Persuading clients to defer enough salary

Everyone has hurdles to jump. For financial advisers, many of them come in the context of business development: attaining and then ex-ceeding X number of clients, gathering Y in assets under advisement or management, pushing the profit margin to Z.

In addition, advisers work every day to help clients overcome their own hurdles on the path to financial security. Of course, one of those is saving for retirement.

That’s a high hurdle for most clients, and it requires advisers to think and act creatively to get clients where they need to be. Research indicates that the ideal contribution rate — salary deferral plus employer match — is about 15%, an overwhelming target for many, if not most, workers.

Wade D. Pfau, professor of retirement income at The American College, has been talking about such a contribution rate. For his soon-to-be-released Retirement Watch Accumulation Index, he uses as a benchmark a rate of 15% for a 35-year-old worker who hopes to retire at 65.

“The 15% is calibrated to a 35-year-old,” Mr. Pfau recently told InvestmentNews’ Darla Mercado. “If you’re 40 years from retirement, 8% to 10% [contributions] is fine, but if you’re already 45, 50 years old and you haven’t saved much, 15% isn’t going to get you a very good lifestyle at retirement.”

That’s an important point, as employees often start with a 3% salary deferral into a 401(k), with a company match that can bring the percentage to 6% or more. Not bad for millennials who have 30 or more years to build their retirement nest egg but, as Mr. Pfau points out, insufficient for a late-career worker.

Last year, 18% of U.S. workers said they were very confident about having enough money for retirement, up from 13% in 2013, according to the Employee Benefit Research Institute.

Though the im-provement was good to see (confidence had reached record lows between 2009 and 2013), 18% is still low. What’s more, the increase came almost exclusively from people with higher household income. EBRI found that confidence was highly correlated with participation in a retirement plan, with nearly half of workers without one not at all confident about their financial security in retirement.

So the first hurdle — admittedly a low one — is to ensure that working clients are enrolled in their company’s retirement plan or otherwise participating in a retirement plan, including an individual retirement account.

From there, make sure clients are enrolled in their employer’s auto-escalation program, if it has one. That way, the deferrals automatically increase each year.

The trick — and here’s where advisers’ creativity comes into play — is finding ways to move that deferral needle ever higher.

It’s a trick because advisers need to be pragmatic. Clients who are saving for their children’s college education probably will find even a 10% retirement deferral a difficult hurdle to reach, let alone clear. The same goes for younger clients who are trying to save enough money for a down payment on a house or who are planning to start a family. And think about clients who already give 10% of their income to charity.

As Mac Gardner, branch director of executive planning at the Noble Group, an independent firm with Raymond James Financial Services Inc., told Ms. Mercado, “There’s a big gap between 5% and 15%.” He called the latter “tough to swallow for a lot of people.”

What should an adviser do? Returning to auto-escalation, set up such a plan for clients if they don’t have one through their employer. Incremental increases probably “hurt” the least.

Help clients with household budgets to identify potential areas of savings that might be directed toward retirement accounts. Consider earmarking a certain percentage of annual tax refunds, salary increases or bonuses.

The key is to be realistic. Simply telling clients to put 8%, 10% or 15% of their salary toward retirement probably will produce one outcome: They’ll shut down, turn off and save nothing.