Kristi Mitchem — picked to run the defined contribution business of a combined BlackRock Inc. and Barclays Global Investors when their merger is completed — believes the DC industry has gotten a bum rap. Instead of focusing on all the innovations since passage of the Pension Protection Act in 2006, policymakers and the media have zeroed in on the plans' performance during the market implosion of 2008, said Ms. Mitchem, who now is managing director, head of U.S. defined contributions at BGI. “401(k) plans are long-term investment vehicles, so we need to make sure that we're measuring them with a yardstick and not a ruler,” said Ms. Mitchem, a former Fulbright scholar who joined BGI in 2005 from Goldman Sachs, where she was managing director, equity products group, Americas.
That's not to say Ms. Mitchem doesn't see the need for some changes. She believes annuities and exchange-traded funds both will be a major part of the DC plan of the future. Certainly, competitors will be watching BlackRock's defined contribution business closely. BlackRock's purchase of BGI makes the combined firm the third-largest manager of internal DC assets with $213.28 billion, behind Fidelity Investments and TIAA-CREF, according to Pensions & Investments' data as of year-end 2008. “We couldn't be more excited about how these businesses are coming together,” Ms. Mitchem said.
Managers have been designing investment options embedded with annuities or income guarantees. Will plans adopt them? The time for income is now. Like anything else, you need supply and demand. What we're seeing now is a set of really robust products coming on the marketplace that offer to replace the income for life that was previously offered in defined benefit plans. In combination with that, and in the wake of late 2008 we have a participant base that is really interested in income, in having some guarantees in terms of an income floor in retirement. It's the marriage of having good products that are very sound in combination with participant need, and awareness of that need, that makes today right for income. We did a participant survey in the spring of this year and (found) over 90% of all participants said they would be interested in seeing retirement income on their platform. That's a staggering number. Even more interesting is that 73% rated guaranteed income on their 401(k) plan as equal in importance as knowing health care would be covered in retirement.
The next hurdle is that these products are new, and there's always an adoption cycle with new products, so we're going to need a couple plan sponsors to lead the way. That's the case with all innovation in the marketplace. Over the last 12 to 18 months, we're seeing record keepers really starting to keep pace with the innovation on the product side. Record keepers are getting there, consultants are getting there, plan sponsors are getting there, and participants are getting there, so the time is right.
BGI's Sponsor Match, launched last year, is a target-date option that includes an annuity component. What sort of interest are you seeing? It's been interesting to see the evolution of the conversations around the product. ... The conversations have moved from the theoretical into the practical over the past 12 to 18 months. We're now getting detailed sets of questions from plan sponsors on how it works for them on their plans and with their participants. The nature of the conversations indicates we are at the tipping point. While we are still waiting for client funding, we expect a stream of early adopters to commit in the first quarter of 2010.
What's your vision for the DC business at BlackRock? As we begin to go through the integration of the two firms, we're finding that we couldn't have crafted two businesses that fit more perfectly together. BGI is really focused on the large and megaplan segment with index funds, lifecycle funds and SponsorMatch. At BlackRock, you have this incredible suite of active fixed-income and equity products that serve as institutional-quality core offerings, with both an institutional and a retail footprint. When combined, the businesses offer something completely new and differentiated in the marketplace. Post-merger, we will have the ability to provide a broad range of solutions to plans across the spectrum — from very large plans to those plans that have only 10 to 15 participants. Plan participants deserve, and should demand, the institutional quality vehicles BGI and BlackRock have been providing to investors over the course of their combined heritage.
With retirement confidence plummeting, how should the DC industry be responding? Retirement confidence has been falling for several years. The answer for how you respond to that is to make investing in 401(k) plans easier — to make a good outcome easy for participants to achieve. You do that in two ways: by developing thought-leading products that work in the best interests of participants; (and combing) those products with plan design that nudges participants in the right direction — understanding that participants are not CIOs, and that left to their own devices, they are likely to do nothing.
How will the combined BlackRock/BGI approach investment advice? Where we try to focus the business is in areas where we think an investment is going to make a meaningful difference in the retirement prospects of the participant, where it will lead to substantial increases in retirement readiness. What we've found is that when advice is on the platform, only about 30% of participants access the advice offering. Of that 30%, only 20% use that advice to make a decision. When you think about it, what you're impacting through an advice option is really 6% of the overall population. So my focus ... is on creating products that can actually service the broad spectrum of participants and make a difference. If we start to see shifts in behavior, we absolutely will explore how to get involved on the advice side, but today it's not a priority.
What trends are you seeing in DC? One of the big trends I see is more and more sponsors adopting automated plan features, like auto-enrollment. That gets people into the plan, which is a good thing. Now what happens is most participants get stuck at the default savings rate, unless the plan utilizes auto-escalation. If we look holistically across the industry, we find many corporations have default savings rates in the 2% to 3% range. As an industry I would like to see us focused on getting participants to increase their savings rates. I would like to see default rates pushed up to 6% to 8%. ... It's kind of simple, but the biggest determinant of how much you have in your retirement account is how much you save. ... We see income as another big trend. So the two trends that will dominate over the next three to five years are increasing adoption of automated features and guaranteed income.
What keeps you awake at night? One of the things that's been on my mind lately is the negative press about 401(k)s. We need to step back and think about the amazing progress we've seen in the evolution of 401(k) plans over the last several years. ...
We now have a large number of plan sponsors auto-enrolling participants. They're auto-enrolled into diversified investment options like target-date funds. We're increasingly seeing plans use things like auto-escalation to push savings rates higher. Income is very much on the near horizon.