Our guest on the podcast today is Mike Moran, managing director and pension strategist for Goldman Sachs. Mike focuses on areas such as plan-funded status, contribution activity, and asset allocation for both defined-benefit and defined-contribution plans. He also works directly with plan sponsors on issues specific to their retirement plans. Mike has worked at Goldman Sachs for more than 24 years in a variety of roles focusing on capital markets, asset allocation, and investment strategy. He is a CFA charterholder and has an MBA in finance from New York University’s Stern School of Business, as well as a B.S. in accounting from Villanova University. Mike can speak to a wide range of retirement-related issues, but he is here today to discuss Goldman’s most recent retirement survey and insights report, titled “Diving Deeper Into the Financial Vortex: A Way Forward.”
Retirement Survey and Insights Reports 2023: “Diving Deeper Into the Financial Vortex: A Way Forward,” Goldman Sachs Asset Management, gsam.com, 2023.
Retirement Survey and Insights Report 2022: “Navigating the Financial Vortex: Women & Retirement Security,” Goldman Sachs Asset Management, gsam.com, 2022.
“Retirement Survey and Insights Report 2021,” Goldman Sachs Asset Management, gsam.com, 2021.
“Despite Low Financial Literacy, Many Americans Manage Their Own Retirement,” Goldman Sachs, goldmansachs.com, Oct. 18, 2023.
“Financial Vortex Contributes to Looming U.S. Retirement Shortfalls,” by Michael Moran, fa-mag.com, Nov. 11, 2022.
“How to Avoid a ‘Financial Vortex’ in Retirement, According to Goldman Sachs,” by Alyssa Place, benefitnews.com, Sept. 19, 2023.
“No Time for Corporate Pension Complacency: An Interview With Michael Moran,” by Michael Moran, gsam.com, April 20, 2023.
“Why Most Americans Aren’t Saving Enough for Retirement,” Goldman Sachs Exchanges podcast with Mike Moran, goldmansachs.com, Oct. 3, 2023.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar Research Services.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Arnott: Our guest on the podcast today is Mike Moran, managing director and pension strategist for Goldman Sachs. Mike focuses on areas such as plan-funded status, contribution activity, and asset allocation for both defined-benefit and defined-contribution plans. He also works directly with plan sponsors on issues specific to their retirement plans. Mike has worked at Goldman Sachs for more than 24 years in a variety of roles focusing on capital markets, asset allocation, and investment strategy. He is a CFA charterholder and has an MBA in finance from New York University’s Stern School of Business, as well as a BS in accounting from Villanova University. Mike can speak to a wide range of retirement-related issues, but he is here today to discuss Goldman’s most recent retirement survey and insights report, titled, “Diving Deeper into the Financial Vortex: A Way Forward.”
Mike, welcome to The Long View.
Michael Moran: Thanks for having me here today.
Arnott: It’s great to have you. For starters, can you describe the report at a high level—who did you write it for and what do you hope readers will take away from it?
Moran: In our report, we surveyed over 5,000 working and retired individuals really to try to understand the realities of preparing for and living in retirement. And as part of our process, we try to include a good cross-section of age groups so that we could really drill down and understand how different generations are thinking about retirement. And our goal was to understand the obstacles that need to be overcome and the lessons that can be learned from those that are already in retirement. So, who we wrote it for was really everybody. We want individuals to better understand the challenges they need to take into account when preparing for retirement. And we hope planned sponsors and financial advisors are better equipped to provide the tools and services to help employees reach their financial goals.
Benz: In the report you discuss this term you call the “financial vortex.” Can you give us a quick summary of what you mean by financial vortex and how did you come up with the idea of vortex as a metaphor?
Moran: The vortex really refers to the competing financial priorities that can crowd out saving for retirement. So, that could be paying down credit card debt. It could be student loan repayments. It could be saving for a child’s college education or dealing with a financial emergency. Your car breaks down, your refrigerator breaks, and you have an outflow that is needed to take care of something right then and there. Those are all part of the vortex. The other part of the vortex is really acknowledging that there are times when individuals may be out of the workforce, which causes them to stop saving for retirement. Maybe they have to leave the workforce to care for an older family member. So, not only are they not working, they’re not earning money, they’re not saving for retirement.
It’s not that people don’t want to save for retirement. It’s just that there are these other financial obligations that throw them off track and cause them to push off saving for retirement. So, we came up with this idea of the metaphor of a vortex because it just seemed to hit the mark when you think of all these financial obligations swirling around and sucking up cash. It is pretty stark and alarming, but I think our survey results both this year and in prior years would validate that these are real factors that influence retirement savings. In the current survey this year, we did some modeling where we came up with a hypothetical worker and assumed that that worker was impacted by several financial vortex factors over the course of their career. They started saving for retirement later because they had to pay off their student debt first. They had to take time out of the workforce to care for a family member. A number of different factors we played into the modeling and in total, all of those factors collectively reduced retirement savings for that individual by almost 40%. So, that really highlights how impactful these factors can be. And the reality is most people are going to be influenced by more than one factor over the course of a 40-year working career. They’re going to be impacted by multiple financial vortex factors and that’s really going to have an impact on their retirement savings.
