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September 9, 2021
Episode 61 of the NewRetirement podcast is an interview with Renee Schaaf — the President of Retirement Income Solutions at the Principal Financial Group. Given that our users have about 70% of their investable assets in qualified savings accounts (e.g. 401(k)s and IRAs), representing tens of billions of dollars in savings, we thought it would be interesting to talk with an expert about how company retirement plans are evolving over time.
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Steve: Welcome to NewRetirement Podcast. Today, we’re going to be talking with Renee Schaaf from the Principal Financial Group where she is the president of Retirement Income Solutions, Principal’s largest business. She’s led Principal’s international business throughout Asia and Latin America and strategy as well. So given that our users have about 70% of their investible assets in qualified savings accounts, so 401ks and IRAs, and that represents tens of billions of dollars in cumulative savings, we thought it’d be interesting to talk with an expert about how company retirement plans are evolving over time and how people can use them better. So we’re going to dive into the past, present and future of enterprise retirement plans. So with that Renee, welcome to our show. It’s great to have you join us.
Renee: Well, thank you and it’s good to be here, Steve.
Steve: Yes. So you’re coming to us from Iowa. That’s awesome.
Renee: I am.
Steve: The magic of Zoom. Well, look, I appreciate your time here. So first I thought, could you give us just a few minutes on how you got here personally and also how Principal, their place in the market?
Renee: Yeah, absolutely. So I have been with Principal for 41 years. It’s hard to believe. So I literally came to Principal right out of college. At that point I’ve always been in employee benefits and I actually started in the life and health side and then mid-career transitioned over to the retirement side but I’ve always been interested and intrigued by how employers use benefits to attract and retain talent and the incredible complexity of financing those benefits.
Renee: So I’ve always gravitated towards that. I’ve been in a variety of positions though, all the way from client service to operations marketing strategy with profit monster responsibilities along the way. Despite being with the same company for so many years, I’ve had a lot of different careers within the same company, but tend to gravitate towards the retirement and then spent over half my career in retirement globally and in the US.
Steve: It’s pretty amazing career and I’m sure you’ve seen a lot of things. What are some of the biggest and best changes you’ve seen over your career tour specifically around retirement planning benefits?
Renee: Yeah. So maybe just to step back, I recall that when I started with Principal, the 401k Plan was just introduced and it was a tax code that’s named after a tax code. So the predominant retirement plan was the defined benefit plan and that’s where the strength of the Principal was, was in defined benefit plans. Well, of course what’s happened is that defined benefit plans have become extremely expensive. They are a big balance sheet liability for employers and they don’t always work very well in a job environment where people switch jobs on an average of seven times during their career. So they don’t particularly work well. They’re not very portable.
Renee: So the industry migrated towards a defined contribution plan with a 401k being the most prevalent and the very early 401k plans were very directed by the employer. So the employer would choose all the investment alternatives. The employee had to choose whether or not they were going to contribute and how much, but the employer absolutely played a very paternalistic role and typically chose the investments. Well, that began to morph and evolve and we went from the employer setting the investment menu to opening it up wide to the employees or participants. The average, we would see investment lineup choices with over 20 options and the employees were just lost.
Renee: So they wouldn’t do anything and they would default into money market, which is the worst possible scenario but what’s begun to happen over the years is that we’ve become smarter as an industry and employers have become far more wise and how they sponsor a plan. So now employers and supported by the industry have moved more towards plan designs and features that help the employees make the right choices. So introducing targeted funds and automatic enrollment and things of that nature. So that’s a real quick from roughly 1980 to today.
Steve: It’s pretty amazing. When I started my career 401k was picking up speed, but it was still relatively early and I think for a lot of early generation folks yeah, that there was some introduction. I remember my first job, some fidelity guy got up and was like, “Hey, this is my 401k and you should save into it and here’s some choices.” And that was kind of the end of it and then if you make good choices, then you could have great outcomes. In our community, what we see is there are people that have been very successful with their 401k, 401k millionaires and that’s because they either through default or for many of them who are older they had to make active choices to yet not choose the money market fund and go into more aggressive portfolios save consistently for 20 years.
Steve: Then lo and behold part of the market and compounding things are great and things are looking good, but I think unfortunately right now that’s the exception. It does feel like though newer cohorts of people, vintages of people that are benefiting from these smarter choices that are being made by companies like Principal and the employers that you serve. Quick question actually. Why do employers care that their employees make good choices?
