September 3, 2020

Podcast: Jerry Patterson — Making the Most of Your 401(k)

Podcast: Jerry Patterson -- Making the Most of Your 401(k)

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Podcast: Jerry Patterson -- Making the Most of Your 401(k) Episode 46 of the NewRetirement podcast is an interview with Jerry Patterson — Principal Financial’s senior vice president of workplace savings and retirement solutions — and discusses how to make the most of your 401(k), workforce savings trends, financial independence and retirement income.

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Steve: Welcome to the NewRetirement podcast. Today, we’re going to be talking with Jerry Patterson from the Principal Financial Group where he is the senior vice president of workplace savings and retirement solutions, Principal’s largest business. He’s a former lawyer with some accounting experience and is coming to us from Des Moines, Iowa. In preparation for this podcast, we took a quick look at our usage data over the past year, and just a couple of quick highlights from our retirement planning audience: First, for our planner users about 70% of their investible assets are in qualified savings, so things like 401(k)s and IRAs, and that represents about $18 billion in savings, those are our free users. And then for our paying customers over the past year, about 66% of their assets are in qualified savings and that represents about $2.1 billion and growing.

Steve: So given that, we thought it would be great to jump on a podcast with an expert like Jerry, and we’re going to talk about two topics. First is how to make the most of your 401(k) and the second is some of the big trends in work for savings and the future of retirement savings and financial independence and retirement income. So with that, Jerry, welcome to our show. It’s great to have you join us.

Jerry: Yeah. Good morning. Good afternoon. Good evening. I appreciate the opportunity to talk today for sure.

Steve: Yeah, and appreciate having you here. So before we get in, I’d just love to get a few minutes on your background, how you got here, and also a little bit about where Principal plays in the market.

Jerry: Sure. So I started my career journey as an accountant where I worked with small businesses and individuals and then t. Maybe it gets worse, maybe it gets better depending on how you feel then I became an attorney. And then somewhere along the way, I took a violent left turn into financial services, into the corporate world and I spent about the last 20 years, 25 years in the world of insurance and retirement. So think medical insurance, dental insurance, group insurance, even individual life and disability. And then over the last decade in the retirement plan world.

Jerry: Today I’m responsible for the retirement plan business of Principal and that business, other than just being the largest business of Principal, we serve more than 50,000 businesses in the US and support and serve more than 9 million individuals that participate in those retirement plans. The big Principal Capital PFG we’re a global financial services company, retirement is our core focus both here and outside of the US where we do business. We’re operating in about 84 countries around the world where we manage longterm savings, mostly retirement savings, and we have retirement operations, similar to the one we have here in the US, in countries in Asia and Latin America.

Steve: So a worldwide business.

Jerry: Yeah.

Steve: So what drew you to his work? You’ve been focusing your career on it, obviously it has a big impact, anything in particular that draws you to the work?

Jerry: I know this might sound trite, but we spend every day trying to help people do better for themselves, for their families, for their communities, for their life. And that noble purpose of helping people attain and maintain financial security gets me and gets my whole team excited about what we do every day. It’s really important, and especially after we just lived through an event like we have. You think about when was that, in the middle of March, when markets were moving 2,000 points, 1,000 points, 1,000 points in every direction, the work we do is really important for positioning people to weather storms like that.

Steve: Totally. And it’s interesting to look at the data you see, when people look at their wealth, it’s really concentrated in two places, home equity and retirement qualified retirement savings. So being smart about that and how to use it. Great. So before we talk about some of the best practices for people, I want to just talk about the landscape. I know Principal’s done a ton of work here, so I just wanted to… Obviously one of the big things is COVID, so we’d love to get your take on how that’s impacting your work and the participants out there.

Jerry: Yeah, it’s a great question. So I think there was that moment, I take us back to March, where 401(k) accounts were devastated, other retirement savings accounts were devastated, maybe even for a moment it felt like home prices were impacted, so huge immaterial impacts. The good news is, maybe two pieces of good news. One, we look at the millions of participants we serve, less than 2% of the participants did anything. So what that meant was most participants sat tight, focused on the longterm, and didn’t do anything out of fear or reaction. So we didn’t see tens of thousands of participants moving out of equities into fixed income or out of their 401(k) account into something else. So I think that’s super positive. Well, now here we are and 401(k) accounts have bounced back because markets have bounced back.