Arnott: So, as you said, it’s not the impact of one thing necessarily but really the cumulative effect of these things happening at the same time or to the same person.
Moran: Exactly. And you think about over 40 years, you’re going to have different things going on in your life. Life happens. You come out of college. You’ve got student loan repayments. Then you get done with that. But now you’ve got a mortgage and then you have kids. So, you’re saving for their college education. Things just constantly change and evolve. And those all are things that a lot of individuals have to prioritize over retirement savings, and it causes them to push off retirement savings to later in their career.
Arnott: This report is different from some other retirement surveys in that it focuses specifically on how people feel about their retirement savings as opposed to hard statistics on contribution rates, account balances, asset allocation, and so on. Why did you decide to take this approach?
Moran: We really like to lean into the concept of lessons learned. When we look at retirees, we want to look at what were their expectations when they were working about factors such as how much income they thought they would need in retirement, when they thought they would actually retire. Look at what was going through their minds when they were working. What were their expectations of retirement? But now they’re in retirement. So, let’s then compare that to what actually happened. What did they actually experience?
So, it’s taking those lessons learned from retirees who have gone through the process already of retiring and then taking that to current workers and looking at their own expectations and seeing how those may need to be adjusted based on the experiences from those who have already transitioned to retirement. So, we like that concept of looking at what have people actually thought about as they prepared for retirement, but then what actually happened and how can those lessons be transferred to those who are still working today. It also, I think, then highlights for plan sponsors and financial advisors what are some of the challenges that working individuals and retirees face so that they can better help those groups prepare for and live in retirement.
Benz: This is the third edition of the report, which first came out in 2021. What were some of the key takeaways from this year’s survey and how have they changed from previous years?
Moran: I would highlight four key takeaways and the first would be that our survey did show that there was an improvement in retirement sentiment in 2023. However, many individuals still struggle with impacts from that financial vortex, those other competing financial priorities that crowd out saving for retirement. The financial vortex in many ways is immune to improvements in the economy and the financial markets.
The second key takeaway would be that financial literacy in this country is low, which is probably not too surprising. But what’s interesting in our survey was that despite a lack of financial skills, almost half of all working respondents manage their own retirement savings. So, that feels like that is something that probably has to change.
The third key takeaway was that there are clear and tangible benefits to having a plan for retirement savings. It’s the old saying, failing to plan is planning to fail. Those who have a plan feel better about their retirement prospects, they feel more secure, they feel less stress. But even those with a plan are still impacted by the financial vortex. So, having a plan is helpful, but it doesn’t solve for everything.
And the fourth and final takeaway that I would highlight is that employees look to their employer-sponsored retirement plans for helping dealing with other financial challenges. 401(k) plans are evolving where it’s not just about saving for retirement. It’s about how else can that help an employee with other financial challenges. When we look at what was a plan design enhancement that working respondents wanted to see in their retirement plan, the number one answer was an emergency savings vehicle. So, you’re seeing employees really look to their employers, and in particular the employer-sponsored retirement plan, as a way to help them with all of their financial challenges.
Arnott: You mentioned improved sentiment and people feeling better about their retirement savings. When you look at the macro environment, it seems like there’s a good news, bad news story going on right now. On the one hand, we’ve seen a partial recovery in the equity market, inflation seems to be moderating and there are more generous yields on cash and bonds. But on the other hand, are there still lingering effects from the bear market in 2022 that are still impacting people who are saving for retirement or already in retirement?
Moran: Absolutely. When we think about the macro environment today, it’s definitely a mix of positive and negative factors. On the positive side, when you think about when our survey was conducted over the summer, at that time, many retirees and savers were looking at their 401(k) and IRA balances and, given the rebound in equities we had seen over the past 12 months leading up to that survey time, many were seeing that their balances were higher than at the same time last year. So, they felt better about themselves. They felt better about their retirement prospects.
In addition, higher interest rates mean savers for the first time in a long time are getting a solid return again. Money market funds, stable-value funds, bank CDs—they’ve all seen a notable rise in yields over the past year or two. And as a result, individuals feel better about that when they’re saving money, they’re seeing their stable-value balance grow, their money market balance grow. So, that’s all the positive side.
But there are negatives as well. And the bad news is higher interest rates also mean that the cost of borrowing has gone higher. So, for those that are still saving for retirement, those in the workforce today, higher rates for mortgages and auto loans can divert money away from saving for retirement. So, that’s certainly having potentially an impact on how much individuals are able to currently save today.
And when we think about the inflationary environment, it has certainly moderated in 2023, but it is still above historical level. So, when you think again about that current worker that’s trying to save for retirement, they’re still dealing with elevated prices for things like gasoline and food and other items. And that just crimps their budget. There’s less money left over to save for retirement. And obviously, for those in retirement, inflation is one of the biggest risks they face in terms of reducing their purchasing power. So, inflation coming down has been positive, but it is still above historical levels and still something that’s of acute concern for many retirees and current workers.
Benz: We wanted to delve into the population that you surveyed. It was 5,300 people from this past summer covering a variety of age groups, including people who are currently working and people in retirement. How did you find these folks? Are they people who have plans with Ascensus, which is a recordkeeper that Goldman Sachs works with?