Renee: Yeah. I think that there is probably nothing more distressing to an HR manager who meets with a longterm employee at their point of retirement and the employee says, “Okay, where’s my pension?” And there is no pension and it really was up to that employee to save on their own. I think that’s a very uncomfortable position for an employer to be in. It does nothing for employee relations and honestly it leads to financial stress. Anytime you have an employee population that is under stress whether it’s physical health, financial health, whatever the stressor is, it’s in the employer’s best interest to try to alleviate that stress. That’s the first thing. Second thing just really blatantly honest employers need good retirement plans and well-structured retirement plans to compete for talent. If you’re interested in competing for top talent, you need to have the right benefit structure in place to do that.
Steve: Yep, 100%. I think one thing that a lot of, as a small business owner you see the cost of providing benefits and a lot of folks are like, “Well, raises aren’t good and stuff like that.” But the reality is that the cost of providing benefits especially health care benefits has been rocketing up and employers bear that cost and it’s not easy to necessarily translate that for folks for them to see that. But I totally hear you on that one. On the employer side, do you see that they are actively trying to take care of their employees where they’re meeting regularly to try to encourage the good behaviors that will lead to better outcomes?
Renee: We really see a full spectrum of behaviors out there on behalf of employers. Some employers who are offering a retirement plan just to check a box and just to be able to say that they offer a retirement plan maybe satisfied with giving you the option to enroll in the plan but never take a personal interest to make sure that you’re saving enough for retirement or that you have the right asset allocation or that you’re taking care of your finances holistically.
Renee: Other employers who really understand the power of a retirement plan and understand how important it is for financial wellbeing will take a much more active role in encouraging employees to not only participate but to save enough to do regular check-ins, to access the whole array of financial tools. They’ll host benefit fairs. We have education specialists that will come onsite. There’s really a full array of things that we offer and to employees in there that typically the industry will offer.
Renee: I think the thing that’s really interesting about that question, Steve, is that we did survey work with plan sponsors. We said, how many of you are offering a full suite of retirement financial wellness tools and something like 78% of the employers said, “Yes, we do that. We’re all in and we encourage it.” We asked the same question to the employees and the employee said no less than half. So it there’s a disconnect there.
Steve: So it’s interesting. So the majority of employers feel like they’re doing a good job and the majority of employees feel like it’s okay.
Steve: I can totally see that. So in the present right now, we’ve just come through this year of the pandemic and I think that’s driving a lot of changes around how people see work and where they want to work and remote work and gig work and everything else, what do you see as some of the biggest changes that are going to come out of this year due to COVID and the changes we’re seeing?
Renee: So I think there’s at least three things that we’re going to say. First off is almost a back to the basics and that’s particularly true with asset allocation. So when we were in last year, first quarter of 2020, and we saw the markets dropped so rapidly, it created a panic with some employees and most just were calm and just rode the storm but others became really concerned and tended to move money out of equities and interest to a fixed income or stable value. So I think the first thing that we’re going to see is employers began to hit on the very basics, make sure first off you’re participating, make sure you’re deferring enough, make sure that you have the right asset allocation, make sure you do the right rebalancing and make sure that you check on your financial situation in a repetitive way. So back to basics is the first.
Renee: The second thing that I think we’re going to see is again a renewed interest in financial wellness and advice. It’s become so apparent that the average employee does not understand investing. They don’t understand the power of compound interest. They don’t understand that it’s really up to them, that the government will not take care of them in retirement, social security is a very poor retirement for most people. So I think that financial wellness tools will continue to play front and center and advice. I think that’s something that’s not only important today, I think that’s going to be a trend for the foreseeable future.
Renee: Then the last thing that we’re really beginning to see garner a lot of interest into emergency savings. So coming through the pandemic as a part of the stimulus package, participants were able to access hardship withdrawals. COVID related distributions on a basis that removes some of the penalties and they were able to raid the retirement accounts. That is a very poor substitution for emergency savings accounts. So now we’re beginning to see interest from the legislators and the industry and employers on how do we help people save for emergency savings?
Steve: So I think that this is exactly right. The challenge and the opportunity is how do you help people as individuals make better choices? The science is out there, good defaults, you have to have a certain savings rate. You have need to invest with the appropriate level of risk over a long period of time and keep your costs low and that will lead to success. I think one of the challenges is that you have to ran in it, educate everybody. So it pensions it was like, “Hey, that the company took care of it.” It’s we’re going to make good choices.
