401(k) advice gap presents opportunity for advisers

Participants want professional retirement-planning advice, but many aren't using it when offered, according to a Schwab study, giving advisers a chance to shine

Aug 26, 2015 @ 1:52 pm

By Greg Iacurci

While a majority of 401(k) plan participants want to take advantage of professional investment advice, there's a large gap between those who actually follow through and those who sit on the sidelines, according to a new survey from Charles Schwab & Co.

That the large segment of participants who want retirement-planning advice but aren't receiving any presents an opportunity for advisers working with 401(k) plan sponsors and administrators to boost participant engagement and urge clients to take advantage of professional advice, whether through a managed account program, one-on-one consultation with an adviser or another service such as Financial Engines or blooom Inc.

Sixty-seven percent of participants would like personalized investment advice in their 401(k) plan, according to Schwab's study, but only 12% are actually receiving that advice. The survey included 1,000 participants between the ages of 25 and 70 who currently contribute to their 401(k) plans and who work for companies with at least 25 employees.

“There's definitely a large disconnect,” said Catherine Golladay, vice president of participant services and administration at Schwab Retirement Plan Services.

Laurie Rowley, co-founder and president of the National Association of Retirement Plan Participants, attributes the lack of engagement largely to a distrust of financial institutions. An NARPP study this year that included 4,300 participants found that participant trust levels for financial institutions, including advisers, is just 12%. Trust is important, because it drives engagement with a retirement plan, Ms. Rowley said.

”You're asking people to make trust-based decisions in a very low-trust environment,” Ms. Rowley said.

That lack of trust comes in part from things that advisers can't control, such as the 2008 market crash. But advisers can control other factors, such as transparency, clarity and simplicity in communications to participants, Ms. Rowley said. For example, dense enrollment materials littered with industry jargon and an unclear explanation of fees for advisory services can discourage participation, she added.

“[Trust] presents one of the best opportunities in decades for advisers to distinguish themselves and make a mark for themselves in the industry, because no one's doing it well,” Ms. Rowley said.

Advisers can tap into the relationships between employers and employees to help drive participant use of advice services, which would hopefully lead to better outcomes for plan participants.

“One of the things we see is participants trust their employer — that's where the trusted relationship is,” Ms. Golladay said.

For those plan sponsors that don't automatically default participants into a managed account program or target-date fund, advisers can work with sponsors to make sure they're actively promoting the benefits of a managed account program or other advisory service, Ms. Golladay said.

However, auto-enrolling employees into a managed account offering is the best way to close to advice gap, because it helps overcome employee inertia, Ms. Golladay added. Some advisers also advocate going beyond showing participants what their account balances will look like at retirement, but putting retirement savings in the context of a participant's larger financial picture.

According to Plan Sponsor Council of America data, investment advice, whether through financial advisers affiliated with the plan's provider, a registered investment adviser, web-based provider or certified financial planner, is offered in 32.5% of 401(k) plans nationwide. Only 4.5% of 401(k) plans use a professionally managed account as their default investment option.

Fred Barstein, the founder and CEO of the Retirement Advisor University, said that some plan sponsors don't want advisers working with plan participants. Further, some advisers also may not include defined contribution plan participant advice in their business models because they may feel that small account balances are not worthwhile to service.

“We're advocating that advisers should be incorporating some form of robo-advice inside their own business so when they deal with smaller account balances, they can provide advice,” Mr. Barstein said.

The only caveat in that situation is that the advice may only be customized for each individual to the extent that the software platform allows, he added.

Participant engagement with advice, Mr. Barstein said, could also differ from plan to plan, based on data points such as participant gender, salary and age — it's up to the adviser to determine the best engagement method.

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