Moran: We worked with an outside survey firm to populate our survey. They were not sourced from Goldman Sachs clients, nor were they sourced specifically from defined-contribution plans. What we really wanted was a true cross-section of American workers and retirees. So, when we think about some of the individuals who participated in the survey, some of them certainly have a defined-contribution plan. Some of them may have, in addition to that, a defined-benefit plan, a DB plan. Some may not have either. Some may work for a small employer where there is no employer-sponsored retirement program. And so, what we were really trying to do was get a good cross-section of the American worker and retiree. Everyone’s in a different situation. Some are participating in a DC plan. Some may still have some sort of DB obligation. Some may not have any employer-sponsored retirement plan at all. So, it was really trying to find that cross-section of the American worker and the American retiree.
Arnott: You also have your own perspective on the retirement industry, given that Goldman Sachs offers a variety of retirement-related services, including managed accounts and other investment management services. Can you give us a quick overview of how Goldman Sachs works with retirement plans and what kind of insights you’ve gotten from this work?
Moran: We work with plan sponsors across both defined-benefit and defined-contribution plans. And across both of those types of systems, our role may be to manage part of a single asset class for a plan, such as part of their fixed-income portfolio or their equity portfolio, again, either DB or DC. Or at times, in both of those cases, we may operate as an outsourced chief investment officer, an OCIO provider. We may operate in that capacity for the plan sponsor on both the DB and the DC. And I would say, working across all of a sponsor’s retirement plans really gives us insight into how they are thinking about that part of their benefit offering.
So, for example, many companies over the past 10, 20, 30 years have either closed their defined-benefit plan to new employees or completely frozen new benefit accruals. And in that case, the focus for them becomes on reducing the volatility of the plan on the sponsor’s financial results. And we can certainly work with them through asset-allocation shifts and potentially some pensioners transfer to help them achieve that goal. But then, since their employees may no longer be covered by the DB plan, they’re focused on, well, how do we enhance the DC plan? How do we think about retirement income? How do we think about maybe providing better alternatives in the DC plan? How do we think about a more personalized experience like through a managed account? So, I think the way we work with organizations is really holistically across both their DB and DC plans. The goals and objectives may be different for both but trying to understand what’s going to be the best answer for that plan sponsor.
Benz: Going back to the survey, there were some positive findings. You found that people feel less stressed about their retirements and many of them have been able to save more for retirement. Can you expand on what you found there?
Moran: So, retirement sentiment definitely improved in our 2023 survey versus what we saw in 2022. It goes back to equities were up at that point over the last 12 months. People were looking at their 401(k) balances and their IRA balances. They saw them higher. They felt better about that. Interest rates are higher. So, they felt they were getting a return. They felt better about their prospects. Their stress levels were lower. It all felt really good. In addition, we think about the economy, it looks like that we may avoid recession. Certainly, our house view here at Goldman Sachs is that we’re going to avoid recession. Inflation is still high but moderating. It’s coming down. And employment has remained strong. So, individuals feel better about their balances in their accounts. They feel better at their ability to potentially we’re going to avoid recession and that their employment prospects look good, so they will be able to save for retirement.
Arnott: You touched on this earlier—but on the negative side, the competing priorities that make up this financial vortex are still a major issue. So, can you expand on some of the key issues that are a barrier to retirement savings and which age groups are being affected the most by each of those issues?
Moran: Those other financial priorities include things like paying down debt—student loan debt, credit card debt, mortgages. It’s saving for a child’s college education and dealing with unexpected expenses and also time out of the workforce to care for children or for older family members can really take away from retirement saving. We talked about how, when we did our survey, we really wanted to get a cross section of age groups to really see how different generations are thinking about retirement, preparing for retirement, and how they’re impacted by these financial vortex factors. And what we found is basically every generation is impacted. But I would say in particular the results showed that Gen Z and millennials, the younger generations, were more impacted. And some of that can be attributed to many of them are not going to have the benefit of having a defined-benefit pension plan anymore as some older generations had, as many boomers had. So, now the onus on saving for retirement and investing for retirement is really on that individual. In addition, many of them are dealing with student loans and having to pay that back in addition to all those other factors that impact everyone, no matter what your generation—credit card debt and so forth, unexpected expenses. So, I think when we think about the financial vortex, it definitely impacts every generation, but we’ve seen the younger generations be impacted a little bit more and some of that may do to the evolution of the retirement system in this country moving to more of a DC system as opposed to a DB system.
Arnott: One of the other findings you saw is that many individuals end up retiring earlier than expected. Why is this and what can investors be doing to plan for this possibility?
Moran: It’s interesting because in all three years we’ve been doing the survey about half of all retirees have indicated that they retired earlier than anticipated. Now that sounds like a good thing, but it actually isn’t because oftentimes they retired for a reason outside of their control. And those reasons can include things like needing to retire due to a health issue. They were just no longer able to physically work. They may need to retire early to care for a family member or perhaps the individual’s job is just no longer available. And this is a key aspect of the vortex. People run out of time to save. And in particular, they may run out of time a lot earlier than they anticipated.