Jerry: And I’d like to say that for a lot of people that maybe weren’t making the right choices, weren’t doing the right things in terms of diversification, how they were investing, we might be living right now in the moment of the greatest second chance for American savers that’s ever happened in our history. You think about 2008, 2009, for many people, their longterm savings may have taken years to crawl out of that hole that was created by the market downturn. For many savers right now, their 401(k) balance might even be higher than it was pre-COVID.

Jerry: So I think there’s a big opportunity for people to roll up their sleeves and maybe make decisions and choices and take action they didn’t before COVID. So I think the good news is, like I said, obviously, there was a big impact for a minute, we saw it bounce back, and we saw both employers sit tight and employees. So in terms of employers stopping matches or reducing matches, very low levels, very limited. And where we saw that happening, it was in the sectors you’d assume hospitality, retail, restaurants, places that were hit really hard. But beyond that, we saw employers sit tight and we saw investors sit tight as well which is good.

Steve: Awesome. Yeah, and so are you seeing people now rebalance and adjust their risk profiles given what they just saw in the market volatility?

Jerry: Yeah, we’re seeing a little bit of that. We just completed some research, we study all the participants in our retirement plan. There’s one group of participants we call super savers. So these are people that are either saving the most you can possibly save by tax on a 401(k) plan or nearly the most. And we just got done with some research to try to figure out how are they viewing things? How are they reacting? And maybe two important conclusions from that group of people. Number one, they see this as a vindication for all that sacrifice and effort that went into preparing for an event like this, but we’re also seeing an interest in investing more and maybe contributing more and saving more given the current circumstances. So at least among that group, we saw some of that. Among the millions of participants in our plans, we don’t see the money moving around very much. Again, it’s 2% or fewer of them are moving money around or reallocating which is a shame because again, it’s a huge opportunity, right?

Steve: Yeah. We’ll talk about that a little bit more. I think one of the big opportunities for the space in general is better defaults and potentially automatic rebalancing over time. I know there’s more work with target date funds that put people on a better glide path. Another thing though, back to the landscape, one of the things I saw is you guys talk a lot about, the growing importance of individual responsibilities. So with the background of, hey, social security is potentially under pressure. You hear about the trust fund being exhausted for that and Medicare in the coming couple of decades, and then pensions have been declining and then the ones that are in place are under varying levels of pressure, especially public pensions. And then I think one of the stats you called out was 30% of workers are now in high deductible health plans, so backed by HSAs. Any other big trends that you see around that individual responsibility mandate?

Jerry: Yeah. I think it’s a global trend that’s not unique to the US and that’s the weight that’s placed on governments to take care of people when they’re sick or when they’re old both on the healthcare side of things and on the retirement side of things, that’s happening all over the world. If you think about the World War II generations, where social security was something you felt you could live on and many, many workers back then were fortunate enough to work for a single company for a lifetime, and they could also look forward to a pension. Well, nearly three quarters of pension plans in America today are frozen and the number of pension plans terminating has been moving at a record pace over the last three, four, or five years. And then I think there is a lot of skepticism and concern around the viability of social security going forward.

Jerry: So this match towards taking the burden off of governments and companies and pushing that burden on individuals to manage their own money, do their own planning, and fund their own healthcare, and fund their own retirement is a jury that’s happening all over the world. And so today Principal does business in multiple countries in Asia, Thailand, Malaysia, Hong Kong, China and in Latin America in places like Mexico, Brazil, Chile. And we’re seeing that same trend unfolding in those countries, where government can no longer support the huge demand for the middle class for health.

Jerry: And so those systems are trying to introduce voluntary savings to their population to push that burden and shift that responsibility to individuals. So I think it’s a trend that’s been going on, it continues. You wonder, with all of the government spending going on right now in the wake of COVID, is that just going to put more pressure on social security as we move forward? And will we ultimately see things like means testing take hold in social security thus forcing all of us to rely more on our personal savings when we retire? So I think the trend is strong and it continues.

Steve: Someone framed it up for me a while ago where they said, “Hey, with pensions we centralize the management of money and thinking about the financial engineering to deliver the benefit.” And now with the 401(k) basically said, “Hey, everybody. You have to become your own personal CFO. You get to have control of the money, good, but you also to have to be financially educated, know to save, know to invest, ideally identify low fee funds.” And these are all things that are improving, but it’s literally taking us decades. And by the way, it’s so interesting to hear you describe the movement that’s happening in Asia and South America and these other countries.

