very lengthy retirement, and that's a good thing, right? We should all want to live very long in retirement. So, because of that, their time horizon is quite long, and they can afford to have portfolios, even in retirement that are more focused on growth. There's no doubt the risk of short term market volatility. It should not be ignored. And something we think a lot about at T. Rowe Price, but the reality is, in terms of a successful retirement, it's secondary to the larger risk of facing a shortfall in retirement or running out of money in retirement.

Again, not being able to maintain your standard of living because you're 10, 15 years into retirement and you don't have enough assets to keep paying your bills. We like to think about a potential 30 year retirement in two halves, right? The first 15 years, and then the second 15 years, the day you hit retirement, you're only going to spend half your money and you're not going to spend half your money for another 15, 25, 30 years. That's a long time horizon and prices are likely to be much higher, 15, 25 and 30 years from the day you retire.

So, stocks, the part of your portfolio that's invested in stocks. Therefore, the latter part of retirement. Making short-term volatility less of an issue for you. But then again, not all of your portfolio is in stock. So, when you retire, you're going to spend some of your money the first year, the second year, five years in. That's where bonds come into play. So, the reality is the most important thing is to have an asset allocation that's appropriate to be successful when you retire. Two years into retirement, but also 15, 20, 25 years into retirement.

Chris Augelli: That's fantastic perspective. And Joe and Stuart, thank you both for the conversation there, but at this point I'd like to involve Michael Oler in the conversation. So, Michael, we've been talking a lot about investor preferences, glide path design, increases in longevity and such, but we haven't touched on yet though are the needs and preferences of the employers themselves that are sponsoring benefit plans. So how do they fit into this equation?

Michael Oler: Thanks Chris. I think that's an important perspective that needs to be included in any holistic retirement benefits discussion. I think the employer's view of the defined contribution landscape is changing and I think they're increasingly acknowledging the importance of defined contribution plans in terms of shaping the retirement for their employees. We sit with our clients and prospects continually and they simply tell us they want to get it right; they want to get it right for their participants. And this brings a heightened focus on the whole asset and retirement life cycle process with an emphasis on outcomes. And that actually changes the conversation. And what I mean by that is it becomes a bit more strategic in nature and we can help address the issue or address the challenge plan sponsors are trying to solve by focusing on a simple question, what are you solving for?

Help us understand what you're solving for and more specifically what outcomes are being targeted for your participants. And when you can get to that bottom line question, everything can begin to unpack from there. And so being able to answer what and who you're solving for as well as how, informs the choices that a plan sponsor can make, which will ultimately lead to more informed decisions. And this is important because you want plan sponsors to make decisions that are aligned with their objectives. They want to understand the heterogeneous nature of their population and evaluate trade-offs and trade-offs of their decisions with care. And when we talk about the heterogeneous nature of participants, this is where we can start to discuss some of our research at T. Rowe Price on the impact of behavioral preferences and how they play a role in choosing retirement income solutions for participants.

And if we understand that income is the goal. And by income, I mean the replacement of consumption in the absence of labor income, behavioral preferences show us that there is no one silver bullet in terms of solutions for reaching that goal. And it's an important point to keep in mind, especially as we look at the varied landscape of retirement solutions that are in market today. Having a suite of solutions as opposed to a singular option, it’s . a much more compelling approach to being able to solve this challenge.

Chris Augelli: Yeah, that's really interesting and it's great to bring the focus around to see then how plan design and investment menu design within these plans can really have a very meaningful impact on the retirement income landscape for these participants over time. So, if we now see there's greater alignment than ever before between plan sponsors and their participants on wanting to make sure they really are effectively preparing individuals for this transition into retirement store. Stuart, let's bring the conversation back to you because we still have the question of, well, how can we assist not just the plan sponsor, but the participants and the advisors to all work together to help enable that successful transition for individuals? How do we do that?

Stuart Ritter: Well, Chris, we at T. Rowe Price have created a program to help all the players focus on helping those participants be successful. So, what we did is we looked at that conceptual gap. Where only one out of three people have prepared for the emotional side of retirement and built some structure for people to use as they envision what's going to happen in retirement. So, what I want to do is describe it in a little bit of detail and then to give everybody a sense of what the experience for the participant will be like. I'm going to ask each of the panelists to answer one of the five questions that we put up in front of people. So, an advisor can sit down, or a plan sponsor can create an educational program where a participant comes in and we have them answer five questions.