So, again, coming back to our survey results, of those that retired earlier than expected, almost 25%, a quarter of them, retired more than five years earlier than expected. So, coming back to as you’re going through your life, as you’re going through your working career, you have these other financial obligations. I need to pay off student loans. I need to pay off my mortgage. I’ve got these emergency expenses. I’ve got to save for my child’s college education. I’ll get to retirement savings later in my career. Well, oftentimes later comes sooner than they anticipated, and their career ends earlier than they anticipated. They never have time to catch up. So, I’d say from a retirement savings perspective that really highlights the importance of saving consistently over the course of your career and making sure you are taking advantage of any employer match. You’re leaving money on the table and you’re leaving retirement savings on the table if you’re not completely maxing out your contribution to take advantage of any match that your employer may provide.
Benz: You also found that older investors, specifically people in the boomer generation are less impacted by competing financial priorities. Is that partly because many of them may still have pensions or are there other contributing factors?
Moran: That’s definitely a key factor. If you think about the history of retirement in this country, many older generations had the benefit of having or coverage through a defined-benefit pension plan. They were covered by Social Security and then they had private savings. And now as a country, we’ve evolved on the private employer side where for many private employers and therefore many younger generations it’s now just DC, defined contribution. They still have Social Security. Although Social Security system has its own challenges and there’s questions as to whether younger generations are going to see 100% of the benefits that they were intended to get under Social Security. And then they also have private savings. So, the onus for younger generations is on the individual to save for retirement, invest for retirement, and then figure out how not to outlive the assets. So, for those older generations having the benefit of a defined-benefit pension, which provides a number of benefits including longevity insurance, making sure that that individual doesn’t outlive the retirement assets. That is certainly something that has made them less impacted by these other competing financial priorities because it’s one less thing they necessarily have to plan for.
Arnott: When it comes to managing all of these competing priorities, you found that financial literacy is a critical factor. But it seems like literacy levels are still surprisingly low. Is there something that employers can be doing to improve this situation? Or is it just not realistic to expect employees to learn about the basics of finance if they already have a lot of demands on their time with working and raising a family, commuting, and so on?
Moran: I think this is one of the reasons why you’re seeing a number of employers leaning to providing more financial wellness programs for their employees. One of the things that a number of surveys would show is that employees are stressed about financials. They’re stressed about their savings for retirement. They’re stressed about healthcare costs. They’re stressed about saving for their child’s college education. They’re stressed about how to deal with financial emergencies. Stressed employees are not productive employees. They tend to have higher absenteeism. So, from an employer perspective, there’s a real financial cost when employees feel stressed due to financial issues.
So, you are seeing more employers recognize the benefits of providing some sort of financial wellness coaching and benefits to their employees to help their employees deal with some of these other financial obligations to make them less stressed. It’s also why you’re seeing a number of employers on the heels of Secure Act 2.0, which has allowed us now to embed an emergency savings program in a 401(k). It’s allowed us to provide a matching contribution to a 401(k) when an employee makes a student loan payment. These are the types of things that from a regulatory perspective, we’re now seeing that pass and we’re seeing companies look to incorporate them within their programs, all with the benefit of potentially helping employees reduce their stress levels related to financial obligations.
Benz: Some high schools and colleges have introduced financial literacy programs, but it seems like the results of those programs have been somewhat mixed. What do you think could make them more effective than they have been to date?
Moran: I think there’s two things, well, there’s more than two things, but the two that I would highlight is: number one, start them earlier and number two, make them mandatory. Some schools have started to offer financial literacy programs, financial planning programs, but oftentimes it may be an elective course as opposed to a mandatory course. So, I think starting them earlier and making them mandatory at the high school and university level would be a good recommendation.
The other thing I would say is to take a hard look at the curriculum. When a finance class does a stock-picking game, and students pick different stocks and see who outperforms over the course of the semester, there’s benefits to doing that in terms of helping students understand how the stock market works and so forth. But that’s not really financial literacy. You need to have specific content related to topics like credit cards and insurance and taxes and saving and investing for retirement over a long time period. Some of those topics aren’t sexy, but when students realize how much it can really cost them by making bad decisions on things like credit cards and taxes and insurance, you really start to see them get excited and realize, hey, this is real life stuff, and these are things where the smarter I can be about this, the more financially literate I can be, it’s actually very beneficial to my bottom line.
Arnott: And is part of the issue that maybe there’s a timing mismatch in that if you’re trying to teach high schoolers about mortgages and credit card debt, they may not have to be dealing with those situations for many years to come. So, is there a way to get people matched up with financial literacy at the point in time when they need it?
Moran: I think that’s 100% correct. It’s thinking about what’s the appropriate curriculum for that age group. So, to your point, trying to help someone understand when they’re in high school, what their Social Security-claiming strategy should be is probably not going to resonate that much. But if you think about, well, what is a high schooler maybe dealing with, maybe they are getting a credit card for the first time, or maybe they are thinking about saving for retirement because they have a summer job, and they’re maybe eligible for a Roth IRA. Thinking about that, then as you get to college, and you start thinking about things like maybe the buy versus rent decision in terms of homeownership or apartment ownership. So, I think you’re right. It’s staging that curriculum at different age levels to find what’s going to resonate most with that age demographic.
