We’re surprised Anne Lester isn’t more surprised by the passage of the SECURE Act.
“Our colleagues in Washington had been giving this better than 50-50 that it would,” Lester, portfolio manager and Head of Retirement Solutions with J.P. Morgan Asset Management, said in response to the bombshell Beltway news. “I think we were hopeful, but not confident, and we are glad to see our hope born out.”
At a high level, “getting the act done” underscores the importance people place on retirement saving and security, she noted.
“Whether it’s multiple employer plans, the tax credit or in some ways the inclusion of lifetime income, they are really aligning with outcomes, which we know are important,” Lester explained. “In the case of MEPs, it’s figuring out a way for people who offer them to drive scale, drive down costs and increase access. That’s super-important.”
The same for the small business tax credits, “Let’s make it easier for small plans. And last but not least, I might quibble with provisions in the lifetime income calculations—and we need to be mindful of behavioral disincentives—but just recognizing that it’s important to think about these balances not as having hit the jackpot, but rather as an income stream, is a really important shift in messaging.”
The open MEP concept is something J.P. Morgan believes will lead to industry innovation, “because, in essence, what Congress is doing is creating a new way to offer retirement products out to businesses, and we think this would be very attractive to small employers,” Dan Notto, an ERISA strategist with Retirement Solutions at J.P. Morgan Asset Management, added. “We think this will lead to interesting product designs.”
Combine that with the significant increase in the startup credit available to small employers (those with 100 or fewer employees), and it will prompt new plan formation.
Moreover, employers with a standalone 401k plan will likely see MEPs as more efficient, less expensive and perhaps more fiduciary compliant, and will, therefore, consider joining one as the structure develops, Notto said.
Lester pointed to Australia and the U.K., with their super funds and master trusts, which she described as analogous in some ways to the MEP idea—professional companies and oversight and a strong fiduciary structure driving tangible benefits to employers and employees.
“So, I think there are some really interesting lessons that we can learn from overseas that may give us a hint into how powerful this could be.”
Deeper income dive
Going deeper into the lifetime income issue, Lester claimed the ability “to help an individual understand how their portfolio balance will translate into income is critical. The more we can help people frame it that way the more successful people will be in retirement.”
That said, she warned of the potential to create perverse outcomes based on the way the retirement income calculation was designed.
“By that, I mean taking somebody’s current balance and immediately translating that into income. For somebody in their 50s or 60s, that’s going to be extraordinarily helpful in understanding how much it could generate, but that amount is likely to be much lower even for someone 50-years-old with another 15 years of compound returns and contributions. So, in a weird way, it may give people a false understanding of what it will turn into in the future.”
She referred to her son now in his first job, who would get a statement that reflects $0.12 a month in lifetime income based on his current account balance.
“He’s going to say, ‘That stinks, let me go do something else with my contribution because I don’t see the point.’ It’s true that it’s always possible to add more disclosure, but as we saw with the Pension Protection Act and the 3% starting contribution rate and stopping auto-escalation at 6%, people anchor onto what’s written into the in the law because there’s a perception that doing anything different increases fiduciary risk, so they think they’re doing the ‘right thing’ when really it’s something perverse.”
However, she was quick to emphasize that the concept of having one, clearly articulated rule or measuring stick to convert balances to income (that’s easily understood) is incredibly powerful. Yet if it’s the only thing, it will lead to “odd” outcomes.
Beware of behavioral anchoring
Part of the issue is, of course, unintended consequences, and specifically the behavioral anchoring seen from sponsors and participants who adhere to regulatory guidelines that are meant as examples and bare minimums. Lester said J.P. Morgan would take an active role in educating lawmakers on the dangers it presents to positive outcomes.
“These are big shoes that plan sponsors are walking in when they make this very complex set of decisions about a whole host of very nuanced things,” she concluded. “They’ve got a nanosecond to spend on education. There’s an assumption that some of these nuances will be navigated with more time and attention, but just because of the level of detail that many plan sponsors struggle with, the easiest thing to do is to use the [regulatory] example and not take it any further. So that regulatory dialogue is going to be very important for us and many of our peers in the industry.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