Who, what, where, when, and why the five's. And the first thing that does is it gives people some context around which they should be thinking about the emotional side of retirement. So, people go into that transition period, both with excitement and anxiety and the more they can prepare, the more we've seen that anxiety come down. So simply by telling people, here's what you need to be thinking about, that helps people feel more confident about their ability to make that transition. So, who is, who are you spending time with today? And more importantly, who are you going to spend time with in retirement? How's that going to change? What is what you're doing with your time? Obviously while you're working, a lot of it is going towards that, but what will things look like in retirement? And that same focus group I mentioned where we were asking people about their transition into retirement, somebody said, so I was talking with my advisor, he said, what do you want to do in retirement?

And I said, well I guess I should golf, because you're supposed to golf in retirement. He said, do you golf now? No, I don't like golfing. Well maybe that's not the right what for that individual when they're making that transition and this program will help them figure out what it should be. So, who, what, where do they want to live? They're staying in their home. Are they going to travel? Who, what, where, when, what is going to trigger that transition to retirement? Is it an age? Is it an asset level? 30% of people say work is part of their vision for retirement. So, when do people really retire? The model used to be I'd work full time on Friday and then never work again on Monday. But now people are redefining that and different people if they're married or have a partner or are retiring at different times.

So, they're thinking through that when and recognizing it's a lot more complicated than it can initially seem. And then why, why am I getting up in the morning? What is that identity that I'm going to have in retirement? So, Chris, let me start with you. all right. When we do the who part is as part of this program, we start with adult learning theory that says people will think about and consider new information by comparing it to what they already know. So, the first step in the process is who do you spend time with today? Just rank order it a bit.

Chris Augelli: Reality. It's mostly my work colleagues. That's where the majority of my time goes. And then I'd say my family, probably an even tie there or close second, behind that, I spend a lot of time then coaching and volunteering for kids' activities.

So, I'd say groups that are tied to my kids and their stage of life. Beyond that, probably I'd say a little bit of time leftover for friends, and that's about it.

Stuart Ritter: That's a pretty typical response. I mean a lot of it is work and then family to the extent that you have one. So, the question people need to face, and I'll pose to you is when you transition into retirement, how is that prioritization going to change? Who will you spend your time with?

Chris Augelli: Well, the easy answer is always spending time with my family, but I can see there's going to be a massive shift in my calendar. All the time that has been going to work will no longer be going there. And even now, as you're asking me that question, a lot of my personal time is spent around my kids' activities and that's certainly going to change, so yeah, I'm going to have to figure out some of the extended circle where I spend my time.

Stuart Ritter: Yeah, the experience you just had about connecting what you're doing today and how that's going to change in retirement is very typical. I mean, 57% of people say I'm spending more time with family and friends, no word from those family and friends to see if they want to spend more time with us when we retire. So that kind of thing needs to be thought through and just starting with that helps people figure out, okay, this is worthy of my attention. And then part of the program is having people think about, well, if I want to change who I'm spending time with in the future, what can I be doing today to help bridge that gap? If things are going to be different, what kinds of things can I be doing to help that transition?

The other thing we put into the who category is healthcare. Very often people are worried about healthcare. It's a priority item for folks. So, we have two questions for people to think about. One, whose healthcare team are you currently on? Because a lot of people have aging parents who are still alive and haven't thought through that, whatever vision of retirement I might have, it probably needs to include caring for them and then later on in your own retirement, who do you want to be on your own healthcare team potentially taking care of you.

All of those things get put into the who mix, and people start getting a better sense of what it is, the who part of their vision is, and what things they can be doing today to help with that transition. All right, Michael, let me ask you the what questions. So, first of all, what do you do with your time today? If you were to rank order it, what is taking up your time?

Michael Oler: Well, I think if you think about Chris's response to the who, the what people or the people he spends most time with, the what for me is work. Most of my time is spent working 9:00 to 5:00, 9:00 to 6:00, whatever the hours. Beyond that. I think in terms of my priorities, how I like to try to spend my time, family and friends next, and then recreational activities, trying to get back to the gym, trying to get in shape, getting close to middle age if I want to make sure I can combat that as much as possible.