Steve: We have a CFO, our pension administrator, they understand the math, they understand how this works and they’re going to make good choices on behalf of everybody, but the company that risk, which they didn’t want to do cause they’re like, Hey, “If people live a long time or things don’t call as well financially, we’re suddenly on the hook for all of this pension plan.” So they shifted the risk through the 401k plan, their defined contribution to the employees. Now you have to get all these employees, tens of millions, a hundred million people to make good decisions across everyone. I hear you that you want to reach out and educate folks. But if you think there’s a different better way, there’re mandates where you’re like, “Hey, guess what? The absolute default is this. There’s going to be a certain amount of savings. There’s going to be this risk profile and it’s going to be made for you.” Do you see that kind of stuff happening?
Renee: Well, I think the first lever that’s been pulled with that is going towards plan designs that are that do it for me. So I’m just an employee. My focus is not on investing. I don’t understand the fundamentals. So the industry and employers have gravitated towards things that create these really great guard rails. It starts with automatic enrollment, where guess what? You’re in the plan. You can take yourself out, but every year you’re going to put, be put back in the plan. And the best designed plans are those that puts you in at a starting point of 6% and then escalate you 1% a year until you get to a 10% savings rate.
Renee: Then the default, the investment default typically is a target date fund. Something like 60% of all employee contributions do they are going into target date fund industry-wide. So either a target date on the managed account, some type of a balanced fund that it recognizes it’s age adjusted and the hope is they set it and forget it that they don’t raid that account for loans or hardship withdrawals and things of that nature. I think the interesting thing is and we can look globally and see examples of this or even if you were to mandate a savings rate and a mandatory pension plan, if that pension plan or defined contribution and mandatory defined contribution plan allows you to withdraw money during your course of your working career people can, and they will, and they will put themselves in a real bad spot without even understanding it. It’s really interesting.
Steve: Now, it’s hard. People see those pools of money out there. They’re like, “All right, where’s the money?” It’s like, well, there’s credit cards. I can get high interest loans, they don’t see it that way or there’s a bunch of money in my 401k and that’s really where most of the dollars are. It can be very tempting cause stuff because life happens. Well, it’s good to hear that those things are happening and that, that auto-escalation all these good things are happening. How about the cost side?
Steve: So I know that early on a lot of financial services companies in the space or mutual fund companies would have pretty high. There were high fees on funds. Vanguard helped to drive those fees down but the high fees are in many areas of financial services. Do you see employers and providers like yourself really focusing on? How can we manage those fees down?
Renee: It is top of mind. It is top of mind for every employer. It’s top of mind for every provider and you are entirely correct. One of the things that is happening industry-wide to your point is that fees have come down significantly, both on the investment management side and what’s been driving that. You pointed to Vanguard, that’s the perfect example. Vanguard is a passive money manager. So they’re going to do low cost investing indexed. So that philosophy of low cost investing has become pretty pervasive but even active managers and I believe personally, there’s a very important role for active management, but even active management fees from just a competitive standpoint have been dropping over the course of years.
Renee: So passive management has driven that down. Just the competitive nature of recordkeeping fees have come down, but you know the other thing that’s really been interesting that’s put every employer on their toes, particularly large employers is this whole notion of fiduciary liability. So employers have a fiduciary liability to make sure that the package of services that they’re providing for their retirement plan is well-priced and competitively priced and that it provides good value to the employees. If you are a large plan there are lawyers out there looking with class action suits, they approach large plans and they will instigate a class action suit on behalf of employees. Believe me, every large employer is acutely aware of this and it’s a trickle down effect and the advisor community is incredibly aware of this.
Steve: Well, that’s part of the market. That’s interesting, but it’s good. Hopefully ultimately fees continue to go down because that makes the better returns, hopefully for the employee and they have a better chance of success. Do you see any other big changes with demographics as people? So one thing we see is there’s these mega trends, people are working longer, but they also want more control. How does that factor into retirement plans? Then also, another thing is, do you see innovations where companies are trying to offer more around retirement income, let people turn more simply turn their savings into income and over time?
Renee: Yes and that’s a really important trend that you’re hitting on. So the whole concept of providing income guarantees within a defined contribution plan is one that plan sponsors voice a lot of interest in. I think anywhere between a third to a half of plan sponsors will say I’m extremely interested in offering in plan income guarantees to my employees. The thing that’s held them back from doing that right now is a very low interest rate environment. When you’re in a very low interest rate environment, annuities are more expensive than when there’s inflation and rates are creeping up.