Arnott: You also teach personal financial planning class at Fordham. How did you get interested in teaching and what has that experience taught you?
Moran: I think there are actually parallels to my day job here at Goldman Sachs. So, in the group that I work in, we often advise clients on different topics and trends. And so, part of our job is to take a complex topic like potentially a regulatory change or market volatility and break it down to make it understandable for clients and importantly, help them understand what it means for them. So, take something, a lot of information, synthesize it, explain it to that group, and then make it actionable for them. And there’s a lot of parallels to that with teaching in terms of breaking down things and making it understandable for a group.
In the past, I guest-lectured at different universities. I’ve enjoyed it and said maybe that’s something that down the line I could see myself getting more involved in. But I also understood and appreciated there’s a big difference between parachuting in to do a guest lecture versus building out a whole syllabus with assignments and tests over the course of an entire semester. I do have a day job here at Goldman Sachs. I have a family. I wasn’t really in a position to commit to teaching a semesterlong class at night. But then one day a former colleague of mine who had transitioned into full-time teaching at Fordham rang me up and said that Fordham was looking to introduce a new class on personal financial planning. It’s only a one-credit class, it’d meet seven times a semester, would I be interested in teaching it with him? And that just seemed like a perfect situation and a way for me to get my feet wet with actually teaching a class that goes on for more than one class.
It’s been a great experience developing that really from scratch because it was a new course that the university was offering. I think the feedback from students has been very interesting. One part of feedback, which is a little scary to me, is that students said this shouldn’t be a one-credit class. It should be a three-credit class because there’s so much to cover across all these different topics. It’s scary to me, because again, I’m not ready to teach the three-credit class. But at least for now, you see that demand from students saying, “Wow, some of these topics we could have gone a lot deeper on if we actually had more time.”
The other thing that I thought was interesting from students, and it comes back to the point of when you introduced this content, the class was really geared toward juniors and seniors and a number of students have said to us, “Boy, I wish I had this class as a freshman,” because to understand some of these concepts—coming back to Roth IRA—many of them, you see the light bulb go off in their head: “Wow, I’ve been working summer jobs and part-time jobs ever since I was a freshman. I missed out on an opportunity to fund a Roth IRA and start saving for retirement in a very tax-efficient manner.” So, I think it comes back to a lot of the students are excited about this. They understand that they’re not really learning this elsewhere and they also understand that there’s real financial benefits to being more financially literate.
Benz: You’ve identified an interesting phenomenon called the planning paradox. Can you explain what that is and how you think the industry can address it?
Moran: We asked working respondents whether they have a personalized financial plan for retirement. And our definition of plan was very simple. Have you calculated how much retirement savings you need and how to save and invest to achieve that goal? So, nothing too complicated. And I’d say, the good news is 60% of respondents said they do actually have a plan and those with the plan felt they were more ahead of schedule. They were more confident that they would be able to meet their retirement goals than those without a plan. The paradox part of that though was those with a plan were more likely than those without a plan to feel the impact of the financial vortex.
They were more likely to say they are impacted by such things like credit card debt and paying down student loans and dealing with financial emergencies. And I think that was a little bit of, we call it a paradox because it’s like, wait a minute, these people have a plan, but yet they’re saying they’re more impacted by that. And I think really the answer is, having a plan makes savers more aware of the financial vortex. Those that don’t have a plan may not recognize or appreciate the impact of those other competing financial priorities. They may not appreciate that when they have to pay down a credit card credit card debt that that’s preventing them from saving for retirement. So, having a plan doesn’t solve all the problems, but I think raising awareness and being aware of the financial vortex is likely better than being uneducated on some of these forces and how it impacts retirement savings.
Arnott: We’d like to switch gears a little bit and talk about another section of the report, which is called “Rethinking the Role of the 401(k) Plan.” So, if you think about the 401(k) plans, defined-contribution plans have been around for about 45 years now. You now have about $10.2 trillion in defined-contribution plans versus $3.1 trillion in private pension plans. How do you see this mix evolving over time? Will we continue to see assets shift toward the defined-contribution side at the same rate as in the past?
Moran: I think that’s very likely, at least for corporate employers. For a number of corporate employers, they have stopped offering a DB benefit for new and existing employees. So, the growth of DB has slowed down. You’ve also seen a number of them taking actions to move some of these obligations off their books to an insurer as part of a pension-risk-transfer activity. So, DB, not growing as much as it had in the past, and you’re seeing companies take proactive steps to actually move some of these liabilities off rather than holding on to the obligation themselves. DC has now become the primary retirement program for many employers. And when we think about recent legislation, it’s only made it more important—again, Secure Act 2.0 providing ways for employers to embed an emergency savings program within a 401(k) plan. That’s going to make DC even more important.