And then travel both professionally and personally. I think those are probably the top four items that are taking up my time. If I think about how that will change in retirement, I'd like to move work all the way to the bottom of that list if I can, unless of course I decide that I want to do something to take on an Encore career if you will, but I think family friends will always be that top priority. Travel. I'd like to do a shift more to all personal travel as opposed to professional travel, but really just trying to focus on the things that make me happy right now and try to expand those as much as I can in retirement.

Stuart Ritter: That's a fairly typical answer. The travel one especially comes up a lot and travel has a wide definition. For some people that means a single trip. For some people it means I'm going to be buying a second home somewhere, so a lot of what you've described has implications for things you could be doing today to think about setting yourself up so that you can make that transition. To your point, that work drop, that's drops, that opens up a lot of time in the day. So, helping people think about what it is they're going to do with their time is a big part of that transition and helping people have the vision for retirement that will give them a confidence that they'll be able to actually implement it.

Michael Oler: Absolutely.

Stuart Ritter: All right, Joe, your turn. Here's the where. When you think about where you live today, what were some of the important factors that led you to decide this is the right place.

Joe Martel: I think the number one factor was family. So, where I live today is where I've lived for a good bit of my life and a good reason, a big reason behind that is because that's where most of my family has lived.

Stuart Ritter: When you think about retirement, what factors might influence where you live in retirement?

Joe Martel: So I think still family, right? So, I hope to one day as my children get older and have grandchildren, so I'd want to live close to wherever they live. The other one would be unlike that other investor that you referred to who didn't enjoy golfing. I actually enjoy to golf, so I'd want to be somewhere where I could play a little bit more golf year round. So that would definitely factor in as well as I love the beach and being able to spend time on the beach just relaxing will drive the where for me.

Stuart Ritter: Excellent. That helps clarify what you're looking for. And Chris, that's the kind of thing this program can give to people. It's a way for advisors and plan sponsors to provide the structure for participants to think through that emotional side and start out not only what their vision might look like, but the things they can do today like researching travel or beaches to figure out what they can do to be successful when they get to that point.

Chris Augelli: I really appreciate the practical aspects of this framework and how it really does guide someone through these considerations that otherwise might fall by the wayside as they're thinking about their future. But let's talk about individual investors who may have a spouse or a partner. Should they be trying to answer for them in their heads going through this exercise. Should they engage them directly in this dialogue?

Stuart Ritter: Oh, absolutely. We know it works, that if your spouse wants an opinion, you just come up with what that opinion is and give that to them. What most people will do obviously is have to integrate two ideas, two visions if there's somebody else involved in your retirement, so getting them to go through this program provides two important benefits.

One is people who are sometimes caught up in the day to day and haven't had the time to share what their vision of retirement is, have the opportunity to do that and very often, and that's the first time some people will hear about things. The second thing it does is it often brings in somebody to this conversation that hasn't been part of it before. As we have conversations with folks about replacement rates and investing very often with a specialization of labor, there's one person in that partnership who's really interested in that and somebody who's less interested, and trying to bring them in and say, hey, we're going to talk about your investing strategy for retirement may result in some reluctance.

But if they have the opportunity to be brought in and say, hey, we want to know what your vision of retirement is, who you want to spend your time with, what you want to do, where you want to go. That's something people get really excited about. So, the second benefit is you have the opportunity to bring somebody in and develop a relationship with them that might not have been part of the conversation up until that point. Let me give you an example of how this can work out or not work out. One Sunday morning, I'm at somebody's house meeting with the husband who had just retired the previous Friday with all the financial documents that he had laid out on the dining room table and he was sharing with me how all the numbers were going to work and as he's talking through all of this, he mentioned at one point that this was all going to work because his wife was going to work for another five years full time, and suddenly there's this voice from the other room that says, I never agreed to that.

Uh-oh, he gets this puzzled look in his face. He says, well, wait a second. We had a conversation about it. That's what you agreed to. And she said, we had a casual discussion. I don't want to be tied down for something like that. Well, maybe you should have told me that before. I put the paperwork in on Friday, well maybe you should have asked me before you made a decision. Now at this point I'm looking for the nearest exit.

Now we were able to work it out, but that's an example of somebody who focused only on the financial aspect and more importantly two people who hadn't really sat down and shared their vision of retirement with each other. Now when we got to the end of the discussion, he agreed to go back to work part-time. She agreed that maybe she would continue working, but it didn't have to be the five years and they were able to bring those two visions together. But it just underscores the importance of looking beyond the financial and making sure if there are two people involved that you've got both perspectives.

