Last year, markets enjoyed significantly positive returns. The S&P 500 (as of this writing) had returned nearly 20% for the year and key economic indicators (unemployment, consumer sentiment and GDP) were all signaling continued growth, enough so to allow the Federal Reserve to put forward its plan for three rate increases in 2018. We also have the promise of U.S. corporate and individual tax rate cuts that can help corporations and small businesses remain competitive in the global economy, hire more workers and produce goods and services that will help America remain prosperous.
1) Key asset classes in 2018. The rising rate environment continues in 2018 (and possibly beyond) and so I look at fixed income very opportunistically. Fixed income often is seen as a “safe” investment, but that changed in 2017 with many bond fund managers adjusting duration and credit quality to bake in rising rate assumptions. Well, I expect this to continue and I think asset classes like high-yield are set for some additional flows. This recalibration will force employers and plan sponsors to continue to adjust their asset allocations for their pension funds, or add additional asset classes to their defined contribution menu or target date funds to allow participants to further diversify. The tax-cut package presents opportunity for energy investment as well as infrastructure. Hedge funds and private equity had good years, too, so expect consultants and employers to weigh adding or increasing allocations to these asset classes in 2018, balancing the ROI versus the fees. Did some one say Bitcoin or cryptocurrencies? Um, no – still a bubble in my (and other’s) opinions, so I’d have to say let’s wait and see how these new and exciting products can be used by retirement plans.
2) The impact of fee litigation and the allocation of retirement plan fees. This year included a new front in the battle over retirement plan administrative and investment fees. Many 403(b) plans in the higher-education and tax-exempt marketplaces faced an onslaught of lawsuits focused on the number of investments and recordkeepers, the share classes of the investments, the allocation of fees to participants and the selection process used by employers. This is nothing new since we have seen this in the corporate environment for many years and I expect the litigious environment to continue, and in to other arenas such as non-ERISA plans like public sector 403(b), 457(b) and 401(a) plans. How can employers and plan sponsors mitigate their fiduciary risks? All plan sponsors – ERISA and non-ERISA – should have a formal process in place to review expenses and investments, but also other aspects of their retirement plans. Have you and your consultant discussed fee allocation? Is your fee allocation transparent? How many recordkeepers and investments do you have for your plan? How did you arrive at these decisions? Document. Document. Document. Or else. Oh, by the way, the race to the bottom continues and I expect the flow to passive managers to continue, though adding alpha through active management can serve an employer well for small cap stocks, international and even fixed income.
3) More discussions about financial literacy and employee outcomes – please. I have spent the last ten years as a consultant and adviser to many employers for their defined contribution plans. I have seen quarterly conversations continue to evolve, especially when it comes to adding topics during these marathon meetings. First, we need to make sure we get the committees materials well in advance of any meeting, and organize a well thought-out agenda with regards to topics that need to be covered. We need more dialogue. Second, investments are as important as plan design, but even if you have a great plan, how are employees using it? Many retirement plan service providers have developed data mining techniques to be able to present this information in a thoughtful way, but this is an evolving and iterative process. I expect more meetings to dive into the data and consider thoughtful paths forward to engaging employees to save more. I expect auto features – auto enrollment and auto escalation – to see continued growth, especially in non-corporate markets like governmental plans. Defined benefit plans – a staple in the public sector – are stretched and so defined contribution are becoming more prominent. Moving to a DC environment will continue, but not without consequences, especially as it relates to the delivery of core government services to citizens at the state and local levels.
4) The importance of cybersecurity and data protection cannot be underestimated. I don’t think I have enough space to list all the data breaches in 2017 but we know they are increasing year-over-year and that the U.S. financial system and government will continue to be under threat from sovereigns, groups and individual hackers looking to gain important financial and political information. What does this mean for employers who are managing their retirement plans? Quite a bit actually. It’s already a complicated environment for fiduciaries and it continues to get even more complicated. I have written dozens of request for proposals for recordkeepers and asset managers over the years and this section of the document has grown significantly over that time. I expect that more and more of the due diligence process both during the selection and monitoring processes will include more focus on the sharing and protection of data. Cybersecurity insurance? Got to have it in 2018 and beyond, both as an employer and making sure your vendor partners do as well. I brought up Bitcoin earlier, but the underlying technology — blockchain — is relatively new in the U.S. and global financial system. There are some real merits that should be explored such as using a ledger system and uniquely identifying each transaction. We are going to need more than 128 bit encryption to protect the second most important asset for most Americans (after a home).
These are just some of my key trends for 2018 (and beyond). Perhaps we will have an opportunity to discuss this more in future issues. As always, I welcome your feedback and look forward to your input. Have a happy, healthy and prosperous 2018.
Jeffrey Snyder, a retirement plan consultant for over two decades, is the president and CEO of The Morning Pulse, a digital investment consulting firm.