Introduction of Larry Fink:
Larry Fink, Chairman, and CEO of BlackRock, was welcomed as a guest speaker at NYU Stern School of Business. His talk focused on the challenge of old age and its impact on individuals and society.

Ground Rules:
Following Fink’s speech, Tom Cooley, Fink’s predecessor, moderated a Q&A session. Fink’s accomplishments were highlighted, including being named CEO of the Decade by Financial News in 2011 and one of the world’s best CEOs by Barron’s for seven consecutive years.

Fink’s Speech:
Fink chose to read a prepared speech due to the importance of the subject matter. He emphasized the need for students to consider the issue of old age and its implications, even though it may seem distant.

Focus on Old Age:
Fink’s speech centered around the topic of old age and its impact on individuals and society. He urged students to think about old age after securing a job.

Social Security:
The aging population is straining Social Security, as retirees now depend on it for 70% of their income. Social Security was not designed to support the current demographics, with fewer workers paying into the system compared to retirees. Adjusting benefits or raising the retirement age are difficult and emotional solutions.

Pension Plans:
Defined benefit pension plans, which provide a set income during retirement, are declining. Employers are shifting to defined contribution plans, such as 401Ks, where workers save for their own retirement. This shift has led to individual responsibility for retirement, but many people are not equipped to meet their future needs.

Private Savings:
Only half of private sector workers are covered by an employee-sponsored retirement plan. Less than 40% of employees participate in these plans, leaving the majority of workers without a vital part of the retirement system. Even with employer plans, few employees max out their contributions, despite the benefits.

Consequences:
The Gray Society is already straining governments, depressing economies, and suppressing job opportunities. Longer lifespans and fewer workers supporting the elderly create a drag on growth and GDP. Young people face restricted job opportunities as older workers stay in the workforce longer.

Solutions:
Governments, businesses, and individuals need to address the challenges of the Gray Society collectively. Adjusting Social Security benefits, raising the retirement age, and reforming pension plans are difficult but necessary steps. Encouraging participation in retirement plans, educating individuals about retirement savings, and promoting financial literacy are crucial.

Investor Concerns and Behavior:
A survey conducted by BlackRock revealed that a significant portion of investors are worried about outliving their savings. When managing their own retirement savings, individuals tend to prioritize safety over returns, leading to more investments in traditional fixed income products compared to defined benefit plans. This behavior stems from investor psychology and the tendency to feel more pain from losses than pleasure from gains.

Challenges of Long-Term Planning:
Investors often lack a long-term perspective, focusing on short-term fluctuations and noise in the market. The constant stream of information and rapid news cycles contribute to this short-term focus, disrupting long-term thinking and objectives. This noise and concern about outliving savings ironically drive investors towards perceived safer investments like traditional bonds, which may not provide adequate returns in the long run.

Need for Embracing Long-Term Horizons:
Given the extended timeframes involved in retirement planning, investors should adopt a long-term mindset and take advantage of longer investment horizons. By focusing on the bigger picture and not getting caught up in short-term events, investors can keep their money working for them and potentially achieve better retirement outcomes.

Irrelevance of Short-Term Events:
When asked about specific economic events, such as the Cyprus situation, the speaker emphasizes that such short-term events are not relevant to long-term retirement planning. Central banks’ actions in lowering interest rates to stimulate growth have had positive effects on housing, bank lending, energy, corporate investments, and equity markets.

Current Monetary Policy and Its Impact on Savers:
The current monetary policy is affecting savers negatively, particularly those relying on traditional government bonds to fund retirement. Historically, bonds provided steady returns over the last 30 years due to falling inflation and interest rates. However, with low 10-year treasury yields (less than 2%), traditional bond investments pose risks.

Overallocation in Bonds and Potential Losses:
Overreliance on traditional bonds carries the risk of losing money when interest rates rise, leading to a decrease in bond values. Investors may lose an entire year’s return on long-dated treasuries with a slight interest rate increase of just one-fifth of 1%. The conventional strategy of investing 60% in equities and 40% in fixed income, with a higher fixed income allocation closer to retirement, is no longer effective in the current environment.

Need for a Different Investment Approach:
Investors should adopt a different approach to achieve higher returns needed to support longevity and longer lifespans. Diversification is crucial, including a wider range of equities and bonds in investment portfolios. Younger workers should adopt an objective-based approach, focusing on long-term goals over a 30 to 45-year horizon.

