How the financial services industry can impact retirement

Jivana Y Brokolyn

Investment management firms are well positioned to influence the outlook for aging societies — and not only by helping them save and invest. Retirement investments are a form of economic energy, and that energy can be sent coursing into companies and sectors whose products and services will help meet the needs of tomorrow’s burgeoning older population. As a result, in a rare confluence of interests, investment firms have the opportunity to impact aging populations in two ways: by helping individuals meet their retirement savings and spending needs, and by investing in businesses that will contribute to improved life experiences for older individuals.

The first step involves helping more people save and invest for retirement more effectively. Over $37 trillion is currently invested in US pension plans, including roughly $10 trillion in more than 600,000 employee-directed defined contribution plan — 401(k)s and the like. The investment management industry can help these numbers grow even further, ensuring more Americans enjoy a secure and productive retirement.

In the especially important case of employee-directed defined contribution plans, there is opportunity for investment managers to improve outcomes for clients: by encouraging employers to auto-enroll employees in defined contribution plans, for instance, and auto-escalate their contributions over time, without a cap. Similarly, by making continual enhancements to target-date strategies, which allow employees to “set and forget” a plan that gradually shifts their portfolio from higher risk to lower risk as they age, investment managers can improve retirement outcomes for participants.

There are also opportunities to develop new income and payout solutions for retirees. Historically, retirees often withdrew their assets from their plans in a lump sum, but today they increasingly opt to keep their savings “in plan,” taking their distributions over time. To improve the so-called distribution phase, firms should strive to simplify the distribution process and create payout-like funds that in some cases could permit retirees to receive payments regardless of how long they live.

At the same time, investment management firms seek to invest client assets in businesses and sectors that they believe offer attractive, risk-adjusted long-term returns. One such area is the “longevity economy” — the expanding universe of products and services that stand to make life better for older people. Older demographics represent a remarkable growth market, with fertile conditions for innovation in many industries and businesses.

The longevity economy offers a wide array of potential investment opportunities. One of the most obvious targets is the health care sector. Advances in basic science, the advent of new drug discovery tools, and new treatment modalities are enabling the development of high-impact drugs with the potential to extend longevity and improve quality of life. On the timeline involved in retirement planning, however — typically a span of 30 or more years — the potential upside of cutting-edge medical research is even more enormous. This past year, for instance, saw the first use of the gene-editing tool CRISPR-Cas9 to treat disease in humans. Future applications of this type of work may make a healthy old age achievable for far more older adults than is currently medically possible.

Beyond the health care sector, Wellington Management’s recent Future Themes research suggests that technology and personalization, two highly dynamic economic areas, will probably underpin future retirement. Artificial intelligence technology may prove ubiquitous in the lives of older adults by 2050, if not before, with any number of innovations supporting their physical and mental health. New technologies may help create novel forms of leisure and social activity, for instance, ranging from virtual games to augmented-reality experiences.

AI and robotics may also facilitate the development of increasingly personalized services and care, with health care and nutrition among the most tangible examples. We may see companies offering food and diets scientifically tailored to individuals’ personal nutritional requirements, based on their genetics, metabolism, environment, and personal wellness goals. Older adults might benefit from AI-driven monitoring of their physical condition through easy at-home blood testing. And each older individual could be encouraged to live a healthy lifestyle through a combination of personalized health insights, nutritional interventions, and behavioral nudges. The upshot would be enormous: more years of healthy, independent life.

Investment firms have the chance to serve aging populations not only by helping them achieve a more secure retirement, but also by funding the companies whose products and services will make a better old age possible. Boston may prove an especially important hub of such activity. A number of notable investment and financial firms are headquartered in Greater Boston or operate major offices in the region. Boston’s world-class stable of financial companies, combined with the growing awareness in the region of the opportunities afforded by the longevity economy, can help shape how we’ll live as we age. We — as a community, and as an industry — must make the most of it.

Jean Hynes is CEO of Wellington Management Company.

https://www.bostonglobe.com/2022/03/07/opinion/how-financial-services-industry-can-impact-retirement/

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