Chris Augelli: Thanks Stuart. That's fantastic. And Michael, this would seem to tie in nicely to a lot of the behavioral insights that you and your team have uncovered. Can you walk us through that linkage and what the role is that plan sponsors can play here?

Michael Oler: Sure, happy to share some thoughts on that Chris. As Stewart just pointed out, everyone's going to have their varied needs around the who, what and where for retirement. Much like they've got their own preferences around the lifestyle they want to lead, they're also going to have preferences around how they want to generate income from their assets in retirement. And this is illustrated by some of the behavioral research that we've done at T. Rowe Price to really illustrate how every individual is going to have their own unique preferences around income as well as asset preservation.

And understanding how these preferences play into coming up with the right income solution or the income strategy for individuals is going to be valuable to both plan sponsors and advisors as they evaluate the spectrum of retirement income solutions that they want to offer to those participants. <What are income preferences Slide 7 at 31:06> So , for purposes of our discussion on the screen, you can see that we classify these preferences into five distinct categories that allow us to match our participants retirement profile with a range of retirement income solutions.

So, in this example we're only going to be looking at five income preferences, income yield, duration and volatility as well as the liquidity and the preservation of their assets. So, let's first talk about what each of these preferences mean and then we can also talk about the spectrum against which they can be measured. So, first when we talk about income yield, how much income am I going to receive? The spectrum is from a lower to a higher level. If I were to ask the three of you, would you prefer a lower or a higher level of income at retirement? I suspect all of you would say higher level of income.

Chris Augelli: That's easy.

Michael Oler: And it may seem very intuitive that everyone would want that choice as well. But some research has shown us that there are some individuals who continue to replace a high level of importance on preserving a level of assets as opposed to generating a certain level of income.

And what that tells us is these individuals may be willing to adjust their spending in retirement in order to preserve that level of assets. When we talk about income duration, how long is my income going to last? So, do I want to make sure that I won't outlive my income and if so, what level of income do I want to maintain? Kind of connecting back to that first preference. And when we talk about income volatility, are there going to be changes to my income? What ability will I have to adapt my income or adapt my spending in retirement based off of fluctuations from month to month or year to year? And the last two, while not necessarily income preferences, choices around income strategies can impact asset level. So, it's important to consider these preferences as well. So, when we talk about asset liquidity, will I be able to access my assets if needed and how much liquidity am I willing to sacrifice in exchange for income?

And finally, asset preservation. Will I be able to leave a bequest? Do I want to leave money behind for any specific individuals? There's a certainly a level of interconnectivity between each of these preferences. I think I kind of illustrated how the yield connects to the duration very easily, but I think rather than focus on that component of it, I think what we want to do is focus on how the preferences themselves can actually shape outcomes for individuals.

<What are income preferences Slide 8 at 33:35> And let's look a little bit more about why these preferences are so important. If we gather an individual's preferences across each of these spectrums, we could end up with a pattern, much like what you see represented by the purple lines. But if we add another layer and we insert another participant's hypothetical preferences indicated by the yellow line, we see a bit of a completely different pattern and these unique preferences when shown together, they build a visual that's very similar to a DNA pattern. And much like each individual has their own unique genetic makeup, they also have their own unique preferences around how to generate retirement income from their portfolio, or as I like to call it, they have their own retirement income DNA.

And plan sponsors should take this uniqueness into consideration as they make decisions on their behalf. <Solutions Spectrum Slide 9 at 34:25> And if we look at another side which shows the retirement income solutions across a spectrum, we see that there's a landscape of multiple retirement products in market today. And we see that there are many options from which individuals can choose. When we couple this landscape of solutions with the impact of preferences and driving satisfactions of outcomes, it's very clear that this is not a one size fits all proposition in terms of finding that right solution and it's why we at T. Rowe Price believe that participants are best served by a suite of solutions rather than a singular product. And in fact, this is a point that was confirmed through our plan sponsor research where 74% of plan sponsors agreed that retired participants are best served by a suite of solutions to address a set of varied needs and preferences as opposed to a singular solution that was incorporated into the plans default.