The Power of Compounding and the Importance of Saving More:
Compounding highlights the significant difference in returns over time. Saving $1,000 per month for 30 years with a 3% annual return (comparable to current 30-year bonds) yields less than $600,000 at retirement. Investing the same amount with a 6% return (achievable in many equities) results in over a million dollars during the same period. To reach a million dollars at a 3% return, individuals need to save more than $1,700 per month or an additional $700.

Urgent Need for Acknowledging and Addressing the Retirement Crisis:
The retirement crisis is a systemic issue affecting not only retirement systems but also economic futures. A solution to this crisis requires urgent attention and should be a national priority. Open and constructive dialogue is necessary to address the problem before it escalates further.

Employer Responsibilities:
Employers should fulfill their moral obligation to help workers prepare for retirement despite the shift from defined benefit plans to defined contribution plans. Offer auto-enrollment plans to all employees, provide matching funds, and educate them about the importance of maximizing their contributions. Emphasize the concept of compounding and longevity to workers.

Asset Management Industry’s Role:
Asset management firms, including BlackRock, need to focus on investors’ long-term objectives and liabilities rather than short-term sales and products. Provide outcome-oriented solutions that help investors stay on course, avoid distractions, and understand the importance of time in the market. Promote target date funds, target risk funds, and multi-asset solutions that align with long-term goals.

Comprehensive Retirement Savings Solution:
Implement a mandatory retirement savings system similar to Australia’s superannuation funds or the UK’s pension requirements. Australia’s superannuation fund, launched 20 years ago, requires every employee to contribute a portion of their income into a fund that belongs to them. The superannuation fund has been successful in replacing the government pension scheme and reducing the burden on the government. In 20 years, the Australian superannuation funds have accumulated more than $1.6 trillion in assets, providing Australians with one of the highest per capita retirement savings pools globally.

Other Models for Retirement Savings:
Explore models such as CalPERS, the state employee pension fund in California, for pooled funds for small employers. Consider opening up the highly successful thrift savings program for federal employees to all workers. Learn from successful pooled funds created for small employers and not-for-profits.

Current System:
The current retirement system relies on Social Security contributions (6.2% of wages up to $113,000) matched by employers, totaling approximately 12% of wages. Over 30-40 years, this generates a foundation for retirement but often insufficient to meet full retirement needs. Americans are concerned about the future of Social Security, 401ks, and IRAs, which are often inadequate.

Mandatory Savings:
A mandatory savings system is proposed to address the shortcomings of the current system. This system would be phased in gradually to avoid economic shock. Benefits of a mandatory savings system: Relieves pressure on the federal budget Welcomed by markets Alleviates the crisis of financing longevity, which can drag down the economy and job creation.

Personal Actions:
Start saving for retirement early, even if it’s a small amount. If working, max out contributions to 401ks or start an IRA. The longer you wait to save, the greater the burden in the future.

Longevity:
Longevity should be a blessing, providing opportunities for compounding investments and a longer investment horizon. Without proper preparation, individuals face two options: Working longer than anticipated, as seen in society and Europe. Relying on children for support, creating a burden on them.

Social Justice:
Longevity is a social justice issue that will significantly impact future generations. If not addressed globally, it can lead to fewer job prospects, higher unemployment, and lower growth. Young people should speak out and advocate for addressing longevity issues.

Demographics and Longevity:
Demographic shifts are significantly impacting society and economies, straining budgets and markets. The challenges posed by an aging population are enormous, complex, and emotional.

Economic Implications:
With more money invested, returns on investments may be mitigated due to increased savings. There is a shortage of investable assets worldwide, leading to low interest rates and rallying equity markets. Long-term investors are seeking duration in equity markets rather than long-term bonds due to low returns.

Mandatory Savings Programs:
The need for a comprehensive review and overhaul of retirement systems is emphasized. The discussion should encompass social security, corporate responsibilities, and individual responsibilities. A mandatory savings program should be considered, but the specific details, such as contribution percentages, are yet to be determined.

Short-Term vs. Long-Term Focus:
The shift from a long-term to a short-term perspective has been gradual and influenced by factors like financial products, larger capital markets, technology, and high-frequency trading. The objective of long-term investing should be revisited and prioritized.

