Technology will be the key to helping individuals make better retirement decisions in a world dominated by defined contribution pensions.
That was a key message delivered by Chip Castille, the managing director of BlackRock Inc.’s global retirement strategy group, during a session at the 2017 Defined Contribution Investment Forum. He told the audience that the ongoing shift to defined contribution plans has essentially transferred pension liabilities to individuals from institutional and corporate balance sheets. But many workers aren’t ready for the extra responsibility that the changes place in their hands, he noted.
“The idea that we can engage with clients on a very sophisticated asset-liability pension management problem — one where they can understand the consequences of their actions, make decisions that they feel good about and feel that they’re actually managing their retirement problem — that can only happen using a lot of advanced technology,” said Castille.
“We’re making a lot of progress in DC space, but I feel that technology is going to be a crucial part of that going forward and that will be the big thing that closes the gap to success.”
Castille said the current approach to defined contribution plans places too much of the focus on the asset side of the equation while neglecting liabilities. He used the housing market as a contrast.
“You buy a house with the mortgage in mind and you know how to support that mortgage. And the goal is to pay off the mortgage and own the house. What we’ve built with the DC system is akin to me buying a house when I have no idea what the mortgage is. I’m just going to send cheques to the bank in the hope that it all works out,” he said.
“If you don’t know what the liability is, the idea that the systems are going to work is kind of misplaced,” he added.
With that concern in mind, online tools, such as retirement cost income indexes, are emerging. Using data on inflation, interest rates, risk and life expectancy, the tools generate an estimated fair value for every dollar a person will need annually in retirement.
Plan members can then use that information to determine how much income their current savings will buy them in retirement or to set a savings target based on their projected needs once they stop working.
“It’s helping investors to set concrete goals and then make investment and savings decisions around obtaining that goal,” said Castille. “Our clients are exposed to technology in other parts of their lives, so they’re looking for that kind of ease of use, and intuitive use, in their financial lives.”
Read more articles from the 2017 DC Investment Forum