The key then becomes having the ability to align individual preferences within a given set of solutions. And when we illustrated the hypothetical preferences for two individuals, that's just a small microcosm. We know that plan sponsors are really trying to address this for their entire retiree population, not just two individuals. So how can they evaluate a broader set of offerings for their population? <Mapping Preferences to Solutions Slide 10 at 35:46> And I think if we look at our mapping preferences slide, we can consider some of the retirement income offerings that we had illustrated in the spectrum against the five preferences that we spoke about just a moment ago. And when we frame it in this context, it can go a long way for plan sponsors in assessing the solution set that they want to make available for their participants. And for participants, enabling them access to a suite of offerings that allows them to calibrate their own individual preferences. It's really quite valuable to them.

There are two other points that I want to make in consideration of retirement suites. The first, it's important to have a framework in which you can provide consistent outcomes. And what I mean by consistent outcomes is that not everyone should receive the same result or the same outcome. It means more so that we should evaluate the same criteria and use the same methodology to evaluate their outcomes. So, the process in and of itself is consistent as opposed to the outcome. Let's use the simple analogy of going to the eye doctor for an exam. I think we're all probably very familiar with the process. The doctor shows you a set of letters than another set of letters which looks better A or B. You go through this exercise a number of times with one eye or with both eyes and at the end of that process the doctor gives you a prescription that's based off of your responses.

Now we all go through that process, very similar process, but at the end of the day we all come out with different prescriptions. And that's what I mean by a consistent framework and evaluating solutions. You should be able to solicit information from the individuals, go through that same analysis and give them different outcomes that are tailored to their unique needs and preferences. And I would say second, whether a sponsor ultimately offers a singular retirement income solution or suite of solutions. It's really important that they engage with their participants along the way, especially as they get closer to retirement, whether it be through communications, financial education or access to planning tools. It's important to make sure that their participants are enabled to make informed decisions about their retirement that are connected to their individual preferences.

Chris Augelli: So what would your advice here be to advisors and how do they actually deliver solutions here that take into account the unique needs of both plan sponsors and their individual participants?

Michael Oler: I think advisors just need to have very direct conversations with their clients. And I think the visualize retirement program that Stuart had spoken about before allows them to start this process in a consistent way. Don't make assumptions about your clients. Ask them what they want, understanding that people have different needs, they want to do things differently. They may have different plans. Once you have a clear understanding of what they want to achieve, it then becomes more of a conversation about objectives and how they want to achieve those objectives. That helps inform the right strategies to help them achieve those objectives.

Chris Augelli: So giving different plans then and different needs across a broad participant base. I mean that's pretty challenging. Planned sponsors really don't have an easy job here, do they?

Michael Oler: No, they really don't and it's not easy. They need to take into account the needs of a heterogeneous population across a spectrum of retirement income solutions in the hopes of meeting individual participant goals and objectives as they transition into retirement.

But they can start with addressing a key question, namely what is your preference as a plan sponsor in terms of keeping participant assets in plan post retirement? They can take an important first step in tackling this challenge. And if you look at some of the research that we've done at T. Rowe Price, a key theme that we're seeing is participants are increasingly inclined to keep assets in plan after retirement. And if you look at the data and the chart, the left is from our proprietary record keeping system. The bar shows the percentage of assets that participants left in the plan during the first, second and third year of retirement and so on. And then the gray bars are showing the percentage of retiree assets in plan years from 2012 through 2015, while the bars in the colors show the percentage of assets that were retained in more recent years, you can clearly see a dramatic up shift in those numbers.

For instance, in 2015 the first year retirement participants left approximately 40% of their assets in plan, and by 2018 that percentage has had risen to over 60%. And these trends are paralleled by a stronger plan sponsor inclination to keep assets and plan after retirement. Based on a recent survey that we did at T. Rowe Price of large plan sponsors, 50% of the respondents expressed a preference to keep DC assets in plan post retirement and then conversely, only 6% of them preferred to that these assets actually leave the plan, it's a big difference. It's a major shift in how plan sponsors are looking at the plan sponsor disposition towards this phenomenon. We think it could be driven by plan sponsor interest in trying to be more paternalistic, recognizing that with increased assets in plan, they have increased buying power and can potentially negotiate lower fees.

