If your employees are like most Americans, they could use customized 401k advice. For years, the industry pitched employee education. Actually what was called education was merely information in a PowerPoint presentation. The result is a crisis.
The case for 401k advice
Research shows America’s employees know they need help. With seven out of 10 employees reporting they lack the time, interest or knowledge to manage their retirement plan1 and more than half confessing confusion about it,2 the need for advice is great.
Recent regulatory changes and technology now make it possible for CERTIFIED FINANCIAL PLANNER™ professionals and other fiduciary advisors with retirement planning designations to take a more meaningful role in putting plan participants on the path to retirement.
As you know, a 401(k) and 403(b) allow for tax-deferred savings of up to $17,500 (defined contribution). It does not relate savings to a future paycheck. Pensions have been attractive to employees because an outside expert, an actuary, determines how much should be saved to replace a given percentage of income. Why not provide this feature of a pension inside of your defined contribution plan?
Personalized 401k advice helps employees answer:
- How much should I save?
- How do I invest in the plan?
- When should I retire?
This advice should be backed up with reports that show them where they stand today and what their options are to close the gap. It can also provide retirement progress reports and projections of potential retirement income based on their current situation. Will employees use it?
- 55% would use advice if their employer made it available.2
- 51%prefer a personalized touch over online tools or brochures;
- 74%trust personal financial advisors for help. 2
Ongoing 401k Advice and Human Nature
Multiple priorities can easily distract employees. It’s important to provide ongoing coaching.
- Are your savings on track?
- Are you sticking with the investment plan (not to be confused with investments)?
- Should the retirement date change?
- Has anything changed since the last review, job, pay, marital status, etc.?
It is important that this be an ongoing exercise. 92% who receive advice stayed the course through the volatile markets of 2008-2009. 2
The return on investment of 401k advice
While you could pay for the advice, I recommend that you have your participants pay for the advice out of their balance. Your cost is the facilitation of this advice at or through your workplace. Your return is the upside of reduced healthcare costs of financially stressed employees and improved productivity from reduced absenteeism. If you have workers over 60 years old who are delaying retirement due to retirement readiness, it’s been shown that they typically cost you significantly more than workers in their 20s and 30s.
Recent employee studies have shown these employee returns:
- 70% who receive advice doubled their average savings rate (from 5% to 10%) and increased their asset diversification level (from 3.7 to 8 or more asset classes).2
- The median annual return for employees receiving advice was 292 bps higher on average each year. 5
- Employees who get help with their retirement plan did better 87% of the time.6
- A typical 45-year old employee in an advice program was projected to have 70% more savings at retirement.6
Given these returns, I challenge you to get your 70% of your employees on track to replace 70% of their income within 3 years. The returns to your company should be clear. We’d like to work with you to document the effects of financially distressed employees and their increased productivity. Email James Brewer at james.brewer@lpl.com to get started evaluating your options.
(1) 401(k) Plans Under Pressure, Charles Schwab, Advantage 2011
(2) The New Rules of Engagement for 401(k) Success, Charles Schwab, June 2010
(3) Research Works: Partnership for Workplace Mental Health report. Feb 2009.
(4) Higher Health Care Costs for Metabolic Syndrome Risk, Disabled World, September 2009.
(5) Help in Defined Contribution Plans, is it Working and for Whom? Financial Engines (January 2010). Past performance is not indicative of future results. Report assesses the impact of professional investment help, including investments, managed accounts and online advice, during the three-year period between January 1, 2006, and December 30, 2008. It includes analysis of eight large 401(k) plans representing more than 425,000 individual participants with $25 billion in plan assets. All returns reported in this research are net of fees, including investment-specific management and expense fees, and managed account fees where applicable.
(6) Help in Defined Contribution Plans; Financial Engines/AON Hewitt Study 2006 through 2010 (September 2011).Past performance is not indicative of future results. Report expands upon January 2010 report referenced in prior citation and assesses the impact of professional investment help, including investments, managed accounts and online advice, during the five-year period between January 1, 2006 and December 30, 2010. All returns reported in this research are net of fees, including investment-specific management and expense fees, and managed account fees where applicable.
(7) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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