Morningstar Magazine - June/July 2017 - 18

Dispatches

would act as a stabilizing force during
economic downturns, as they can continue to
spend their regular annuity payments. In contrast,
retirees whose income varies based on market
returns would act as a destabilizing force during
market downturns by spending less. Annuities
are also highly efficient because they pool
longevity risk and could, thus, represent the least
expensive way to convert retirement assets
into a steady stream of income-assuming that
is a saver's primary goal. Finally, annuities mitigate
the risk that retirees will run out of money
and become a burden on government resources.
Of course, annuities are not very popular in the
United States and unlikely to become so. Much ink
has been spilled among financial experts
and economists trying to solve the "annuity puzzle,"
but in theory, retirement savers should want
to annuitize more of their assets than they typically
do. The lack of annuities' appeal is not
confined to the United States. Australians and
Canadians also have very low uptake rates
for annuities, and retirement savers in the United
Kingdom recently got the right to avoid
annuitizing-a right most people availed
themselves of immediately.
Nonetheless, policymakers could make it easier
for people to buy longevity risk insurance-
given the probabilities of retirees living to an
advanced age and spending decades in retirement.
For example, the government could offer
regulatory relief to plan sponsors, who are afraid
to offer in-plan annuities because of liability
concerns. It could also loosen regulations around
qualified longevity annuity contracts, the technical
name for tax-qualified delayed singlepremium annuities. These deferred annuities,
which might be offered to a 65-year-old and not
start making payments for 20 years in the
future, are explicit longevity insurance. If a person
lives a long life, there will be a stream of
payments. In that way, they look more like other
insurance products (such as fire or car), except
in this case, we'd want the negative event
(living an unusually long life) to happen. Policymakers could also explore other, more exotic forms
of longevity insurance, such as tontines,
which many academics believe are more efficient
than other kinds of longevity insurance.

18

Morningstar June/July 2017

How Will Policymakers Regulate Investors'
Account Data?

When investors aggregate their financial account
data using new technology, it can help them
get a comprehensive, holistic picture of their
finances. For example, looking at a worker's 401(k)
balance in isolation will likely result in a
false assessment of his or her retirement-readiness.
Workers with a high level of retirement savings
may appear to be on track for a secure
retirement-but if they lack sufficient emergency
savings, they might be forced to use these
retirement assets to cope with an unexpected
expense. Workers with other pressing financial
goals-such as sending a child to college

right asset-allocation strategy and appropriate
contribution levels. Technology provides a low-cost
way to aggregate data that helps workers with
multiple accounts form a good plan for achieving
success in retirement.
Although technology has a lot of promise, there
is a major debate around data aggregation,
and whether investors own their data and can
share it with third parties. New financial
technology companies generally argue that
aggregating investors' data allows them to
improve their financial wellness, for the reasons
above. Financial institutions often argue
there are privacy or security concerns. Ultimately,

Policymakers will need to explore how they
can make defined-contribution plans
work better for people, particularly during the
drawdown phase.

or purchasing a home-may be very tempted
to spend their retirement assets on nonretirement
purposes. Indeed, this "leakage" may drain
as much as one fourth of assets from retirement
accounts. New technology makes it inexpensive
to aggregate investors' financial accounts,
including retirement accounts, savings accounts,
and credit card accounts. Drawing on this
data, new applications can compute the numbers
to provide users with holistic guidance, which
helps them prepare for emergencies and
other expenses, preserving their retirement
savings for their intended purpose-retirement.
Another complication that aggregation technology
solves is that retirement assets are often
spread across many different accounts, such
as IRAs or a previous employer's 401(k). This
fragmentation means it is critical to look across all
of a worker's accounts in order to recommend the

privacy concerns can be ameliorated through
appropriate regulation. The benefits of account
aggregation are too large for it to be simply
ignored. But policymakers are often risk-averse,
so we will see where they land on the issue.
Hands Full

As we fully transition to a defined-contribution
system (outside of the public sector) over
the coming decades, policymakers will have their
hands full with basic issues (how can we get
people into plans), more complex problems
(how can we ensure people convert their savings
into lifetime income at retirement), and
complicated questions around who can own, share,
and use financial data to give guidance and
advice to investors. K
Aron Szapiro is director of policy research with Morningstar.



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