401(k) plans should allow cross selling: Report

Some of the advice that 401(k) participants want most isn’t available in their workplace plans: guidance on real estate and a retirement timeline.

Older workers pointed to those services, along with long-term care insurance, tax planning and college saving as areas where they want help but don’t often have access to it, according to a report from Hearts & Wallets.

And that gap speaks to a need for retail financial advice, said Laura Varas, CEO of Hearts & Wallets. “The questions they’re asking are way beyond the scope of any workplace advice,” Varas said.

Such questions include: “Will I have to work in retirement?” and “Should I move to a lower-cost state?”

The latter question can be highly consequential for people, and employers simply can’t address it, Varas said.

“If you’re the employer, and you’re trying to get this person to retire, you have legal liability and can get sued for age discrimination,” she said. “How on earth are you going to have an honest conversation with them about their human capital and how long they’re able to work?”

Financial services firms have picked up on this, and it’s part of the reason why retirement plan providers have been buying retail advice businesses, she noted. Empower Retirement’s acquisition of Personal Capital is a prime example, she said, with so much opportunity that companies see to expand their financial relationships with 401(k) participants outside of the plan.

That trend stands to benefit consumers, she said. For example, the top wish that workers said they have is to get traditional pensions back, according to a Hearts & Wallets survey in August of nearly 6,000 U.S. households.

It’s unlikely that wish will come true – but retirees have shown that they get about the same financial-security benefit from pension income as they do from lowering their housing costs, often from relocating to another state, according to the report. Retail advice on real estate could provide help that is nearly as valuable as getting at least 25% of retirement income from a pension, Varas said.

“Lowering your real estate expenses can have as big an impact on your feelings of financial security as pension income,” she said. “That’s the kind of stuff they want help with.”

But that opportunity for advisers does not necessarily mean that 401(k) savers should have to roll their assets out of plans when they retire, she said. The best scenario is an in-plan retirement-income feature paired with access to paid retail financial advice, she said.

“Plan sponsors don’t want people selling to their employees. But I don’t think that’s the right solution, because what their employees want can only be delivered by a retail adviser,” she said. “I don’t know why we are fighting over cross selling.”

In addition to the survey data, the Hearts & Wallets report is based on figures from several large databases that the firm maintains.

About a third of 401(k) participants ages 55 to 74 who access financial advice through their plans indicated they understand where their retirement income will come from, which is the same rate among people who never access available advice, Hearts & Wallets found. People also are much more likely to use in-plan advice while they are younger – 63% of those 45 to 54 said they use it at least occasionally, compared with 44% of people 55 to 64 and just 23% of those over 65, the survey found.

Further, participants in focus groups often said they thought that the overall push to keep workplace retirement plan costs low has resulted in poor-quality in-plan advice, the research group found.

[More: How aging advisers could hurt the 401(k) industry]

People also were the least likely to recommend their plan providers to others, but they were much more likely to recommend retail financial advice companies, the survey found. However, when the same company provided the retirement plan and retail advice, that scenario was linked with the highest recommendation rate by consumers, according to Hearts & Wallets.

A target market for financial advisers – those who are 55 to 74 with $500,000 to $3 million in assets – is much more likely than peers with small asset levels to roll assets from 401(k)s to IRAs when they retire, the report found. Among that group, 53% said they get financial advice from paid investment professionals.

“I’m a big fan of [IRA] rollovers, because I see that that’s what people want,” Varas said.