The other thing I would say is that other legislation—going back to Secure Act 1.0—created pooled employer plans or PEPs. And one of the biggest retirement challenges we have in this country is that a number of individuals are not covered by an employer-sponsored retirement program. If you work for a large employer, it is very, very likely that you have some type of retirement plan coverage, whether that be a defined-benefit plan, a defined-contribution plan, or both. But for a lot of smaller employers, they weren’t offering any retirement program to their employees. A lot of that ties into just the cost and the administrative efforts of setting up a defined-contribution program. Well, pooled employer plans are a way for unrelated employers to pool together in one plan and provide that coverage to their individuals. So, when we think about, again, the trajectory of the DC market, one of the things that should increase the growth of assets in DC is that vehicles like pooled employer plans will hopefully provide more coverage for employers, employees, get more people into the DC market, and that should provide more growth for the market.
Benz: What are some of the things that 401(k) plans are doing well, as well as some things that they’re not doing so well?
Moran: I think what 401(k) plans have done very well in the past is be an accumulation vehicle, a way to provide employees a way to save for retirement. You join the plan and you set up how much deferral you want, and it just happens. It’s the power of inertia. Every pay period, 10% or whatever percentage you select, is taken out of your paycheck and put into your 401(k) plan. It really helps to accumulate assets. Where we need to do a better job going forward as an industry is on the decumulation side. Right now, as more and more individuals are retiring that are not covered by a defined-benefit pension plan, it’s trying to figure out how to turn that pool of assets into a lifetime stream of income.
And then, the other thing what I think we need to do a better job at is personalization. So, we think about one of the great changes that we saw in the retirement plan industry in the DC industry over the last several decades is introducing target-date funds as a QDIA. And that was a great way to get individuals defaulted into a multi-asset class vehicle that would be rebalanced professionally where the asset allocation would change as someone got closer to the retirement age.
And that was an improvement over previous QDIAs. But it really only is based on one factor and that factor being when that individual felt they were going to retire. Well, most of us have a very complicated life. We may have a spouse, that spouse may or may not work. We may have assets outside of our 401(k) plan. How do we take all of that into account to develop what is a personalized asset allocation for you, the individual? And how should that change over time? So, I think the next phase of retirement planning is how do we bring a more personalized experience to the participant, make something more customized to them, especially as more individuals are going to be seeing their DC plan as being their primary retirement vehicle.
Arnott: You mentioned some of the positive developments from Secure 2.0, including new plan features like provisions for emergency savings, employer matching for student loan repayments. Are there any other regulatory changes that you would think would benefit retirement savers?
Moran: We’ve gone through two really significant pieces of retirement legislation here with Secure Act 1.0 and Secure Act 2.0. And I think from a Washington perspective, a lot of the focus now is going to be the implementation of these. So, I don’t necessarily expect to see a lot of significant regulatory change coming up in the future just because we have to digest and implement a lot of the changes from Secure 1.0 and Secure 2.0. I would go back though to, again, Secure 1.0 and talk about PEPs and pooled employer plans. I think that’s going to be a very critical way to get more employees, more individuals, into a retirement program that may not be in one today. And again, coming back to many smaller employers do not provide a retirement plan for their employees, this is a way to provide more coverage. And I think that’s going to be one of the ways to benefit retirement savers is just to give employees more access to an employer-sponsored retirement plan.
Benz: You mentioned decumulation as an area where there’s still work to be done. One aspect of, I believe it was Secure 1.0, was the Safe Harbor for 401(k) plans to offer their participants in-plan annuities. Do you think more plans should be offering those annuities for people embarking on retirement, for employees embarking on retirement? And what do you think are some of the obstacles to annuity adoption for DC plans? Because as far as I know, we haven’t seen a lot of adoption there.
Moran: One thing our survey showed was there is definitely appetite for guaranteed income by participants. So, participants saying, as they think about where they’re drawing their retirement income from, having some of that be from a guaranteed option is definitely something that’s attractive to them. But to your point, we haven’t seen a lot of adoption yet of annuities within DC plan. I think some of that comes back to many participants are just still unsure of annuities. They’re complex, they’re costly, I don’t know how this works. And so, I think over time, we’re going to see how does that fit into the retirement income stream.
But retirement income in general will be a big topic for the next several years. We say it’s been a topic as an industry for the past 20 years. But the risk of saying it’s different this time, I do think it’s different this time. And that’s primarily for two reasons. Number one, to your point, the Safe Harbor, that Secure Act 1.0 provided for having annuities in a DC plan, regulatory change is often a big driver of change in the DC market. So, when we look at that, we see that as a critical potential change that could change behavior over the next decade.
But the other factor is just natural demographics. And it comes back to as every year goes by, somehow, we all get a year older. And as we all get a year older, everyone becomes closer to retirement. And we’re seeing more and more people get closer to retirement who are not covered by that DB plan. And so, as opposed to the DC plan just being a supplemental savings vehicle, now it becomes the primary retirement savings vehicle and retirement income vehicle, how do we actually generate retirement income for participants is going to be something that over the next several years is going to receive increased focus from plan sponsors, financial advisors, and obviously individual plan participants.
Arnott: We’d also like to talk a bit about the broader market environment and how that impacts investment options for retirement savers. If we look at the equity market, it still hasn’t fully recovered from the drawdown in 2022. And so, that raises the question about whether recent retirees should be concerned about sequence of returns risk, the risk that if you have a large market correction at the beginning of retirement, that can have a very negative impact on sustainable withdrawal rates or how many years you’ll be able to draw down the portfolio. So, is there anything that retirees can be doing to mitigate that risk?