And they're also continuing to provide fiduciary oversight of the investments as opposed to an individual trying to go out and, on the street, and try to do this on their own with a financial advisor. But I think the most important statistic that stands out on that right hand graph is the swath of plan sponsors in that gray bar, almost 40% who are expressing no clear preference towards keeping assets and plan. And this really could mean one of two things. One, they either haven't made a decision about it, or two, they really have no preference. They don't care whether participants stay or whether they go. Either way, it's a little bit troublesome from our lens because how do we know that they're then thinking strategically about how their plan is designed in the right way if they don't know what their end goal is from a retirement perspective.

And so, thinking about such things as plan design, QDIA assessment, participant communication, and of course retirement income solutions, how do they know they're making the right choices around each of these components? If, again, if they don't know what that end goal is. So much like advisors working with individuals need to understand preferences to help determine appropriate income solutions. What are they trying to achieve in their retirement plans? They should also engage with plan sponsors to understand what their preference is towards keeping assets and plan post retirement versus letting participants go.

And once they've begun to answer that question, basically, as I stated in the beginning, what are you trying to solve for? It really helps plan sponsors to ensure that they're aligned with the journey that they want to create participants. So, for instance, if a plan sponsor wants to keep assets and plan post retirement, are they making sure that their participants have a clear understanding of what those retirement income offerings are and the different ways that they can generate income for them along with the associated trade-offs to their assets. What tools and resources are they helping to make available to them to support that decision making process? All things that are helpful, to help them on that journey, but again, contingent on that initial question. What is your preference around retiree staying in plan?

Joe Martel: Mike raises a really important point that advisors can play a key role in helping plan sponsors determine their goals and really, what the roles they want to play in their investors retirement journey. In terms of assets and plan. We often get the question about participant behavior around retirement. What are participants doing at retirement with their assets on how that should influence the appropriateness of a target date fund or the suitability of your QDIA. The trend that Mike alluded to in terms of seeing more participants, keeping assets in plan, that is definitely a nod towards glide path that are focused more on the entire retirement horizon through glide path. However, there is a big misperception that exists that if you do have a plan where the majority of participants are taking assets out at age 65 that a more conservative or true glide path is the most appropriate solution.

The reality is that would be true if those investors were creating a taxable event. If they were cashing out the assets and spending all of their assets at or around retirement, that would change the economic characteristic of those assets and the time horizon and therefore a different asset allocation would be more appropriate. For example, the college savings plans that we manage are very similar to a target date fund. The target date is age 18. The asset allocation that we employ for our college savings plans when an investor is 18 years old, is a very conservative one. That's because those assets are going to be spent down over a relatively short horizon, four or so years. And given the fact that it has a short horizon, the asset allocation should be more conservative. When we actually take a look at what participants are doing with the money when they're leaving the plan, the data tells a completely different story.

So we've looked at our record keeping data and said, what are the participants actually doing when they take the money? Are they cashing it out? Are they rolling it over to another tax deferred vehicle? The reality is that the vast majority of investors aren't cashing the assets out. They're rolling those assets over into other tax deferred vehicles, which to us indicates that one, they're not changing the economic characteristic of those assets. They're staying tax deferred and therefore they are intended for a long time horizon. They're still intended to help investors support themselves in retirement. So, the fact that investors are utilizing the assets to still support themselves in retirement by keeping them tax deferred, tells us that a more equity oriented glide path could still be appropriate. The better question for advisors to help plan sponsors grapple with, is what's the objective for the assets?

If the objective is still oriented on supporting income or helping investors get the highest balances possible at retirement, a through or more equity oriented glide path is still very appropriate for that type of objective. We've actually done some analysis and we've gone back and we've looked to 1926 and looked at market data to evaluate the impact of taking lump distributions at age 65, so what we do is we compare the amount of assets that investors would have taken out historically at age 65 by using a more growth oriented glide path versus a lower equity, more conservative glide path. And the data overwhelmingly shows that investors using the more growth oriented glide path when they take their assets out at age 65, they're taking more assets out even when you look at periods of poor equity market returns. So, the benefit of accumulating more growth over time has tended to outweigh any negative impact of market declines around retirement.

And that type of trend applies not only just over long periods, like 40, 30 year accumulations. When we look at relatively short periods, like 10 year accumulation periods, the trend still holds that if you have 10 years to accumulate before, so think of age 55 to age 65, historically you will be taking out more money at retirement using a more growth oriented glide path than and had you used a more conservative glide path. And for that reason, we believe that if the objective again is more focused on supporting income in retirement or building higher balances than a more growth oriented glide path is still appropriate. Even if investors are taking all of their money out at age 65, because they're rolling those assets over and they're still indicating that they have a preference to use those assets for perhaps 20, 30 years in retirement.