Steve: I think in financial services very often it’s a very us focused business because there’s so much money concentration here and you can make a lot of money here. But these other countries hopefully, they take some of the lessons and can skip some of the pain that some US savers have gone through. Like from what we see in our business, if 401(k) folks, if you made the right choices and you save consistently and diversified and just kept doing it, you’re good and people have millions of dollars and they’re confident. But it’s so few people that actually do that across companies and sustain it. It’s increasing, there’s more awareness but it’s definitely not… It’s like a lot of people say it’s simple but not easy.

Jerry: I think a trend that could help, that I’m pretty optimistic about, is… So let’s talk about back to March when markets were going crazy. When participants in our plans were calling our call center, the most common question they had on their mind was what should I do? Should I do anything? Should I run for the hill? Should I move money around? And there is an incredible desire and demand among Americans for advice, they want somebody to just tell them what to do. When we look at the data from our electronic enrollment, the place where we lose the most engagement, where people drop off the most, and it’s 70% of the time when they drop off, it’s when they’re confronted with that decision, what do I invest in? Because to your point, we’re expecting them to be their own CFO and for many people, they really struggle with understanding investments or what to invest in.

Jerry: One trend, you mentioned one, one trend that I think was positive was the introduction of target date fund, which conceptually is pretty straightforward, you’re going to take more risks while you’re young and you’ve got more time to earn back your losses, and you’re going to take that risk off as you get older and closer to retirement. Conceptually good, it’s helped a lot of people get in the right place, a lot of people just plain all get diversified. But the new trend that’s interesting is the introduction and the proliferation of advice solutions. People want somebody to tell them what to do, but in America only about 25% take the next step and that is to go seek professional advice from a traditional financial advisor, which means 75% of Americans are not working with an advisor.

Jerry: And so now you’ve seen the proliferation if you’ve ever heard the concept, robo-advisor or automated advice. When you think about companies like Betterment Wealth Fund, companies like that or personal capital, we’ve seen a lot of high tech companies try to package advice in a digital format to help people figure out what to do. We do think that will continue to proliferate and bringing that CFO off the shelf into your den or your living room is going to be a growth market from our perspective. So we do think that’s a great development in helping people get through that hardest thing they struggle with, which is what do I invest in? Where do I go? So that’s one trend in the market we think will grow.

Steve: Great. Yeah, totally agree. It’s interesting how these trends are when we think about our business. Online banking happened so people got comfortable with digital banking and moving money around. Then robo-advisors, which when I look at my personal capital wealth front, those folks, I think it is the focus on asset allocation and savings, which is hugely important. And for our firm, what we’re thinking about is planning. So how do you put all the different pieces together? Social security, home equity, insurance, qualified savings, and everything else. But yeah, definitely. Well, there’s good trends there and hopefully good things happening. So just keep going on the landscape a little bit. Another couple of things that you called out that I want to just touch on that I thought were interesting is, now there’s five generations in the workforce and also we’re seeing a massive workforce remote work experiment happening, any color on what you guys see there?

Jerry: Yeah. I think it’s a wild environment because taking a one size fits all approach just doesn’t work. I think about my 16-year-old son on TikTok and my 82-year-old mother-in-law on match.com. We do see technology adoption across all generations, which is I think really positive, but the needs and the focus and the priorities of each generation is very different. So you think about Gen Z and Gen Y for instance, the concept of retirement is almost incomprehensible, but the concept of financial control and financial independence is really worthy and interesting to them. Now think about even boomers right now on the verge of retirement or Gen X is approaching, even their concept of retirement is different. It’s about that next job, it’s about that second career. The fastest growing segment of the workforce right now are people over 65.

Jerry: So people in retirement age years are flooding into the workplace and not all of them are doing it because they have to, not all of them are doing it because they didn’t save enough, a lot of them are doing it because they’re finding joy in it. And as we think about, to your point, about planning and how to really have your journey planned out, one of the things we’ve tried to introduce to younger savers is think about that second career and how are you going to plan for that second career? And have you incorporated into your planning? Maybe you leave your current trajectory whatever you make, with a 3% raise a year, and then when you turn 60 or 57, you end up in a totally different role making less, but you plan for it and you got ready for it and now you’re doing something you love and you enjoy. So yeah, we’re seeing significant differences in terms of needs. So I’ll give you another really important trend.