Moran: I think near retirees or recent retirees should always be concerned about sequence of return risk. When you think about that soon-to-be-retiree or just-retired person, oftentimes their balance in their retirement account is the largest it will ever be. So, you have, from that perspective, the most risk you’re ever going to have. So, sequence of return risk is something that should always be on their radar screen.
I think when it comes back to what they should be doing to mitigate that risk, I’m going to come back to the benefit of having personalized professional advice, like through a managed account, working with a financial advisor, someone who could really look at your portfolio, but then also take into account other factors, like other assets you may have, other obligations you may have, and can come up with what’s the right sort of mix of risk and return that’s going to be appropriate for you. Obviously, target-date funds will start to reduce equities and go more to fixed income as someone gets closer to that retirement age. But again, that’s only based on that one factor when you think you’re going to retire. We think there’s a lot of benefit to having something more personalized to that individual specific situation, and that can help them mitigate any sort of sequence of return risk that you’ll see right around retirement.
Benz: We’ve also seen more moderate inflation rates recently. Do you expect that trend to continue?
Moran: We expect inflation to continue to moderate through the end of next year, and we see core CPI settling in around 3%, which would obviously be a decline from what we’ve seen in the last several quarters. But that’s still higher than the long-term historical rate of inflation. And I think there are legitimate questions as to whether we will be in a higher inflation period for a longer period of time. We think about the long-run inflation environment. It typically has been around 2%, 2.5%. Well, is 3% the new 2%? Are we going to settle into a higher inflation environment going forward? I think obviously that again has impacts on investors and savers, and how to think about making sure you’re outpacing inflation. How do you make sure you’re protecting the purchasing power of your assets? Over long periods of time, equities have proven to be the best inflation hedge. And certainly, for a lot of savers, that’s going to continue to be the right answer. We’re also seeing more interest from plan sponsors and participants around allocations to real assets as a way to potentially mitigate the impacts of inflation.
Arnott: Another aspect of inflation that I think is less often discussed is the fact that even if inflation does moderate and eventually reaches the 2% target that the Federal Reserve has set, there’s still a negative impact from previous inflation. And if you look back to price levels from the end of 2020 versus where they are now, you’ve got almost a 20% cumulative increase, which is kind of a permanent increase in the cost of a consumption basket for either people who are retired or people who are still working and trying to save for retirement. So, is there anything that people can be doing to offset the ongoing impact of previous inflation?
Moran: Part of that I think comes back to really having to take a hard look at your own personal budget and your own personal, where are you spending money, where are you saving money? Because to your point, we’ve seen inflation may be moderating, but over a longer period of time, over the last several quarters, the cumulative impact of that is still having an effect on gas prices, on food prices, on clothing. And therefore, that is something that is going to be baked in for a long period of time. So, almost resetting your personal budget to account for that is something that individuals are going to have to go through.
I would say as part of that, though, especially for current workers, it doesn’t mean we have more money now going to travel and entertainment expenses, to food, and so forth, therefore, I’m going to have to stop saving for retirement. You always have to make sure that you’re saving consistently throughout retirement, but it’s being more realistic on the rest of your budget to account for these cumulative step-up in prices, given the spikes in inflation we’ve seen over the last several years.
Benz: Now that interest rates are so much higher than they were a couple of years ago, what do you think the risks and opportunities are for retirement savers? With higher yields on bonds and cash, should retirement savers be tilting their portfolios more toward the fixed-income side? It seems like there’s a lot of appetite for cash, but less interest in bonds among a lot of retail investors.
Moran: Fixed income has a return. Again, to your point, a lot of it is really concentrated at the shorter end of the curve, what we’re getting on even six-month T-bills and two-year notes. So, it definitely has a return again. I wouldn’t call it investors tilting toward it. I would call it tilting back. What I mean by that is, we were in a period of time there where rates were so low, that we were in the TINA period—there is no alternative to equities. So, we had to be in equities since rates were so low. What we saw is many investors reduce their allocation to fixed income because they just weren’t getting any yield. So, in many ways, as we’ve seen interest rates go higher, you’re seeing investors go back to where they used to be—whether that be a 60/40 portfolio, a 70/30 portfolio, or whatever—to get back to what I would call a more normalized portfolio, given their own age and their demographics and their risk and return profile.
I think that’s probably where we are, is that it’s coming back to a more normalized environment. Even though the short end is a lot higher than the long end, we have seen long rates come up now, and the 10-year has been hovering around 5% again recently. And therefore, again, I think it comes back to fixed income has a return again. Investors are thinking about how much duration they want to have in their portfolio. They want to take advantage of the short end of the curve and what we’re seeing in six-month T-bills and one-year T-bills. But at the same time, the long end is starting to become more attractive. So, it’s not necessarily tilting more toward fixed income. I would just call it tilting back to maybe where it used to be, but also thinking about the underlying composition of the duration of that underlying fixed-income portfolio.
Arnott: You mentioned target-date funds as a default investment option a few minutes ago. And it seems like Goldman Sachs has had an on-and-off relationship with target-date funds and actually has now discontinued the last few target-date funds that you were offering at the end of last year. What was the rationale behind that decision?
