Retirement in America is gradually becoming more out of reach for most, at least several studies done in the past five years give such cues. Though the U.S. economy is slowly gaining its lost ground, the improvement is still too small to make up for the lost money of the older cohort during the time of recession.
Despite having enough time to plan their savings for retirement, the younger generation often has a carefree approach towards long-term savings, as per Mandi Woodruff. Also, the U.S. population is replete with low-income earners who have several part-time jobs but do not get retirement benefits as these are given only to full-time employees. Only the high-end population is likely to take part in retirement plans thanks to their excess income and a higher risk appetite.
A recent study reveals that almost 25% of Americans are not saving for their retired life. Most people are running out of cash, especially the middle-income mass. As much as 30% of the millennials – ages between 18 and 29 – are not saving at all while 33% of this group has managed to hoard something via a 401(k) plan. Also, about one-third of the population having 401(k)s is unaware of the investments that their savings are leading to.
Wage growth is sluggish in the U.S. while some fear a housing bubble. Towering stock markets in most cases are being accessed by the high-income population. A recent article in NY Times says “The American Middle Class Is No Longer the World’s Richest” while rich Americans kept on earning more than many of their cousins worldwide. While emerging economies are witnessing increased purchasing power of the middle-class population, exactly the opposite is happening in the world’s largest economy.
The NY Times study suggested that tax-deducted middle-class income earners in Canada -- quite lower in 2000 than America -- have now outpaced the U.S. That’s not all; the underprivileged class in most part of still-struggling Europe makes more money than poor Americans. This income inequality has reduced the power of saving.
Impact on Retirement Savings Related Products
Questions arise on the future health of the retirement plans like 401(k), IRAs and the ETFs designed for retirees’ benefits. The use of ETFs in 401 (k) is still at a nascent stage with Charles Schwab launching an ETF-only 401(k) plan this February.
Schwab proclaimed itself as the first foremost 401(k) provider to bring an all-ETF option to the market. This version of 401(k) will keep a check on expenses as opposed to the regular 401(k) which mainly focuses on mutual funds.
Next comes IRAs. The usage of ETFs in Roth IRAs – a type of individual retirement account which differs from a traditional IRA in that you cannot deduct your contributions but can withdraw tax-free – is pretty large, though many investors are still just starting to embrace the usage of these products (read: 5 Long Term ETF Buys for Your Roth IRA Contribution).
Purely ETF Version
The ETF world itself also has many retirement-oriented products such as Target Retirement Date ETFs. The biggest fund in terms of AUM in this space is Target Date 2020 ETF (TZG). Investors will be shocked to know that since its debut in November 2008, this fund has managed to accumulate only $54.4 million of assets. The fact once again verifies Americans’ inability or reluctance (depends on case by case) to focus on their retirement portfolio (read: 3 Low Risk ETFs for a Stormy Market).
These are generally multi-asset funds. As for TZG, the iShares fund holds a basket of iShares ETFs comprising global stocks and U.S. bonds targeting a retirement date of nearly 2020.
Stocks account for 58% of the fund while bonds take up the rest. Thanks to its semi-conservative approach, the fund returned about 75% over the last five-year period, 26% in three years, 9.5% in one year and 3% so far this year.
So, strategy wise we find nothing wrong in such multi-asset funds while these funds bear a moderate cost structure with average expense ratio of 42 bps per year. Still, these products fail to amass enough AUM, probably due to investors’ lack of interest or incapacity over this horizon of investing. Now with cash-strapped Americans saving nothing for future, these funds might not see any improvement in AUM numbers (read: ETF Asset Flow Roundup: Treasury Soars, Equity Lags).
Not only the target retirement funds, but also some other actively traded funds have been the top choices for U.S. 401(k). Last year, Brightscope – a company assessing 401(k) and 403(b) plans – issued some notable ETFs that are largely used in U.S. 401(k), as per a Forbes article.
These ETFs include SPDR S&P 500 (SPY), Vanguard Total Bond Market (BND), iShares Russell 2000 Index (IWM), Vanguard Total International Stocks (VXUS), Shares Russell 1000 Value Index (IWD), iShares Core Total U.S. Bond Market (AGG), iShares Russell 1000 Growth Index (IWF), Vanguard S&P Small-cap 600 Index (VIOO), iShares S&P 500 Index (IVV), Vanguard Value (VTV), SPDR Gold Shares (GLD) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).
Apart from the usage in 401(k) and IRAs, these funds are often used by those who would retire soon as most of these are extremely diversified and offer a decent risk-adjusted return. Now, with savings seeing a decline, these top notch and high-profile ETFs may also witness less investors’ participation.
Is the Scenario That Scary?
There is a hopeful aspect in the studies discussed above. The studies probably underrate the number of savers through employer-provided plans (as per some analysts), though widespread research calls for a diminishing savings ability of the majority of the populace. With more than 6.0% unemployment level still prevailing in the U.S., brighter days are yet to come.
However, while the situation can come as a blow to exclusively retirement products like 401(k) or IRAs – which have much diversified application, the ETF industry will likely be less hurt.
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