Renee: The Secure Act that was passed, provides a safe harbor for employers in terms of it makes it easier for them to offer one. It makes those benefits portable. So there’s a lot of things that have been done legislatively and within the industry to encourage plans with income guarantees embedded in them. I do personally think that we’re going to see those tick up in popularity and in use.
Renee: I don’t know when this will happen in the person who can accurately predict it is going to be very, very wealthy, but I do think that interest rates will begin to creep up over time. As that happens, these kinds of provisions will become far more attractive and affordable. I think they’re important because one of the things that we face is a social security system that is not well-funded and we need alternatives to the social security system. We need to be able to save for ourselves and to protect ourselves financially.
Steve: Yeah, for sure. We’re getting into some of the future part of this, which is where is this going? We talked about how plans are changing, defaults are getting better. I know for our users, they’re really thinking hard about retirement income, healthcare and taxes and how to make smart choices around all their assets holistically. Do you see innovations happening from the employer to help users think broadly about their situation?
Renee: Yes, absolutely. We’re beginning to see some of the solutions come to the market today already. I think that we’ll continue to see evolution. So let me tell you what I’m thinking about. First off, let’s think about the accumulation phase, where you’re trying to build up that nest egg so that when retirement comes, you have some base of assets to turn that nest egg into an income stream. We’ve done I think a really good job from employer standpoint and industry standpoint of trying to get people into the plan and invested into target date funds in particular that really do a nice job for the middle income.
Renee: They’re easy to understand, they’re easy to use. But to your point, there is a certain population. There’s a certain segment of every employee population that could benefit from something more specific. The specificity of those solutions are really embraced with managed accounts as an example. So with a managed account, you can specify your risk tolerance, your age, you can bring in outside assets and the asset algorithm, the allocation algorithm, we’ll take all that into consideration may even take in tax implications and we’ll give you an asset allocation that is unique to you.
Renee: I think that’s one example. Then on the other side, when you have, I think this is the next frontier that’s really going to play out. It’s I’m not sure that it’s working well. To get somebody to the age of retirement, hand them their nest egg and say, “See you.” And they have no idea how to take that nest egg and turn it into an income stream. I think that will be a frontier that we began to see unfold. Certainly something that we’re doing with our former plan participants now is helping them turn that nest egg into an income stream for asset allocation that’s appropriate and investing this appropriate in the retirement.
Steve: So I you’ve gone from we’re helping employees accumulate and make good choices and get their assets saved in the right vehicles. But you’re actively for people that actually have retired and are no longer employed or partially employed, you’re still working with them to help them think about income after the fact.
Renee: Yes, absolutely. So it’s not just income but most people will have many years in retirement. The longevity post retirement, it continues to grow. So for many people, just because they have retired doesn’t mean that they need to put all of their assets into fixed income or into very, very secure investments. They need to continue to think about depending on their circumstance how to continue to accumulate during retirement so that their nest egg keeps pace with inflation. It keeps pace with market growth. But yes, this is an important area. An area that Principal certainly is venturing into. I think it’s an area that employers are also beginning to understand is important to their employee population.
Steve: For sure. We’re back to the stress point. I think we know that money is the number one worry that people have in their lives generally and specifically how to pay for retirement is a huge part of this. I think when we look at the world we kind of see there are folks that are, unfortunately in a bad situation, they haven’t really saved money and if they don’t kind of get going, they’re going to have a hard time paying for themselves and they’ll just be relying on social security and Medicare in their retirement, which as you’ve said isn’t that great. And the average social security payments, $1,200 a month or something like that, it’s not super substantial.
Steve: Then there’s people that have saved something but maybe not a ton. They’re thinking about how do I make the most of this and maintain a decent quality of life and then there’s some people at the top that have saved a lot. I think they have much broader options, which is like, “Hey, I can lift up my retirement income or I can try to generate more wealth for my estate and that can go to my kids or my errors or whatever.” So is that what you see as well? Do you see those kinds of groupings and how big do you see them, those buckets being?
Renee: Yeah, absolutely see those buckets. I think the practical environment that we’re in right now is that if you are in an unfortunate position where you’ve been either low-income or you just didn’t save, there’s not a lot you can do your retirement. There’s not a money guide. You’re really stuck with social security or the benevolence of friends and family. There is a whole middle-class though that to your point has saved some and their retirement savings is by far the biggest source of savings, the biggest source of nest egg.