Chris Augelli: So a lot of really good substance here and truly the opportunity for more detailed conversations between plan sponsors and their participants or between advisors and their individual clients.

And speaking of individual investors, we started our conversation there. Let's bring it back full circle and come back to the investor perspective again. And Joe, sorry to put you back on the spot here again, but let's dig a little bit deeper on some of the points that you just made about differing asset allocations around the point of retirement.

So, as an individual investor, let's assume that I've been doing all of the right diligence, savings behaviors. I've even, Stuart, gone through and I visualized my future retirement self and I've made all of the right calculations about those nonfinancial aspects that we had talked about earlier in our conversation. I'm approaching the point of retirement, but now there's a fair amount of volatility occurring in the marketplace. Joe, how should I be thinking about that? How do I balance out then what you've been telling me about the need for planning for the long term versus that shorter term disruption?

Joe Martel: There's a lot there, Chris, but let's start with draw downs and volatility. We tell our clients that you can evaluate short term volatility or market risk in a vacuum and ignore a discount. What happens prior to a market pullback, looking at simple draw down statistics does not tell the entire story. We tend to use a very simple example to help put in context the impact of market volatility on balances for an investor. So, we use a simple example of saying would you rather lose 10% or 5%?

Chris Augelli: It's up to me, neither.

Joe Martel: Exactly, right. We wish that was all true, but the reality is the asset allocation that loses 10% was a more growth oriented allocation. That's why it lost more than the allocation that lost 5%, that 5% allocation was a less growth oriented asset allocation. But what happens with that more growth oriented asset allocation, because you've experienced more growth during the good markets leading up to a market pull back, you're losing 10% of a larger balance, right?

So, you can't ignore what happens prior to the market pullback. So, if we reframe that question and I ask you, would you rather lose 10% of $100,000 leaving you with $90,000 or would you rather lose 5% of $90,000 leaving you with $85,500. That completely changes the question. You may have a quite a different answer, right? So, the benefit of a more growth oriented allocation and the accumulation that you achieved during the good markets, that neutralizes sequence of return risk and it really can outweigh the risk of a big market pullback. And what we found is that more growth has historically resulted in higher balances at retirement. Even when you factor in periods of poor market returns, lower equity or less growth oriented asset allocations, that can limit the percent that you lose in a bad market, but you're still going to end up with less assets at retirement.

So, more growth oriented asset allocations, you may lose a greater percentage of your balance, but you still have a larger balance. So, what you get from kind of less equity and more conservative asset allocation, it's less variability in your balance, but there's a cost for losing less in a bad market. And that cost is ultimately a lower balance. We can use the financial crisis as a great illustration of this relationship.

And what we do is we compare two hypothetical investors who invest $100,000 in September of 2002 into our, the T. Rowe Price retirement 2010 glide path and then the other investors invest that same $100,000 into the S&P target date, 2010 glide path. A more conservative asset allocation than the T. Rowe Price 2010 glide path. We pick that September of 2002 point because that's when we incepted out our retirement portfolios. <Even During Financial Crisis, Our Approach Led To Better Outcomes slide 12 at 51:23> And on the slide, here you can track the experience of that investor.

Approaching the global financial crisis. The investor in the T. Rowe Price retirement 2010 portfolio has a higher balance leading into the global financial crisis. Both investors experience fairly significant draw downs. Both portfolios experience a meaningful loss. But you can see at the bottom of the market an investor in our retirement, 2010 portfolio still has more money in their account. So while they experienced a larger loss in the financial crisis from a percentage perspective, they were falling from a higher balance and that higher balance provided them a greater cushion to the extent that even at the bottom of the market they had more assets in their account than had they used than more a conservative asset allocation approach. And then as the markets begin to recover, you can see the divergent in the account balance between the two portfolios. And the interesting thing is the accumulation period going up to the financial crisis was relatively short, 2002 to 2008, right?