Moran: The target-date funds are obviously a very important vehicle for defined-contribution participants. When you look at the flows that are going into target-date funds, the benefit it provides to an individual, especially if they haven’t made a decision as to where they want to invest their assets and they get defaulted into a structure, a target-date fund is certainly a much better alternative than defaulting them into a money market fund, notwithstanding where those rates on money markets are today.
But coming back to again that we believe the next phase of retirement will be more personalized and more customized to the participant. So, target dates are a good start. They’re a good vehicle for a 30, 35, 40-year-old who is building up savings, who is getting the benefit of professional money management, a portfolio that’s rebalanced, a portfolio that is going to give them access to different asset classes like emerging-markets equities and potentially emerging-markets debt, other asset classes that they may not understand on their own. But at some point, they probably need to transition to something more personalized and customized as their balance increases, as life happens—their life becomes more complicated, they get married, they have kids, they have other assets outside their retirement vehicles. And that’s where we think the next phase becomes a transition to something more personalized and customized.
So, last year, we purchased a managed account provider, NextCapital, and we’ve been integrating that within the Goldman Sachs Asset Management community here. And we think that’s really something that a lot of employers are going to look at for their employees going forward is how do we provide something more personalized and customized for that participant? When they reach that point, when their balance has become sufficiently large and they have a number of other financial priorities and competing priorities, that means they need something a little bit more personalized than a target-date fund that is only based on that one factor: When that individual thinks they’re going to retire.
Benz: It seems like one impediment to managed accounts like what you’ve just described is getting people to surrender all of the information that they need to provide in order for that customization to really work. Can you talk about that challenge? Like how to ease that problem so that you truly can get the information that you need to deliver, say, a customized glide path?
Moran: I think part of it is making it easier for the participant to provide that information. I think part of it is also changing views on that within just different employee groups. So, younger generations tend to be more open in terms of providing that information. So, if we think about this over the course of the next several decades, it should become easier as more individuals are more comfortable with sharing that information and understanding that that’s the value they’re really getting out of that product is by providing that information. But we do have to make the user experience as seamless as possible. I think we’ve all had that experience where if we’re working with a provider and anything—it may not be financial services, but they need more information. They need more information. And at some point, we call uncle and say, we’re going to stop. If we make that process easier for the participant, that will hopefully engage them more and provide them with the ability to provide that information and feel understanding that by providing it, it’s going to get them with a better answer for their ultimate portfolio.
Arnott: One new dataset that just came out within the past week or two is the Federal Reserve’s Survey of Consumer Finances, which comes out once every three years. And it seems like, based on that survey, there was some good news on the retirement front where more families are participating in retirement plans. Net worth has increased overall. Fewer families have financial burdens like excessive debt. What was your take on that survey? And should we feel better about the overall prospects for retirement plan savers?
Moran: I would say a lot of the regulatory change of the past few decades has really helped to increase retirement security. When we think about auto-enrollment, giving sponsors the ability to enroll their participants in the plan, even if the participant has not elected to do that. Obviously, the participant can always unenroll, but auto-enrollment has proven as a great way to get more people into a plan, increase participation. Auto-escalation—lets them increase the amount of deferral that they’re putting in, a great way to get individuals to save more. Target-date funds as a QDIA option, again, a much better alternative than defaulting an individual into a low-yielding money market account. Those are all been great, great improvements. And then I’ll keep coming back to I think PEPs, pooled employer plans, are another thing that should help to increase coverage, make it easier for smaller employers to provide retirement coverage for their individuals. So, when you talk about the direction of travel for retirement plan participants, I think we’re heading in a great place. And a lot of that is because of the regulatory change that we’ve seen over the last several decades.
What we need to do then as an industry, though, is continue to build on that. And again, I’m going to come back to what are some of the things that we think we need to now focus on going forward? Part of it, number one is more personalization. Everyone is unique and different. Their journey is unique and different. Their situation is unique and different. How do we provide a more personalized and customized experience to retirement defined-contribution participants? Number one. Number two, how do we potentially provide them with access to greater asset classes that they don’t use today or don’t have access to today? We certainly know many institutional investors, like defined-benefit pension plans, on both the corporate and the public side. Sovereign wealth funds, endowments, and foundations have successfully used asset classes like private real estate, private credit, for decades. Individuals in defined-contribution plans often don’t have access to those asset classes. And that may be inhibiting their returns. How do we provide more access to alternatives in private markets and defined-contribution plans? And then, of course, coming back to—now, if we’ve done everything right: we’ve saved money, we’ve grown those assets, how do we turn that into a reliable retirement income stream? These are all the next phase. I think what we’ve done to this point, we’ve seen a lot of great things that improve participation, contribution rates, growth of assets, coverage. But now we have to take it to the next level and think about what’s the future direction of travel. And a lot of that is going to be a more personalized experience.
Arnott: So, some positive developments, but also more work to be done?
Moran: More work to be done. I think it’s all building on a lot of the positive developments we’ve seen over the last several decades.
Arnott: Well, Mike, thank you so much for taking the time to talk with us today. This has been a great discussion.
Moran: Thanks for having me on.
Benz: Thanks so much, Mike.
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