Professional advice has a direct and positive impact on the behavior of 401(k) plan participants, according to a study by financial services firm Charles Schwab.
Although more employers are making 401(k) help and guidance available, and most employees surveyed say they would use it, few plan participants actually take advantage of the advice offered to them, according to Schwab's study, The New Rules of Engagement for 401(k) Success. The study drew on a behavioral analysis of 401(k) plans serviced by Schwab and a nationwide attitudinal survey of more than 1,000 401(k) plan participants.
Among the findings, 70 percent of survey respondents say a 401(k) is their only or primary source of retirement savings. However, just participating in a 401(k) is not enough to ensure confidence:
• Lack of confidence. Less than half (47 percent) of 401(k) participants surveyed feel very confident when it comes to making investment decisions.
• Confusion. 53 percent say they find retirement benefits even more confusing than health care benefits.
Use of advice can have a significant impact on people’s behaviors in 401(k) plans, Schwab found. Specifically, use of professional advice has a positive impact on participant savings, diversification and investing behavior. For example:
• Improved savings rates. 70 percent of participants who receive 401(k) advice make changes to their deferral rates, and their savings rates nearly double as a result, jumping on average from five percent to 10 percent of pay.
• Greater diversification. The average participant who has not received professional advice is invested in less than four (3.7) asset classes, whereas participants who receive advice have a minimum of eight asset classes.
• More disciplined investing behavior. The vast majority (92 percent) of advice users stayed the course in their 401(k) portfolios from July 2008 through February 2009 and stayed fully invested for the significant market rebound through the remainder of 2009.
“There is no doubt that the 401(k) has become a significant slice of the retirement savings pie in America, which is why we need to zero in on what truly drives positive and meaningful results for 401(k) investors,” said Steve Anderson, head of Charles Schwab Retirement Plan Services. “When we look at participant behaviors," he noted, "the use of professional help and guidance is one of the biggest factors in 401(k) success.”
Advice Adoption: Perception vs. Reality
Acknowledging the role the workplace can play in providing financial education, a significant number (74 percent) of Schwab’s plan sponsor clients are currently offering 401(k) participants access to professional third-party investment advice. That number has grown considerably since 2005, when it stood at 42 percent.
But while a majority (55 percent) of participants say they would use free personalized advice if their employer made it available, an analysis of actual participant behavior in plans serviced by Schwab reveals something different: less than 10 percent of people with access to advice actively use it.
Survey respondents cite a number of explanations as to why they don’t engage in 401(k) advice even if it is available as part of their plan, such as they:
• Are getting financial advice elsewhere outside of the workplace (27 percent of participants).
• Have more immediate concerns, such as day-to-day financial matters (26 percent).
• Doubt the advice would be personalized for them (23 percent).
• Don’t think they've saved enough money to warrant spending time to get help (23 percent).
• Don’t trust that the advice would be good (22 percent).
• Want to keep their finances private from their employer (21 percent).
“Even though most people say they would use professional help if it were available, the reality is that more often than not, procrastination, distraction or confusion prevents them from doing so,” said Catherine Golladay, Charles Schwab vice president of 401(k) education and advice. “But it is clear from our study findings and our personal experience with clients that people are more likely to engage in professional help if it is provided in a personalized one-on-one setting.”
Engaging Plan Participants
Based on the research, Schwab identified strategies for employers to help increase 401(k) participants’ use of professional third-party advice:
• Offer one-on-one consultations. 51 percent of 401(k) participants say they prefer a personalized touch over online tools (23 percent) or brochures (4 percent).
• Show participants the money. 65 percent need some kind of motivation to use advice, and more than one third (34 percent) would like some kind of proof that advice would improve their investment returns.
• Work with a trusted third party. 74 percent trust personal financial advisors and 59 percent trust financial institutions as a source for savings and investing information, and guidance.
• Know when to engage. Most respondents cited “approaching retirement” as the top reason to seek help with planning—when it can be too late to maximize the potential savings in a 401(k) plan. Other top life events prompting people to seek help include changing jobs (29 percent), stock market volatility (28 percent), and loss of spouse or partner (23 percent).
The Devil Is in the Distraction
More than two-thirds of 401(k) participants (68 percent) report worrying about their finances at work. Survey respondents say that these distractions can impact their productivity in the workplace, with 82 percent saying they feel more focused when their personal finances are in order.
Among those who say they are worried about their personal finances, just 17 percent are confident they will have enough money to retire. Worriers also are more likely to be dependent on a 401(k) as their only source of retirement savings.
Among 401(k) investors who received advice in the last two years, 52 percent are confident in making investment decisions compared to 35 percent who want advice but have not received any. In addition, 69 percent of advice users surveyed believe they are good at saving in their 401(k) vs. just 44 percent who want advice but have not received any.
“401(k)s are the gateway to investing and retirement savings for millions of Americans, and employers and plan providers have an opportunity to make a significant difference in people’s lives,” said Anderson. “Getting more 401(k) investors engaged in professional advice needs to become a bigger priority for the industry, because we know that it has a positive impact.”
Participant survey data was derived from responses of 1,005 U.S. full or part-time employees who participate in their company’s 401(k) retirement plan. The survey was fielded from June 9-17, 2010. Plan and participant analytics represent 911 qualified defined contribution plans and 755,000 participants serviced by Schwab Retirement Plan Services Inc. This data was collected between Jan. 1, 2005 and June 30, 2010.
Stephen Miller is an online editor/manager for SHRM.
Most 401(k) Investment Advice Is General, SHRM Poll Finds, SHRM Online Benefits Discipline, September 2010
DOL Issues New Proposed Rule on Investment Advice, SHRM Online Benefits Discipline, February 2010
401(k) Advice Can Pay Off for Employees, SHRM Online Benefits Discipline, June 2008
SHRM Online Benefits Discipline