Jerry: The average worker today, young worker can expect to have somewhere between 10 and 15 jobs during their lifetime, which might mean between 10 and 15 opportunities to participate in a 401(k) plan, which might mean they have multiple IRAs, multiple 401(k)s representing where they’re saving for retirement. They’re also going to have student loan debt, they’re going to have mortgage debt. The number of people carrying mortgage debt into retirement right now is growing like crazy. Even the number of people carrying student loan debt into retirement right now is a moving target. So younger investors, the complexity of their financial picture is much different than somebody right now that might be 71 that worked one or two places during a lifetime of work and might have a DB plan, a defined benefit pension plan, a 401(k). What they need to be thinking about is a lot different than that younger investors. So I would say their behaviors are different, how they look at retirement is different, and what they need to do and the complexity of the choices they need to make are very different.

Steve: Yeah, no, it’s amazing to hear that the number of people over 65 is the fastest growing segment. But I believe it, I see it in our audience that a lot of folks it’s not always needs based. It’s like, hey what’s my purpose? Where can I contribute the most? And they have a ton of human capital and people are, if they stay healthy, they have long runways and lots of say. So yeah, that’s interesting. And also the stat about 10 to 15 jobs per person, I remember seeing it was nine, but 10 to 15, then people are walking around, it’s much more complicated too. You’re carrying around unless you are actively consolidating and putting things back together, rolling them over, which is a very good practice. You’re then keeping track of like, hey, I’ve got money in all these different places and we see that as well.

Steve: Before we move on, I just wanted to touch on some of the best practices, I think you’ve referred to them as planned design silver bullets that you think for folks that run small businesses and offer this to their employees or people that are in plans and they hopefully can look for these and ask for them, because people can also advocate and go, hey, HR, I’d like to see some of these good things for myself and other people that work here.

Jerry: I’ll throw two out there. The most powerful strategy in the world to plan for retirement is save more earlier, period, the end. And it’s not necessarily what you’re investing in or what you’re picking, the value of saving more earlier outpaces performance on your ability to pick stocks. And we have tons of research that we’ve done over the years that proves that out. The rule of thumb is people should save, I think the experts would say 11% to 15%, our experience has been that people find the closer you get to 15, the more incomprehensible that is. So we really encourage people to think about saving 10% out of every dollar they make. So I would say that’s a really, really important and big strategy, is save more earlier, and if you can save at least 10%, you’re going to be on a good track. So that would be one best practice.

Jerry: From a plan design perspective, and you touched upon this, very few businesses or industries have silver bullets. We have been blessed in the defined contribution 401(k) market to have a couple of silver bullets. We know when we auto enroll a population of workers, we get between high 80, call it 89% to 94% of them already knew they probably should have been saving so they stay in the plan. So if you’ve been auto-enrolled, embrace it and ride it out because you’re probably doing something you knew you should have already done. And if you’re a business owner, auto-enrollment has miraculous impact. So traditional enrollment, you put a 401(k) plan in place, you hold some employee meetings, you hand out some workbooks, you should expect somewhere between 40% to 70% of your employees over time to sign up for the plan. When you auto-enroll your employees again, you’re going to get 89% to 95% of employees are going to start investing the day you do it.

Jerry: The other best practice is defaulting people at a reasonably high savings rate. So we promote defaulting people at a 6% savings rate with a 1% escalation each year until they hit that magic 10% as a best practice. And then obviously investing in a diversified portfolio like a target date fund or something where the participant is getting diversified. So auto-enroll, default high, and diversify your investments would be the big ones.

Steve: Well, hopefully more people follow those practices and can have a huge impact over time. So I’d love to move on to… I want to talk about two more big topics. One is the big risks that people face and the second one is going to be big opportunities. But on the risk side we’ve been diving into this pensions so I saw some data that PBGC is potentially predicted to fail, this is the Pension Benefit Guaranty Corporation is potentially at risk by 2025. And that a single plan, the Teamsters Central State Fund is facing $26 billion in unfunded pension obligations and could take down the whole thing. So we’d love to get your take on what you think the risk is there because there are people rolling around, I think it’s like a third of our users are rolling around with pensions in their plans.