Compensation Structures:
Compensation structures for businesses and employees should be adjusted to encourage a long-term focus. The current compensation structures may contribute to the short-term mindset.

Short-Termism in Society and Media:
The combination of technological advancements in media and capital markets has led to a shift towards short-term thinking. Media’s focus on instant news and social media’s rapid-fire communication style further contribute to this short-termism.

Short-Termism in Accounting and Governance:
Accounting practices have become more short-term focused, with regulations like Solvency II in Europe leading insurance companies to prioritize short-term volatility over long-term stability. Governance practices, such as annual review of board directors, may not be optimal for handling crises and should consider longer-term perspectives.

Technology’s Impact on Short-Termism:
The constant availability of technology and the rapid pace of communication through devices and social media contribute to a mindset of immediacy and short-term thinking. This can make it challenging to focus on long-term objectives and distinguish between relevant information and noise.

Importance of Long-Term Objectives:
It is essential to set and reflect on long-term objectives, whether personal, professional, or financial. Individuals should regularly assess their objectives and align their actions with these long-term goals.

Investment Strategies for Different Life Stages:
Investment strategies should consider an individual’s age, retirement goals, and risk tolerance. Younger investors may be better suited for a higher allocation to equities, while older investors may need a more balanced mix of stocks and bonds.

Asset Managers’ Incentive Structures:
Asset managers are incentivized to perform well since poor performance can lead to client redemptions and loss of assets. Compensation structures are typically performance-based, aligning incentives with client outcomes.

BlackRock’s Compensation Structure:
BlackRock has a bonus pool of approximately 35% of pre-tax income, which is lower than many other security firms. All employees start with at least 30% of their compensation deferred, mostly in the form of equities. High-income earners can have up to 60% of their compensation deferred over a three-year period. Leadership has equity plans that are five years in terms and must be present and in good standing to receive them.

BlackRock’s Investment Strategy:
BlackRock is the largest ETF provider and indexer in the world, but it has also invested heavily in its active equity teams. The firm believes that both active management and ETFs play a role in investors’ portfolios.

Market Trends:
BlackRock has seen a significant shift in investor behavior, with clients focusing more on asset allocation rather than individual manager selection. As more money moves into beta products (ETFs and index funds), BlackRock believes it will become easier for active managers to generate returns.

Investment Trends:
Investors are increasingly using beta as active, resulting in a growing dominance of ETS and index products. BlackRock believes this trend will continue due to benefits like lower fees and more control over allocations.

Regulation:
BlackRock welcomes some regulations that aim to protect society from financial market failures. The firm supports efforts to move products off OTC exchanges and onto exchanges for increased transparency. New regulations require asset managers like BlackRock to provide daily derivative holdings across client portfolios. The firm has hired more compliance and legal personnel to meet regulatory demands, resulting in higher costs.

Systemically Important Designated Institutions (SIDIs):
BlackRock is awaiting the government’s report on whether asset managers should be designated as SIDIs. The firm is prepared to adapt to any recommendations from the report and work with regulators and politicians to address the outcome.

Final Question:
The presentation concludes with time for one final question.

Federal Reserve’s Bond Purchases and Private Sector Debt:
The Federal Reserve is buying $85 billion worth of bonds monthly, resulting in a total of $1 trillion per year. In the United States, $1.1 trillion of new debt was raised in the previous year, leaving only $100 billion for the private sector to purchase. This dynamic has contributed to lower interest rates.

Interest Income and Amortization of Premium:
Dollar-based assets generate $950 billion in interest income annually, creating demand for more bonds. Bonds often trade at premiums, leading to $450 billion in amortization of the premium yearly.

Employment and Factory Utilization as Indicators of Inflation:
Inflation is unlikely to be a concern in the near term due to excess labor and excess factory capacity. Employment would need to fall below 6.5% and factory utilization above 84% for inflation to become a problem.

Comparison to Japan’s Economic Situation:
Japan has experienced deflation for over 20 years and is now aiming for 2% inflation. Achieving 2% inflation would be significant for Japan, even during its economic boom in the 1980s.

Demand for Investable Assets:
Fink believes there is strong demand for investable assets, even without the Federal Reserve’s bond purchases. This demand will likely moderate potential interest rate increases.

Conclusion:
Fink anticipates that interest rates will eventually rise, but the demand for investable assets will limit the extent of the increase.