Employees shy away from personalized 401(k) advice

As much as employees like the idea of having personalized 401(k) advice available at work, not very many of them are actually using the service when it’s there.
That was the conclusion of a recent survey by Schwab Retirement Services. The firm polled 1,000 401(k) participants and discovered that only 23% of the participants have access to and use personalized advice services in their 401(k). Those who don’t have access to such services miss them: Seven in 10 said they’d feel “extremely confident” or “very confident” in their ability to make the appropriate investment decisions if they had the help.
Indeed, “if you build it, they will come” does not apply in the realm of retirement plan advice for employees.
Steve Anderson, head of Schwab Retirement Plan Services, says that complexity is a major deterrent for workers who would otherwise seek advice for their retirement plan savings. “If you don’t understand it, you shy away,” he said. “But the other aspect is that though the auto-default features are great in the 401(k) arena, it might imply to the participant that the default is where they need to be.”
In other words, workers might feel just fine with a default contribution rate of 3% of salary going into an age-appropriate target-date fund because those are the automatic settings selected for them.
Workers’ tendency to dodge retirement plan advice makes the case for using managed accounts at the workplace, involving re-enrolling the entire retirement plan into a managed account system and create customized portfolios for participants, Mr. Anderson said. Advisers and service providers have access to loads of data, and they should be putting it to use.
“Think of how the operations of the plan work: You get this payroll file every two weeks with lots of data,” Mr. Anderson said. “You could have 10 or 12 data points that you send to Morningstar Inc. [which provides managed-account services for plan participants]. You can look at savings rates, risk profile, Social Security.
“That’s much more comprehensive than looking at a birthday and picking a target-date fund,” he added.
Advisers on the ground note that there are additional ways to rope in participants and get them to be receptive to advice. The most forward-thinking plan advisers out there are migrating away from merely showing workers what their balances will look like in 30 years. Rather, employees need a context for their retirement savings: How does saving for retirement affect their entire financial picture?
“It’s financial wellness as a holistic approach, engaging the companies and dangling a carrot for a wellness assessment,” said Jasonn Potter at 401(k) Advisors Intermountain. “You get them to complete the assessment and determine their financial needs. It’s not retirement, but more budgeting and the building blocks of a financial plan.”
Since mining workers’ data is essential to bolstering a 401(k) plan, advisers need to make sure they nudge employees into sharing some additional information. Mr. Potter, for instance, encourages workers to complete their financial assessments by providing incentives — for instance, being entered in a contest to win a prize.
Providing workers with additional 401(k) guidance is a labor-intensive effort, so it’ll require teamwork. Advisers recommend working with vendors, record keepers and even with providers of planning and budgeting services (such as Mint.com) to determine how their educational tools can be implemented for the workers. The vendors are essential, as they can coordinate with the adviser to come up with the best way to distribute that additional information to the participants and employers.
“This isn’t a lunch-and-learn at the headquarters, but combining in-person group sessions with one-on-one sessions and deliverables in a way that’s native to them receiving it,” said Alexander G. Assaley III, an adviser with AFS Financial Group.
These efforts work hand-in-hand with auto-enrollment features, and aren’t intended to replace them. After performing a financial wellness assessment and leveraging tools that vendors use to show where and how workers are falling short, the use of auto-escalation and auto-enrollment features are supposed to raise employees’ savings rates, Mr. Potter said.
“We do see an uptick in enrollment and appreciation from our paternalistic [plan sponsor] clients,” he said. “They feel like they’re doing a lot for those individuals.”
In Mr. Assaley’s case, his firm has started working on a program that will focus plan participants on making smart financial decisions. Mr. Assaley says that he hopes to make the program available for all of the firm’s 401(k) clients in 2015.
“We’re working with clients to understand their current demographics and statistics,” he said. “How are employees doing with savings? How are they doing overall in making financial decisions? We’re using that to structure goals and strategies for the organization to focus on areas that are key drivers to creating a better retirement system.”