Pandemic Magnifies Demand for Retirement Income

The COVID-19 pandemic has increased demand among retirees for retirement income solutions, according to BlackRock’s annual “DC Pulse” survey, which also found that nearly half of defined contribution (DC) plan participants’ finances were negatively impacted by the pandemic.

“Workers saving for retirement today are concerned that they are going to outlive their savings, or that they may not enjoy the same kind of comfortable retirement previous generations did,” the report stated. “Plan participants, plan sponsors, and retirees alike all emerge from the pandemic with a sharpened focus on retirement security and the importance of retirement income.”

The survey is a research study of 225 large DC plan sponsors, as well as more than 1,000 plan participants and 300 retired participants in the US. It was conducted by independent research company Escalent Inc. All plan participants polled were employed full-time and had access to a workplace retirement plan at the time of the survey.

According to the survey, 77% of participants are looking for financial help not just on reaching retirement, but on getting through it, and 81% said it would be helpful if their employer provided secure income-generating options as part of their workplace retirement plan. The survey also found that, because of the pandemic, 37% of participants are more interested in owning a product designed specifically to generate income in retirement.

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Some 56% of participants say they would save more for retirement if they had an emergency savings fund set aside, while almost half say that feeling confident about their short-term finances makes them feel more confident about their long-term finances.

Among retirees, 67% said they are confident they have enough money to last through their retirement because they have a pension or other source of income, which was the most common reason, while 76% said that having secure income during retirement makes a bigger difference than they thought it would. And 71% of retirees said they would have chosen a steady income stream through retirement if given the choice.

Plan sponsors are also interested in helping their participants secure retirement income, with 86% saying their participants would benefit from a target-date fund (TDF) with a feature that generates guaranteed retirement income. Likewise, interest in income products is on the rise as 82% of sponsors that do not currently offer a specific retirement income product said they are likely to add one during the next 12 months.

The survey also found that 47% of participants say the pandemic has had a negative effect on how on track they are with saving for retirement. Participants who did not feel like they were on track were disproportionately impacted by the pandemic, as 54% said COVID-19 set them back with saving for retirement compared with 36% of participants who said they were on track.

Meanwhile, 61% of plan sponsors say at least half of their employees’ retirement readiness was negatively affected by the pandemic, which the report said may be larger than what participants report because plan sponsors have a broader, data-driven view that provides a look into more of the negative effects of the pandemic. And more than half of plan sponsors who keep track of short-term 401(k) loan withdrawals said employees dipped into their retirement plans for emergency spending needs last year.

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Tags: 401(k), BlackRock, COVID-19, DC Pulse survey, Defined Contribution, Pandemic, plan sponsor, retirement income

Who do they think they’re kidding? The Federal Reserve got everyone’s attention last week when it proclaimed that it would raise interest rates by 2023. Turns out there’s good reason to be skeptical about that prognosis.

One sign: The futures market is telling another tale. The five-year/five-year overnight indexed swap, which attempts to divine where the benchmark federal funds rate will be by 2026, doesn’t buy the notion that the Fed will be an aggressive rate hiker. This swap instrument attempts to gauge what the highest fed funds rate will be in a business cycle, here set at five years.

When long-dated bonds were selling off earlier this year and yields were climbing, wrote Joseph Lavorgna, chief economist for the Americas at Natixis, the swaps-predicted trajectory was a rise to 2.4% for the funds rate, from near-zero now. That figure sank as the upward movement of long bonds’ yields stalled in March and then shrank. Right now, the swap rests at 1.94%, Lavorgna noted in a research paper, up mildly from the recent low of 1.86%. That doesn’t show a lot of anticipation of a higher-rate situation at mid-decade.

Put more bluntly, Lavorgna argued, the futures market is telling the Fed: “We don’t believe you.” With the White House pushing an expansion of federal spending by $4 trillion, which will generate a lot of new government bonds, it’s doubtful that the Fed will curb its $80 billion monthly purchases of the Treasury paper, Lavorgna reasoned. Those buys are aimed at keeping down long bond yields.

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The same thinking, he indicated, will prevail vis-à-vis the Fed’s appetite for hiking the funds rate, which governs shorter-term rates. The plain fact is that the Fed has been historically reluctant to move with any dispatch to change policy, he pointed out.

Look at the last tightening cycle: The central bank took seven years, from December 2008 to December 2015, to boost the funds rate. Then it waited another year for a second increase. “Recent history tells us that the Fed will act later rather than sooner,” he wrote. Indeed, the funds rate finally topped out at 2.5% in December 2018, a full 10 years after the Fed pushed rates to almost zero.

Certainly, not everyone agrees with Lavorgna. James Bullard, the president of the St. Louis Fed, predicted last week that the first Fed tightening would occur in 2022—a prediction in line with six other members of the Fed’s policymaking body. Fed Chair Jerome Powell will likely lay out the Fed’s plans in August at the big yearly powwow held in Jackson Hole, Wyoming.

At the very least, Bullard went on, the Fed should slim down its $40 billion monthly purchase of agency mortgage-backed securities (MBS). With the housing market booming, that corner of the fixed-income universe doesn’t need the help, he reasoned.