If you extend the accumulation horizon. So, think about where we are today. We've the recovery from the financial crisis has gone on for multiple years. That difference in balance or that cushion that an investor has built up today, is much more meaningful than they had going into the financial crisis. So, it would take really large market declines to completely wipe away that advantage that someone has accumulated over the subsequent years past the financial crisis. And the other really positive thing about this, is investor behavior supports a more growth oriented asset allocation. Contrary to popular belief investors in defined contribution plans and particularly target date investors don't do the wrong thing. They don't panic at the bottom and sell. They look through the volatility and they stay invested so that they benefit from the rebound. Like we've seen post global financial crisis.

Chris Augelli: And that behavioral observation you just made, that held true even during the great financial crisis in 2008?

Joe Martel: Absolutely. So, during the financial crisis we looked again at what were actual investors doing and to do that, we look at our record keeping platform. As I mentioned before, we have north of a million investors on our record keeping platforms. So, we can actually see what people are doing during these periods of market volatility. And when we look at their activity from July of 2008, through March of 2009 effectively the crux of the global financial crisis, we saw a little less than 3 and a 1/2% percent of all targeted investors on our platform make any change, compared to close to 15% of non-targeted investors. So, they absolutely stayed invested during one of the greatest kind of market pullbacks that this generation has seen. And also, we've seen similar behavior hold after the financial crisis. So, for example, when we look at the US debt downgrade in August of 2011, the market was extremely volatile. Equity sold off pretty meaningfully.

And that was only about two years after the financial crisis. So that was top of mind for investors. Same behavior held; we saw even less investors sell during that period. And it's continued to hold over subsequent periods of market volatility. Most recently in the fourth quarter of 2018 the S&P was down close to 20% from its peak, which is the kind of a technical definition of a bear market. Didn't quite get there, but almost. And only about 1% of all of our targeted investors. And now we have north of a million targeted investors. That's a lot of data points to look at. Only about 1% of them made any trade at all. So, the reality is when we look at how people are behaving, there again looking through that volatility, they're staying invested and they're benefiting from the ultimate recovery that they're going to see as markets always do, rebound from draw downs.

Chris Augelli: That's outstanding perspective Joe, thank you and a great summation to have your thoughts throughout the course of today's conversation. At this point let me pause, Stuart, Michael, any final thoughts from your ends as well?

Stuart Ritter: I would say don't neglect the nonfinancial side. There are a whole bunch of benefits that plan sponsors and advisors get from talking to participants about the nonfinancial side of the transition into retirement. You know that person better, you know their spouse or partner better if there is one, they each know themselves better and all of that allows you to collectively create a better financial solution because you've dealt with the nonfinancial side.

Chris Augelli: Absolutely. Michael?

Michael Oler: I think it's important for all of us to help plan sponsors create the retirement journey that they want to have for their participants. So firstly, starting with creating the right plan design that's going to get participants enrolled in the plan and starting to save for retirement. Secondly, trying to give them the appropriate investment options that will help to grow their accumulated savings over time. That savings is going to be a big source of income for individuals in retirement. And then lastly, a plan to take that accumulated savings and turn that into retirement income.

Chris Augelli: Great. Thank you. Excellent discussion today. I want to thank our panelists, Stuart, Michael, and Joe for their time and insights today. As each of our guests today help to illustrate each retirement savings journey is a deeply personal experience and should be reflective of each individual's unique circumstances, preferences, and goals, but importantly, a personal journey doesn't need to be a road traveled alone.

T. Rowe Price offers guidance along the way in the form of a suite of target date funds featuring glide paths shaped by proprietary T. Rowe Price research, that guides investors through the asset accumulation phase of their retirement savings journey and also continues to work on their behalf through their retirement years.

Our visualized retirement program that guides individuals through a review of the nonfinancial aspects of their retirement aspirations to better inform their retirement savings and spending strategies and actionable investment strategies and insights to deploy within any retirement income model you individually construct for yourself or your clients.

We hope this is just the beginning of the conversation on how we can continue to help prepare you and your clients for the retirement journey ahead. You can learn more about these options by calling us at the numbers listed on your screen or by visiting our website, troweprice.com/intermediaries. Finally, I'd like to thank the Asset TV audience for tuning in. If you know anyone that would like to hear a replay of today's conversation, please have them tune into the T. Rowe Price Asset TV channel @assettv.com to watch the replay of this and other insightful videos.



T. Rowe Price is an asset management firm focused on delivering global investment management excellence and retirement services that investors can rely on—now, and over the long term.

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