Morningstar Magazine - February/March 2014 - (Page 64)

Morningstar Conversation lower their standard of living today? We said, "Do you want to increase your participation rate over time as you're making more money?" No, they want to live better. "Do you want to hear of 15 different investment choices? Go ahead and become your own portfolio manager." The good news is that in 2006 the U.S. Congress passed the Pension Protection Act. Now, 401(k) plans can be constructed to be more automatic. You're in unless you say, "No, thank you, I don't want to save." You might have automatic increases each year or every couple of years unless you say no. And you may go into a professionally managed fund, a targetdate fund, or a balanced fund. If you do that over an entire career, I don't see why a defined contribution can't work quite well for people. Siegel: There's another issue. Who would want to work at one company for their whole life? You can't possibly optimize your human capital that way. If we want to encourage people to be entrepreneurs selling their services to the highest bidder at each point in their lifespan, you can't do it through a single-employer defined-benefit system. It may work well for some people, but I don't see how it could possibly be an efficient overall standard. Falk: I agree. To some extent, it's almost like we've romanticized the value of the defined benefit. Not that it's not a great way for people to receive benefits, but based upon how long people stay at one company, they never actually fully monetize their human capital. Kaplan: But we don't see people annuitizing. We still see people trying to finance themselves without getting any of the mortality credits available from payout annuities. It just seems that if this is going to work, we are going to have to pool our longevity risk. Yes, Falk: It's a behavioral issue, Paul, and it's because people don't want the kind of heads-or-tails, win-or-lose scenario from buying an annuity. What they know is if they live long enough, they win, but if they die early, then the assets go poof. The insurance company gets to keep them and their heirs or their benefactors don't get any assets. insurance contract, where you don't have some of the same risks that you had with standalone long-term-care policies? What's interesting, then, with these advanced life delayed annuities is they can help- at last a little bit. They don't get you over the behavioral hurdle, but when you buy one of these deferred-style annuities, you might be paying 15 cents on the dollar for the same dollar of income you would generate at 65, maybe 10 cents on the dollar, based upon the way the math works out for a given individual. Because of the lower cost, you can insure longevity in a much less expensive way, so if you don't get there, it's less of a cost or a loss to beneficiaries. It's not just that people are living longer. Kaplan: You're touching on another issue. Siegel: To be fair, the insurance industry hasn't exactly distinguished itself in presenting this opportunity in a clear and understandable way to customers and in offering its product at transparent and competitive prices. Annuity contracts need to be tailored to the need they are designed to address, which is to guarantee a lifetime of income, rather than having a large number of expensive riders attached to them. Falk: Correct. The only exception that could be an interesting rider is that for long-term care. We haven't touched on that yet. Standalone long-term care insurance policies have historically been a disappointment. Not for those who actually receive benefits. They've been fantastic for them. However, policies have been cancelled, they've been repriced. The industry has had a hard time. They underestimated what their costs would be, and as a result, they've underpriced these policies dramatically. the insurance companies are the institutions that have the ability to do that, but we just don't see a lot of people buying fixed payout annuities when they retire. 64 Morningstar February/March 2014 Living Longer, Not Necessarily Better So, the question is, wouldn't we better off using a long-term-care rider, which is not so cheap, on an annuity contract or a life They're not living healthier, right? We're getting an older population that needs all this additional medical care, and that creates this burden on the economy as well. We have this older population that requires a lot of our resources to sustain them. Falk: Significant burdens, Paul, and it's a challenge that is only growing. With people living longer, the incidence of dementia and other chronic conditions is growing. Most of the research that's being done in the area of longevity right now is on healthy aging. The Buck Institute out in California is doing some interesting research in this area, and it's about not necessarily just expanding one's lifespan but expanding one's health span. This is a challenge, and society-wise, we need to start coming up with some better solutions for dealing with this. Family formation has changed; a smaller number of children in a family places a greater burden on any given child as their parents age and need assistance. Kaplan: And that has implications for long-term economic growth. We have fewer people taking care of more older people. Falk: Correct, but we choose not to look at the negative side of it because they're our family members, they're our friends, and they're still living. But the reality is, we do have to come up with some better solutions. We're not going to solve this problem per se, but we do need to come up with some better ideas for how to support our elderly population. Many cultures have filial obligations to take

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014