In a somewhat nostalgic approach, the annual letter from CEO of BlackRock He begins by reflecting on his experience with his parents. Larry Fink recalls that the way they managed their personal finances influenced his understanding of long-term investments and financial security. He says his parents invested wisely and this allowed them to enjoy a comfortable retirement. In this context, the BlackRock CEO highlights the fundamental role of capital markets in creating alternative financingin addition to banks and traditional deposits, faced with what he considers to be two major challenges, since the middle of the 21st century.
“The first,” he says, “is provide people with what my parents built over time”. The CEO of BlackRock draws attention to a new demographic reality that the traditional retirement system is facing, putting into question the attribution of dignified and safe retirements in the future for many people. As he explains, if people live longer, they will also need more money and here, capital markets can help, “as long as governments and companies help people invest”, he warns.
The second challenge highlighted is the need for infrastructure. “How are we going to build the enormous amount that the world needs?“, question. This is because, as he explains, as countries take steps towards decarbonization and on scanning, there is a need for a greater amount of new infrastructure. Larry Fink even says that in his almost 50 years of experience in finance, he has never seen so much demand for energy infrastructure and, from his perspective, “this is due to the fact that Many countries have dual goals: they want to transition to energy sources with lower carbon emissions and, at the same time, achieve energy security”. Here too, capital markets can be an ally, he says, to help achieve these objectives, “including decarbonization, in an affordable way”.
The importance of financial literacy
In view of the diagnosis highlighted regarding the sustainability of the reforms, the CEO reinforces the determining role of both governments and the private sector, given that the approaches adopted will have profound implications for the allocation of investors’ portfolios. Investment in financial literacy is one of the ways highlighted by Fink to fill some gaps in workers’ knowledge, taking into account that many have difficulty investing for retirement, either due to a lack of familiarity with financial markets or the complexity of investment products. Regarding this last point, Larry Fink sees target date funds as a simpler, more intuitive instrument that can alleviate these difficulties. “When people choose their target date, the fund automatically adjusts its portfolio, moving from more profitable shares to less risky bonds, as retirement approaches”, he explains. The adoption of automatic enrollment policies in retirement investment planscould be, according to the CEO of BlackRock, another measure that mitigates this problem.
Defined Contribution vs Defined Benefit
In the annual letter, the CEO of BlackRock says that the entity commissioned a study in 2018, which involved 1,150 American retirees. When analyzing the data, the result was…a paradox.
The study showed that after almost two decades of retirement, the average individual still had 80% of the money they saved before retiring. However, the data also showed that, even so, many were anxious about their financial situation. Only 32% reported that they felt comfortable spending what they saved. “This paradox has a simple explanation: Even people who know how to save for retirement still don’t know how to spend the money they save”, explains Larry Fink.
According to the CEO, the roots of this problem in the United States go back more than four decades, when workers began switching from defined benefit pension plans to defined contribution plans. From Larry Fink’s perspective, Defined contribution plans place more financial responsibility on individuals, creating uncertainty about how to manage and spend their savings during retirement. This is because, and he explains, “Most of these plans do not come with instructions about the amount that can be withdrawn each month or how to spend these funds sustainably throughout retirement”, he concludes.
