Michael Falcon became managing director and head of retirement, Americas, for J.P. Morgan Asset Management, New York, in January 2011, but his path to the job was anything but a straight line. “I don't think people would have guessed I would have been in this particular industry, let alone the retirement niche,” said Mr. Falcon.
Along the way, he has worked in banking at the former Chase Manhattan Bank; in corporate finance and consumer products at Sara Lee Corp.; in wealth management and retirement services at the old Merrill Lynch & Co.; and in financial media, as president and partner of Samuel Bennett Inc., a media, marketing and personal financial products company.
Sara Lee, where he worked for 11 years, including five years in Europe, was the source of Mr. Falcon's most existential business experience. At one point, he was the chief financial officer for a Sara Lee company that was the “largest intimate apparel company in France,” he said. Mr. Falcon focused on strategic planning as well as finance, and his specialties were pantyhose, women's intimate apparel, men's underwear and athletic wear. “I worked in Paris for the group headquarters,” he recalled. “A group of us — the men — on a dare from the women in the marketing team wore pantyhose for a week to understand what it was like.”
His move to Merrill Lynch introduced him to a “completely different area of finance,” Mr. Falcon said. He was recruited to run Merrill's retirement business even though he hadn't had brokerage, retail financial services or 401(k) experience. “But I had a background in consumer products and general management and finance,” he said. “So it was a great opportunity for me to take skills learned in one world and apply them to another world where I was familiar with the topics in general.”
What is the role of lifetime income options in defined contribution plans? We're just at the beginning of what those in-plan solutions will be, and I am not at all convinced that inside-the-plan is the place to solve most retirement income needs. It will be a part of it, but it won't be as integral as accumulation. I think plans are designed from the bottom up to be accumulation vehicles. Spending in retirement and doing so while not running out of money is really hard. It requires a much more personalized level of advice and guidance than I think plans are structured for today. I continue to see financial advisers, fee-based advisers, planners and online tools as being the major providers of lifetime income solutions.
Can your record-keeping platform handle a lifetime income option embedded within a 401(k)? We can handle it. And it will have a role. We have a managed account solution that has a final-pay annuity at the end. We just launched our Smart-Retirement (target-date) strategies available with Prudential (Retirement's) IncomeFlex product, (which provides a guaranteed minimum withdrawal benefit). So there are a number of things that we have both in and outside of the plan space. I just don't see it being the next target-date wave. I think these products will have a position in plans - and not an unimportant one. I think they are, and will remain, the accumulation vehicle - but not the payout vehicle.
Why? I think the plans are designed to take in small amounts of money frequently over a long period of time and pay them out once. I think people will want to aggregate and assume more control — more direct control — over their money. I think sponsors are split about the balance between keeping people in plan — being able to continue to protect people who work for the company — with the fiduciary responsibility and, of course, getting the scale advantages that it provides. I think they're torn with that against carrying additional liability and expenses relative to providing ongoing support to people who no longer work at the company.
Why are you trying to change the strategy of a core menu? We announced an offering in the fourth quarter of last year called core menu innovation, which is designed literally to blow up the traditional notion of a core menu (by offering three portfolios — diversified stocks, diversified bonds and diversified cash alternatives). Individuals who opt out of the target-date option are overwhelmed — their words, not mine — by the choices in the core menu. They don't know how to use them, and we're advocating a simpler approach.
Why is the core menu too complex? We see core menus anywhere from nine to 10 choices up to 60 or 70. The research I've seen shows the average is somewhere around 18 to 20. We're finding that individuals simply don't know enough about what those funds are, or how to use them. Consequently, there's plenty of indication that says when people construct their own portfolios, they don't do as well as professionally managed portfolios. ... It's a natural human tendency to say: “The more choice we give, the easy we make it to use those options. We'll put tools behind those options. These will be good things we'll be engaging.” That's true (but) it's only true for a small portion of the population. What's really true is that at some point, choice hurts.
Would potential clients worry about having too few choices? We would encourage having either a mutual fund window or a self-directed brokerage option. ... It strikes us that there's a big gap between target-date investing and most core menus today. And so the idea is rooted in, "What if we have something that was simple and straightforward — stocks, bonds and cash?' But each portfolio in itself was broadly diversified and professionally managed. In the largest portions of the market, they could be customized, complete with investment strategy statements. We always contemplated that you would need to keep a broad level of choice. We can do that efficiently through a mutual fund window or through a self-directed brokerage account.
What will be the impact of the Department of Labor's new rules on fee disclosure between providers and sponsors? In the largest segment of the market, this is old news. I think there's been tremendous progress in transparency and competitiveness really in all market segments. ... The risk that we still face — in the political sphere and the financial media sphere — is that we so focus on fees and costs in a negative way that we demonize the system and we create uncertainty or distrust in the public for these systems. I would be very concerned with the unintended consequence of scaring people away.
How important is auto enrollment? I can't think of the last client that came in that didn't have some version of auto enrollment. We think that's a very important thing that sponsors can do improve the underlying performance of the individuals in terms of retirement success.
Why is there resistance to auto enrollment? Sometimes, there's cost; sometimes, there's attitude. There is concern — and we share this too — that the average default rates on auto enrollment tend to be lower than for people who self-select. ... There are lots of these questions of what is good for the individuals vs. what is good for the plan as a whole. And those are the dialogues that we have with clients. ... If you have high levels of first-year turnover, there can be a very, very high cost to having an immediate auto-enrollment with a match. There are ways to structure around that. ... In other cases, you have plans that haven't gotten there or haven't been comfortable with it. In some cases, you have companies that are looking at revising their medical and health benefit programs. So they say: “We're going to get to that (retirement plan changes such as auto-enrollment), but it's six months out or two years out because we have these other things to do first.”