Jerry: There’s still trillions and trillions of dollars sitting in pension plans waiting to fulfill those obligations to those workers. I would say certainly in the private sector, I think I shared this statistic already, nearly three quarters of pension plans have been frozen. And the number of plans that are literally terminating has been happening at a record pace for the past, it started about seven years ago, we started to see that heat up quite a bit. So I think the march of defined benefit pension plans off the stage will continue. And so I think for anybody who is depending on that for retirement, I think you just got to be thoughtful and cautious about it. You might need to plan a contingency and plan around it particularly in the private sector. So I think the pressure to move out of traditional defined benefit pension plans is intense, it’s global, it’s not unique to the United States, and I think that march will continue.

Steve: And I’m sure the super low interest rate environment it’s not helping individual savers, it’s definitely not helping tensions who rely on fixed income as a big chunk of that.

Jerry: Right.

Steve: And that doesn’t seem to be abating anytime soon as we worldwide head into… Europe has a negative interest rates and the US is following suit right now. It looks like we’re getting there, so it’s crazy. So another thing that you touched on in some of your research is just some of the risks that people face. 60% of people have no will, I think you had some stats on these. Just people don’t know what they don’t know, anything you want to call out there about what you see around financial education?

Jerry: Yeah. I think we got to keep… So maybe something I would share, we did a bunch of research not too long ago around confidence and the likelihood of doing a better job, saving, being better prepared for the future. There’s a direct correlation between all that and how much competence you have. And what it takes to build a higher level of competence around managing your financial situation, it doesn’t take much, it could take a couple of evenings on the internet searching around what are the things I should be thinking about and doing it. Doesn’t take going back to business school and getting a finance degree at all. And so I would encourage people to invest the time.

Jerry: We have some research from a while ago that showed more people spend more time planning their next vacation than they do planning for retirement. So there’s a lot of evidence that people let inertia take over, don’t like to confront this stuff, don’t like to invest the time. But I’m going to go back to what I shared before about COVID, this greatest second chance. There’s no question that COVID and the spread of COVID has made people think about whether or not it’s smart they have a will or not. There’s no question that when markets plunged 2,000 points or 1,000 points in a day and workers were furloughed, a lot of people got that rude awakening if they didn’t have emergency savings. And so I do think those basic things people should be doing, they should have emergency savings, they should have a will, they should invest a little bit of time to understand things like diversification. Most people should understand what a target date fund is. Simple things like that. So we’re in this incredibly important and opportunistic moment to reinvest our heads and our time in getting educated about these things.

Jerry: The other thing, a big, big trend, that I do pay a lot of attention to is death. People are carrying significant amounts of mortgage debt into retirement. The last time I checked there were I think nearly 200,000 boomers carrying student loan debt into retirement. And a lot of that debt is adjustable, so think about all the adjustable rate mortgages that are out there, think about all the people that are in their 50s refinancing into 30 year mortgages right now, into adjustable rate mortgages right now. That stuff’s all going to come to roost if they’re not careful. Most people need to do both, they need to pay debt down and they need to save simultaneously at the same time. That’s a hard thing for people to figure out what to do when to do it.

Steve: I do feel like to some degree, some people are adopting, well, I’m going to die with debt. I’m just going to carry it all the way through and then I’ll hand off my house and my assets to my heirs and they’re going to get some debt with it and then they’ll have to reconcile everything. Versus earlier generations were like, hey, let’s have a mortgage burning party. So it’s definitely… But some folks I know that are very financially astute are like, hey, listen, if I can borrow money at 1%, 2%, 3% for a mortgage, I’ll do that and I’ll try to beat that in other areas. You’re taking a risk to do that, but I see them doing that.

Steve: So a couple of quick comments on that, so yeah, I totally agree that planning for your financial future is like a general avoidance problem, many people don’t want to deal with it. Two, I think they should be teaching this in high schools nationwide. It should be mandatory, it’s not there’s a group next generation personal finance that is a nonprofit that I’m a supporter of and they are teaching the teachers. So they’re out there trying to make sure the curriculum is available, teach the teachers. And I think it’s mandatory in 20% of high schools, but it’s offered in 60% right now. But for teach home-ec, or we used to at least, can we teach 30 hours on personal finance? That would help so many people.

Steve: And then I think for individuals out there, definitely talk to your employer. Look online, social security has resources, places like New Retirement we have resources, you can get educated. And it’s not rocket science, it’s save money, get rid of bad debt, build an emergency fund. Jerry you’re calling out, I think 33% of people have no emergency savings. Use calculators to figure how much you should save. Another stat you shared was like 60% of people have no idea how much they should save in the first place. But there are many tools out there that help you think this through.

