What’s the Outlook for Retirement Savers in 2021?

Corporate Defined Benefit (DB) Plan Performance in 2020

• Funded ratios (assets minus liabilities) did not improve significantly despite strong financial asset returns in the last three quarters of 2020.
• The primary headwind remains the low interest rate environment, which elevated liability valuations and offset gains from equity market recoveries.
• This stagnation in funded ratios has persisted for over 10 years since the financial crisis, driven consistently by the low-interest-rate backdrop.
• Companies will file 10-K reports in the coming weeks, with modeling suggesting minimal changes to funded ratios despite 2020's volatility.

Interest Rate Outlook and Pension Strategy

• Early 2021 saw rising interest rates and increased inflation concerns, a shift that is positively correlated with DB plan funded ratios.
• Higher interest rates reduce the present value of pension liabilities, offering a mechanism for plan sponsors to improve funded status.
• A critical strategic risk is identified: many sponsors failed to "de-risk" asset allocations when funded levels rose during previous market upswings.
• Plan sponsors must evaluate shifting asset allocation to lock in gains if rising rates drive funded ratios higher.

Institutional Investment Themes for 2021 and Beyond

• Investors face a projected low-return environment where achieving traditional 6%–7% nominal return targets requires new strategies.
• Private Markets: Allocation to private equity, private debt, and real estate is accelerating as traditional public equity and fixed income yield expectations decline.
• Active Equity: Increased dispersion in returns and earnings estimates suggests the current environment is ripe for active management over passive strategies to generate alpha.
• Liability Hedging: Corporate pension plans are increasingly utilizing interest rate swaps and futures to hedge liabilities, freeing up capital for higher-return investments.
• Governance: The pandemic highlighted the need for nimble governance structures; many sponsors are seeking strategic partners to navigate complex market dislocations.

Individual Retirement (DC) Performance and Behavior

• Individual defined contribution (DC) balances increased by double-digit percentages in 2020, driven by market recovery and continued contributions.
• The prevalence of target date funds and managed accounts contributed to investor "staying the course," preventing common behavioral mistakes like buying high and selling low.
• Professional management and automatic rebalancing in these vehicles insulated many savers from the need to make discretionary changes during volatility.

Legislative and Structural Outlook for Individuals

• 2021 is expected to feature significant retirement-related legislation, building on the 2019 SECURE Act (often referred to as Secure Act 2.0).
• Current coverage gaps are significant: roughly one-third of private sector workers lack defined contribution coverage, a figure rising to 50% among smaller employers.
• Bipartisan support exists to expand coverage and introduce new savings vehicles, with a focus on increasing access to annuities within retirement plans.

Strategic Considerations for Individual Savers in 2021

• Re-evaluation of risk tolerance is timely; some investors may have been overly conservative during the 2020 downturn, while others may need to increase exposure to capture rebound gains.
• There is a growing trend among retirees relying solely on DC plans and Social Security to lack a defined benefit safety net.
• Plan sponsors and asset managers are focusing on developing solutions to convert accumulated DC assets into reliable retirement income streams, extending beyond annuity offerings.
• Key advice for individuals includes maintaining a long-term strategic asset allocation, reassessing risk profiles at the start of the year, and utilizing managed accounts if self-management becomes difficult.