Smallish 401(k) accounts said to get little support

Aug 6, 2007 @ 12:01 am

By Darla Mercado

NEW YORK — Retirement is already scary for both near-retirees on a tight budget and their planners, but these clients may warrant a second look, advisers said.

On average, a 60-year-old with at least 30 years on the job had socked away $193,701 in a 401(k) account as of yearend 2006, according to a new study by the Investment Company Institute and the Employee Benefit Research Institute, both of Washington. That is an improvement from last year’s figure of $181,621 but still insufficient to live on for the next two decades.

Planners are edgy about the prospect of dealing with clients with small accounts. “People are looking for customized solutions, but it’s hard for planners to provide face-to-face advice,” said Dennis Gallant, president and founder of Gallant Distribution Consulting, a Sherborn, Mass., research firm.

No help available

Pressure from planners’ home offices to seek wealthier clients, combined with the lower-end clients’ need for comprehensive service, has created a group of people in their 60s with $200,000 and no one to help them manage it, he said.

Planners have also noticed the industry’s reluctance to approach these clients: Nobody wants to deliver bad news. “A lot of folks shy away from telling clients that they’re not on track to have the retirement they want,” said Bryan Kelly, a certified financial planner and a managing member at Kelly Financial Group LLC of Bel Air, Md.

But advisers who are willing to take the challenge of working with a smaller portfolio and providing advice in person may be tapping into an underserved market — and the rewards come from the sheer amount of demand rather than just the individual size of a portfolio, Mr. Gallant noted.

Comprehensive planning at this asset level begins with an assessment of liabilities.

Not only should investors and planners look at day-to-day expenses and debts that need to be paid, but they should also make allowances for health-care costs with the expectation that the client will live a few more decades, advisers said.

Medical costs can soar past $800 a month, and that will force retirees to rethink living large during retirement, said Jan Dahlin Geiger, a certified financial planner at Financial Network Corp. of Atlanta.

“If you’ve made it to 60 without any major health problems, you’ll probably live to your 90s,” she said. At that rate, a retiree can pull only 4% to 5% of the money without sapping away at the principal of the 401(k) portfolio, Ms. Geiger said.

Then comes the creative part: searching high and low for money.

Traditional sources of retirement income, such as a pension or Social Security, can bulk up a client’s wealth, but there is additional cash in the value of homes — either through the rental or sale of a property, or in a reverse mortgage, advisers said. Also, those who purchased lots of items can sell them online, said Ms. Geiger, whose clients have done just that.

Part-time work creates a cash flow and keeps retirees active.

“Lately, we’ve been dealing more with part-time employment in retirement: If a client likes flowers, she can work at a flower shop” Mr. Kelly said. “It can provide significant financial relief.”

Then there is the investment portfolio.

The average 401(k) account balance of investors in their 60s had an average annual growth rate of only 3.7% between 1999 and 2006, according to EBRI and the ICI. Spreading out the principal between seven different categories according to risk tolerance is the way to go for Ms. Geiger, who advises that investors keep no more than 15% of the assets in any one category and to re-balance the portfolio yearly.

“Smart investors do a good asset allocation and hold it,” she said. “Amateurs sell low and buy high.”

Some exotic products, such as structured notes, have come into the picture, said Thomas Balcom, a certified financial planner and adviser with Foldes Financial Management Inc. in Miami.

The notes allow investors to maintain equity exposure with lower risk. The notes can be tied up for 18 to 36 months and are backed by the credit standing of major financial firms.

Planning at the shallower end of the wealth spectrum is not profitable, but until planners find the way to provide comprehensive services to these clients, the profits go to larger firms: The Charles Schwab Corp. of San Francisco and Fidelity Investments of Boston provide products with advice via phone or Internet.

“From a planning standpoint, these firms are providing services in a means that’s not palatable to the audience,” Mr. Gallant said. “Elderly people want to sit down face to face. They want that combination of products and advice.”


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