Jerry: We did some research and we were talking to millennials and some Gen Z and they all believed, number one, they still got most of the knowledge they gained around finances was from their parents. So the number one source still for people to go to his parents. But they also believe strongly that education on personal finance should begin at schools and a large percentage of them believe that need to begin in middle school not high school, even before high school. But to your point, it’s not that hard. The basic things people need to understand about saving and managing money, it’s an hour on the computer and it sounds like you have resources sitting right on your site to answer a lot of those questions right now.

Steve: And it depends on the families too, so I get my 11-year-old made some money and he’s like, all right, I want to invest in the stock market. And I’m like, okay, here we go, I want to buy some SPY, let’s buy some low cost index funds and we’ll just sit on that stuff. And now he’s like, “Hey, what’s that worth? Am I making more money now?” And log back in and lo and behold. It’s going to go up and down but there’s lessons in just doing it. But not every family knows it. So if you come from a financially astute family, then yeah, it’s second nature, let’s share, let’s jump on, we’ll jump on and buy some stock, no problem or buy an index fund. But for many families, it’s like where do I start? Just knowing where to start.

Steve: All right, cool. Let’s move on to some of the big opportunities. So we talked a little bit before about some of these super savers and what they were doing. I don’t know if you want to touch on that a little bit more, or also just where you see as a provider to 50,000 companies with millions of participants, where do you see the opportunities for individuals to do better?

Jerry: Some of the biggest power is in some of the simplest steps, I shared one save more earlier. When my niece went to her first real job in downtown Chicago, I said, “After you start next week, you’re going to carry an envelope full of stuff home and your tendency is going to be to shove that envelope under your couch. And somewhere in that envelope is the enrollment workbook for your 401(k) plan, put 10% away the minute you get that envelope.” So it’s some of the simplest strategies. And then what we learned from these super savers along that same theme, these were not people that downloaded Quicken software and had sophisticated plans and were working with financial advisors. In fact, most of them didn’t even have a budget. And when we look for what’s the most common tool you use, it’s a spreadsheet, I wrote all my stuff down on a single piece of paper.

Jerry: The steps they took that made the difference were really easy steps. I drove my car longer, I spent a little less on a house, I went with one less bedroom, I drove a little further to work, if I vacation, and this was pre-COVID, it was I drive to my vacation versus get on a plane. So it was really simple steps that hit the big spending items, especially for young investors. The car and the house were two of the biggest areas they took those simple steps.

Steve: It’s great hearing you because I’m part of financial independence groups like Choose FI and Mustache, that’s Mr. Money Mustache, but these guys are super hardcore, but they hit the stuff. It’s like, hey, buy a used car, drive the car forever, drive it to the ground. And they celebrate like, hey, here’s my Toyota truck that has 250,000 miles on it I bought for two grand, it’s still going, post a picture of it. Housing, food. Food is another huge thing. Like our family, we shop at whole foods and it’s freaking expensive. And you have to be thoughtful about where you go and how you get your food. But if you spend time thinking about it and get more food in bulk and stuff like that, it can make… Eat out less, that kind of stuff makes a huge difference.

Jerry: The other thing we discovered, which was positive, was they weren’t suffering in this submission. They had Netflix accounts, they had Spotify accounts, they still did things to enjoy life, they did go out to dinner, maybe not as much as others, but they still did that stuff. It’s just on the big ticket items, they were just a lot smarter about how they spent their money.

Steve: Yeah, it can be game-changing. And then what are you seeing around self-directed 401(k)s things like other ways to invest? Are you starting to see that as a trend just for people diversifying out of, I know I’m going off track here a little bit, but the traditional equities versus fixed income? Are you seeing any of that happen?

Jerry: It’s a great question. So you think about 401(k) plans when they were first introduced where you’d have 200 fund options. And there was a study done, you may have seen this, it was a jelly study where these researchers went into a grocery store and they would set up a table and they give you like here’s 17 different flavors of jelly. And then they go into another grocery store and here’s four, well, I know you’re going to get to the punchline quick. Which table do you think sold more jelly? It’s the table with fewer choices because people apparently we have built into our system, a jelly overload mechanism there’s a point at which we can’t take all the jelly. But that study was used to compare to how people struggled with 401(k) plan choice.

