The State of Retirement Research | #419 (Jean-Pierre Aubry)

Episode Summary

Executive Summary: JP Aubry of Boston College’s Center for Retirement Research discussed research on retirement investing, showing that households often want less equity than they actually hold, advisors and TDFs generally push investors toward more stocks, and public pensions’ shift from vanilla stocks/bonds into alternatives has often hurt performance. He also covered how inflation and market risk hit retirees, and why these issues matter for retirement security.

Main Topics: Desired vs. actual household asset allocation (Priority: 5/5): Aubry’s survey research found older, well-funded investors typically prefer lower equity allocations than they actually hold, suggesting defaults and portfolio salience push portfolios above stated risk preferences. Financial advisors’ influence on equity allocations (Priority: 5/5): Advisors appear to nudge clients toward higher stock exposure, likely offsetting pessimistic return expectations, but compensation models and advisor beliefs also shape recommendations. Advisor-to-advisor variation and fixed effects (Priority: 5/5): For similar client profiles, recommendations vary much more across advisors than within an advisor across different client types, implying many advisors apply a personal “optimal” allocation with limited customization. Public pension allocation to alternatives (Priority: 5/5): Public pension plans moved from bonds to equities and later from equities to alternatives like private equity, hedge funds, and commodities; the research suggests that second shift has generally underperformed and added complexity, opacity, and cost. Inflation risk for retirees (Priority: 4/5): Retirees are especially vulnerable to inflation because they have less wage income, less debt, and more fixed income exposure; households also tend to overreact by pulling consumption forward, which can reduce retirement security. Sequence of returns and lifecycle risk (Priority: 4/5): Market timing risk matters most in retirement when withdrawals begin, and the canonical lifecycle response is to reduce equity exposure with age as human capital and labor income decline. Role of defaults and target-date funds (Priority: 4/5): Target-date funds and plan defaults help move savers toward diversified, age-appropriate allocations, often without requiring active engagement from households.

Key Arguments: Households with significant assets prefer lower stock exposure than they actually hold, indicating that defaults, menu design, or inertia likely push them into riskier portfolios than their stated preference. Advisors tend to increase client equity allocations on average, which may correct overly pessimistic beliefs about stock returns and volatility, but can also reflect asset-based compensation incentives. Advisor recommendations show little customization across client archetypes, but large differences across advisors, suggesting a strong advisor-fixed-effect in asset allocation advice. Public pension plans’ move from stocks/bonds into alternatives has generally been a performance drag, especially for hedge funds and commodities; private equity has been closer to a wash. Public plans are structurally ill-suited to nimble alternative investing because they operate in a political environment that prizes transparency and involves slow governance processes. Inflation is particularly harmful for retirees because they lack wage growth and often hold less inflation-protected human capital; their financial behavior during inflation periods can worsen outcomes through overconsumption. TDFs and advisor guidance both appear to raise equity exposure in ways that likely improve long-run retirement security, given that many investors are too pessimistic about expected stock returns. The strongest evidence-based concern for public pensions is not just underperformance, but whether the added complexity, fees, and illiquidity are worth the governance burden.

Data Points: Survey sample age range: 48 to 70 - Individuals surveyed on desired stock allocations Average desired stock allocation: 37%–38% - Mean ideal equity share reported by surveyed individuals Observed actual stock allocation: 45%–46% - Actual holdings among comparable individuals Advisor-linked incidence: About two-thirds - Share of surveyed individuals who worked with an advisor Number of prototypical client profiles: 4–5 - Advisor survey used archetypal client scenarios Pension fund sample coverage: About 250 pension funds - Public-plan sample used in performance analysis Asset coverage in public-plan sample: 95% - Sample represented 95% of public sector pension assets Worker coverage in public-plan sample: 95% - Sample represented 95% of public sector workers Advisor understanding of sequence risk: About 75% - Estimated share of advisors who understand sequence-of-returns risk Target-date fund stock allocation at younger ages: About 60%–70%+ - Typical starting equity allocation described for TDFs Target-date fund stock allocation near age 60: Around 40% - Typical equity allocation by later life in TDF glide paths Research timeline for public pensions: 2006/2009 onward - Aubry described studying public pensions starting before and around the GFC period Public-plan performance evaluation window: 2001 to 2018 - Rolling-period analysis of pension returns versus index benchmark Recent public-plan benchmark comparison: Through 2023 - Updated index-comparison research mentioned in the interview

Pivotal Quotes: "Advisors come to the table with their ideas about where to start the conversation." — JP Aubry: Explaining why advice varies more across advisors than across client types "The majority of time, pension funds underperformed the index." — JP Aubry: Summarizing the rolling-period public pension versus 60/40 index comparison "Having meaningful relationships... you need some kind of baseline security." — JP Aubry: His definition of success and how financial security enables purpose and relationships

Implications: For investors, defaults and good advice can improve outcomes by nudging portfolios toward appropriate equity exposure. For pensions, the research argues for simpler, more transparent strategies and skepticism toward costly alternatives unless they clearly add value.