Renee: I think it’s important that we do provide solutions for them and we do help them understand some of the fundamentals about how much they can take out every year from that nest egg and expect to make it last over their lifetime, the role of a well-constructed well-priced annuity and the importance of creating a safety net there. Those that are in a really high net worth or have just either cumulated or inherited wealth never underestimate the power of a really good advisor, never. They’re essential for tax planning, for inheritance planning for all of those things.
Renee: The wealthy have no trouble finding good advice. It tends to be that middle America that their nest egg isn’t big enough to be attractive for an advisor to really sit down and work with them but they need to think about how what they’re going to do in retirement, how they’re going to make that last. I think there’s a very important role for providers like Principal in that space.
Steve: A hundred percent, yeah. That’s for what worked more basically building a technology platform to make it easier for individuals or companies to think holistically about all their assets. And yeah, I think that it’s a huge problem. It’s been solved so far by human beings and good employer plans but it’s a complicated issue. Decumulation is so much more complex than accumulating and you do have to think about social security, Medicare and healthcare housing, income and should you annuitize. One of our users, this guy, Glen Nakamoto, I’ll link to the podcast, pat saved a lot and did very well, but really wanted to have income.
Steve: So went about constructing his own retirement income, essentially his own pension through a combination of social security optimization and annuitizing a chunk about a third of his assets because he was like, listen, I want the income floor guarantee for myself and my wife to make sure that we’re taken care of and then for the rest of it, once that guarantee was in place, I can be more aggressive with my portfolio. He actually had a very hard time finding an advisor that would endorse what he was thinking and he felt that it was because they were misaligned that they wanted him to have all the money invested, where they made fees on it.
Steve: I think that illustrates something that we believe, which is like, you have to be very careful about understanding how people are paid around you and making sure that they’re fully aligned with you otherwise they may not… They’re fiduciaries. These are RIA. These were not say insurance salespeople or something like that. They were supposed to have a complete fiduciary view, but he talked to five of them and they all were like, “No, it’s not a good idea.” We can do as a bond ladders or something else. And he’s like, well, that’s not the same thing cause you get the mortality guarantee and everything else anyway.
Renee: That’s an important point and I think particularly as the conversations around the solvency of the Social Security Trust Fund began to heat up and they most certainly will. I think that advisors will find more and more demand for a very holistic approach to financial planning that considers all of the tools and believe me, I understand too, the bad rap of annuities and some of the high fee annuities or some of the ones with very difficult to understand guarantees. But I do think there’s certainly a role for an institutionally priced annuity. So all of those things I think will begin to evolve will become more transparent, which is good and become important pieces of that toolkit.
Steve: A hundred percent. Well look, Renee, this was great. I think we touched on some of the big topics here, considerations for folks and as they save in their own plans, but also as they look forward and they can go and talk to. Do you recommend that people actually go talk to their employees, go talk to their HR folks and ask for certain things or look for certain features that should be provided?
Renee: Yes, absolutely. Find out what your benefit is, find out what your retirement plan is. If you have a retirement plan, if one is being made available to you, for goodness sake participate and take advantage of the match if there is one. Even if there’s not a match, take advantage of the tax advantage savings, look for those financial wellness tools, just take advantage of what you have. You’ll be miles ahead at the time of retirement. So yes, ask questions, be curious, never feel stupid, please don’t feel stupid. To me that’s sad because we don’t feel stupid about not knowing about medicine. I think finances are every bit as complicated as medicine. So we shouldn’t feel way.
Steve: A hundred percent. I agree with that. I think part of this is also you can do your own research. There’s a lot of great resources out there across the internet. There are tools and ways you can kind of start ramping up yourself so that when you come to the table, you have some level of comfort with the topic, but yeah we’re all starting in the same place and it is so important for people to make good savings decisions, invest efficiently, achieve good outcomes and de-stressed their lives. Now Renee thanks a lot for your time. We’ll link to some of the resources that you guys have shared and some of their podcasts on this topic. We do appreciate the work that’s going in there and the innovation.
Steve: I think things are definitely going in the right direction and still plenty of work to be done. So with that, thanks for Renee for being on our show. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for your time. Hopefully you found this useful. Our goal in Retirement is help anyone plan and manage their retirement and much like what Principal is doing in terms of providing the tools and investment options that are out there for employers and employees. If you made it this far, please check out the notes. We’ll have links to some of the resources here, our private Facebook group. You can find us on Twitter as well. Then finally, if anyone wants to leave a review, super welcome, we read it. All feedback is welcome and we’re trying to make the show better, better. So with that, thank you very much.
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