Jerry: So now look at where we’re at today. 401(k) providers have slimmed down the number of choices. So a typical 401(k) lineup might be 14 to 20 fund choices. And now the question in my mind is have we limited that choice to a point where people can appropriately respond to the environment? So think about COVID right now, what’s driving markets right now? It’s the 10 biggest big tech names, it’s a bunch of weird companies involved in battery powered cars, it’s do I buy Delta and Carnival at the bottom because it’s going to go like this? In a 401(k) plan, you can’t respond to a crisis like this very easily. You’ve got to understand what’s in a small cap fund versus a large cap fund, how does that translate into the depression the economy is facing? So I wonder about that.

Jerry: You talk about self directed IRAs. Now you’re getting out of equities and fixed income all together and thinking about raw land, rental property. And I think there’s room for more choice because you talk about parenting. I, for Christmas, we opened a brokerage account, custodial account for my son a couple of years ago and it’s been interesting to watch him ride this COVID wave and how he’s been investing. And it’s just something you can’t replicate easily in a 401(k) menu. So I think that there is a need, there’s an opportunity for more choice, more flexibility outside of the typical lineup that you see today.

Steve: Well, we’re definitely seeing some cohorts of younger users getting super active. On Robin Hood I think there’s some entertainment part of this. Like there was some data about, hey, sports betting got shut down and then people went over and started rolling the dice and there’s somebody who’s investing things and they are definitely getting super active in certain stocks like Tesla. So I’d love to also get your perspective on for older users, we think a lot about retirement income and we… What are the solutions for folks as they transition into retirement? So how can they mutualize risk? QDIAs, qualified deferred income annuities, stuff like that? What are some of those taxes? What are some of those things that you see people paying attention to that matter for them on the other end when they’re transitioning out?

Jerry: So again, think about Gen X, think about younger boomers, definitely think about Y and Z. As they enter retirement, what are they going to look like? Many of them are going to be carrying larger levels of fixed expense, whether that be mortgage debt, student loan debt, a lot of them will continue to work, a lot of them will live longer. And so the need to fund higher levels of fixed expense and debt while you’re in retirement I think is growing. And so the need to have dependable, stable sources of income is growing as well. We talked earlier about the likelihood of that being social security or a pension plan payment. I think most experts would say, don’t count on that or be careful how much you count on that.

Jerry: So what does that leave? Well, the only other source of guaranteed income on planet USA is annuity income. And most consumers have an aversion to annuities, they think it’s a diabolical plot by some actuary somewhere that is smarter than me about when I’m going to die and whether I’m ever going to get all that money back that I provide, so there is that aversion that’s out there. And annuity income right now is especially expensive because interest rates are so low. With that said, I think what you are going to see, so there was a piece of legislation passed right before COVID called the SECURE Act. And the SECURE Act provided some protection for employers to offer guaranteed income in their 401(k) plans. At Principal we do offer that solution today. So, I’m excited about where that could take things and it could take things in a couple of directions. One, and what you’re going to see is you’re going to see guaranteed income available in 401(k) plans at an institutional price.

Jerry: So it’ll be priced more efficiently than if I’m going to go out and buy a retail annuity off the shelf out there, and let’s assume interest rates do rise, if they do moderate or rise over time, the ability to buy that income will get cheaper. The two opportunities for an income solution like that are, I’m a 40 year old investor and today I’m investing 70% in equities and 30% in fixed income. Well, what if on a payroll deduct basis going forward I take 10% of that 30% going to fixed income, and I just start buying income from when I retire. And I think that’s one of those situations where a little bit over a long period of time becomes a lot. So that could be a great way to build income on top of your social security during your younger investing years.

Jerry: The other opportunity is I’m a 57-year-old, I’m a 59-year-old. I’m about to retire and now my 401(k) plan is way back up to where it was. Well, I’m going to take 30% of my 401(k) plan right now, convert it to income, and buy up my social security income. So I think you’re going to see a proliferation of solutions like that which I think will be great for people to set themselves up for that income they’re going to need to fund all those expenses in retirement.

Steve: Agreed. And it just needs to get easier. We had one of our users, he’s on another podcast, I’ll link to it, but this guy, Glenn Nakamoto, and he did that. He looked at this whole situation and was like, “Listen, I want a retirement paycheck.” So he took 35% of his retirement savings and bought a series of annuities, single premium immediate annuities across different insurance companies to diversify the credit risk. He also delayed social security or optimized it. so he waited until 70s, he was bridging himself. And then he took another bucket of money and used that to make sure he would have enough flow for his required minimum distributions, which he uses for his discretionary income. So those are just social security plus annuities plus these RMDs are his income stack. And they took his remaining 54% of his dollars and bought an 80-20 portfolio to hedge inflation.

