The Evolving Retirement Planning Landscape

This analyst blog is part of our coverage of the 2018 Morningstar Investment Conference.

Rising rates, uncertain markets, lengthening life expectancies, and the elimination of pensions are complicating retirement planning for accumulators and decumulators alike.

At the Morningstar Investment Conference in Chicago, Morningstar director of personal finance Christine Benz led a discussion with three Morningstar experts about research and innovations to address those challenges.

Panelists included David Blanchett, head of retirement research for Morningstar Investment Management; Jeff Holt, director of multiasset and alternative strategies; and Aron Szapiro, director of policy research.

Here are a few key takeaways.

Target-Date Funds Are Kicking It Target-date funds are now the default option in many, many retirement plans. And auto-enroll features among plans has only boosted their assets. As a result, target-date funds continue to enjoy significant inflows--to the tune of $70 billion in 2017.

Holt discussed some of the findings of Morningstar's latest target-date landscape report. Among them: investors in target-date funds continue to enjoy strong investor returns relative to other types of funds. Target-date funds investors usually don't check their balances daily, noted Holt.

"These investors tend to stay the course," he said. "Target-date funds do a good job of keeping investors in their seats." And that has allowed target-date fund investors to maximize their returns.

Another of the report's findings: about 95% of the new dollars funneled into target-date funds last year went to series that invest largely in passive strategies.

"Market share between active and passive target-date funds is starting to converge," said Holt.

And costs are on the decline.

"Target-date fund expenses are going down year after year," said Holt. "You have to be low cost to compete. We're seeing historically active managers looking to find ways to lower costs on their target-date funds."

Small Retirement Plans Are Still Lacking "We need to do more work on the small-plan space," noted Szapiro.

A lot of small employers are focused on keeping the lights on, and if the employer does offer benefits, it's usually health insurance, he said. For many small companies, offering a solid retirement-plan option to employees will require thinking outside of the box--and perhaps multiple-employer plans can provide a solution.

"Small employers would band together, and use greater leverage to offer better plans to their employees," explained Szapiro. Legislation regarding such plans has lots of bipartisan support, he noted, but the topic isn't high on the priority list.

Will we ever see 401(k)s for the masses? Something like the Thrift Savings Plan available to government workers?

"I think it's pretty unlikely," said Szapiro. "There'd be a lot of industry opposition to that." He called state IRAs "like a mini TSP for the masses. But they're costly now."

The Cost of Retirement and 'Safe' Withdrawal Rates "There are lots of uncertainties when figuring out what retirement is going to cost," noted Blanchett. "The vast majority of people retire earlier than they'd think, and that has huge implications on the cost of retirement."

Misinformation about Social Security benefits only complicates matters, added Szapiro.

"If someone goes into a local Social Security office, they'll likely get the wrong advice," he said.

Of course, delaying retirement is the best thing you can do to help stretch your retirement kitty. But what if you can't?

"All you can do is learn to live on less and adjust expectations," said Blanchett.

Blanchett also explained that his team--and many others--expect lower returns over the next decade. And that means adjusting models for "safe" withdrawal rates in retirement.

"If you thought 4% was the safe amount historically, it's 3% today," he said. "It has an implication for folks retiring now."

Products for Guaranteed Income in Retirement The current system for generating income in retirement isn't ideal: Accumulators find themselves with a (hopefully) large chunk of money at retirement but are at a loss about how to tap into that for regular income.

"People need guaranteed income," noted Blanchett. "Unfortunately, annuities are still sold not bought. It's a messy environment with a lot of complexity. We need to help individuals figure out which products they are best suited for. Do you want immediate income or delayed, how much income do you need?"

Szapiro noted that there is some interest in making it easier for employers to offer some type of annuity to their employees, but employers don't want to be in the position of selecting and monitoring insurers.