Steve: So the thing is this guy is an expert and knows what he’s doing. It’s not dead simple, it needs to get a bit easier for you to see what’s possible, what are those levers to pull and what are the trade offs. But I think one interesting stat I’ve seen is that for people that have pensions, they love them because it’s like, hey, I keep getting paid, I don’t have to think about it too much, the paycheck keeps rolling in like I was working, I was super satisfied with the product. It’s just people don’t have access to them and people that have, they only have one, two million bucks.

Steve: They’re like, great, I’ve won $2 million, bu all the time, every day, I have to pay attention to what’s happening in the markets. And if the market tanks 30% then you’re feeling a lot less good about your former $2 million is down at 1.2 or something like 1.3 so you’re feeling the pain. So hopefully that… I just think that mutualization of risk has got to happen in a much bigger way. Also, I think people hedging out healthcare, longterm care, and income, hybrid products, are you guys innovating in that space?

Jerry: No. You probably know, you’ve probably talked about it before. Longterm care risk is a really hard risk to price and to figure out how it’s going to behave. It’s still a relatively new risk that’s being insured in the market and the companies that have done it have struggled. So I think that’s a hard one. I think healthcare costs is another one that’s really… I do think people would love to hedge all three to your point. And they’d like one bucket to put the money into that does it. I do think there’s definitely a movement to figure it out what needs can you bundle together and create a single price for? But it’s a hard one, you’re talking about the long term care risk versus retirement and income risk. Those are really hard things to estimate.

Steve: Well, I think personally I would rather buy an annuity that has the income so that if I need longterm care, I have the income.

Jerry: Yeah, you got the income.

Steve: I think about longterm care it’s a qualified assessment. You have to have a certain number of these activities of daily living, ADLs qualify for. And someone else is saying, hey, can you feed yourself or whatever, so okay, great. Well, look Jerry, this is awesome. Anything you want to share about as you look forward and think about the industry moving forward, some of the big changes that you think are on the horizon that people should be aware of?

Jerry: Yeah, I think that the need for more Americans to have access to the vehicles to save is on everybody’s mind. Despite some of the really challenging issues in Washington, retirement policy is an area where there’s a lot of interest part of it because the government realizes that funding social security into infinity is going to be a heavy lift. So if they can help encourage and support private sector solutions, they’re going to. But we’re in a good moment, I think that policy makers get it and they’re cooperating. There’s some good stuff that came out of the SECURE Act or the CARES Act that were meant to help. And so that’s just got to be a journey we continue.

Steve: We’re all in it together ultimately. Sometimes people look at it generationally, it’s like, hey, older folks are taking all these resources or the wealth is concentrated there. But they’ve worked their whole lives and ultimately all of us are aging and we have parents and people have grandchildren and all that stuff, it’s all mixed up together in families. All right, so as we wrap up here, any resources that you really like for yourself or at Principal that people should be aware of?

Jerry: Yeah. I would say, I’m going to go back to what I shared earlier, save more earlier, should be the flag everybody waves. Sometimes it’s the simplest steps that have the most powerful impacts for your financial future. From a resource perspective, this digital world we live in, access to the answer to any question is one click away, it’s one search. You could probably even find all this information on TikTok if you needed to. So I shared earlier confidence drives better behavior, better outcomes. Building confidence around your finances sometimes takes the smallest investment of time. So I would recommend people spend a little bit more time on their financial future than planning their next vacation.

Steve: Awesome. All right, well, look, Jerry, thanks for being on our show and talking to us about what’s happening with Principal and all the work they’re doing, it’s good stuff, we really appreciate it. So I’m just going to wrap it up. So thanks, Jerry, for being on our show, thanks Davorin Robison for being our sound engineer. Anyone listening, thank you for listening and hopefully you found this useful. You can check out what we’re doing at newretirement.com or in our Facebook group, facebook/newretirement. And if you’ve made it this far, I definitely encourage you to look at the resources Principal has to offer. We’ll point to some of the links that Jerry provided, he’s got a lot of good research out there. Obviously, hopefully, come visit us and build the planet newretirement.com. And then finally, we’re trying to build the audience for this podcast, so any reviews on iTunes or Stitcher or anywhere that you listen to your podcasts are greatly appreciated. And with that, thanks again.

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