Investment Advice Effective When Used, but Participation Lags

By Joanne Sammer November 23, 2010

Investment advice often is seen as the next wave of services for retirement plan participants. The number of retirement plan sponsors that offer investment advice to plan participants has grown over the past few years, often driven by employers’ sense of obligation to make sure that employees are prepared for retirement. But in many cases “traditional retirement education efforts have not been effective,” said David Gray, vice president of client experience at Schwab Corporate and Retirement Services. “Plan sponsors are looking for other ways to help participants make the right choices about saving and investing for retirement.”

Acknowledging the role the workplace can play in providing financial education, a significant number (74 percent) of Charles Schwab’s plan sponsor clients are offering 401(k) participants access to professional third-party investment advice. That number has grown considerably since 2005, when it stood at 42 percent.

Positive Results

According to a Schwab survey of more than 1,000 401(k) plan participants (fielded from June 9-17, 2010), use of professional advice had a positive impact on participants' investing behavior. For example:

Improved savings rates—70 percent of participants who received 401(k) advice made changes to their deferral rates, and their savings rates nearly doubled as a result, jumping on average from 5 to 10 percent of pay.

Greater diversification—The typical participant who had not received professional advice was invested on average in less than four (3.7) asset classes, whereas participants who receive advice had 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 as the market swooned from July 2008 through February 2009 and were invested fully for the significant market rebound through the remainder of 2009.

In addition, the study found greater rebalancing activity among investment advice recipients.

Often Underused

Unfortunately, simply offering investment advice has not been enough to address retirement readiness questions. While Schwab's survey found that a majority (55 percent) of respondents said they would use free personalized advice if their employer made it available, an analysis of participant behavior revealed something different: less than 10 percent of people with access to advice use it actively. Other surveys have put the percentage of participants using investment advice, when available, at just 10 to 20 percent.

“If only one out of five people are using investment advice, that implies that the remaining 80 percent have the appropriate skill set (to invest on their own),” which is a highly unlikely number, said Marina Edwards, a senior retirement consultant with Towers Watson in Chicago. “There are probably more people that could benefit from advice, and I think 40-50 percent utilization is an attainable goal.”

Schwab's survey respondents cited 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. Among the top rationalizations, respondents said that they:

Are getting financial advice elsewhere outside of the workplace.

Have more immediate concerns, such as day-to-day financial matters.

Have not saved enough money to warrant spending time to get help.

Want to have more than $100,000 saved before taking the time to get advice.

“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.”

Communication Counts

In addition, low use of investment advice tools and services often can be traced back to lack of communication about investment advice and how it works. “In many cases, investment advice is hung out as another ornament along with all of the other tools that the plan offers,” said Kent Allison, a partner with PricewaterhouseCoopers in Florham Park, N.J. “It tends to get lost in the mix.” If investment advice is not promoted, users may be limited to self-starters and others who are already interested in investing. Other populations may need a compelling reason to use these offerings, so communication can focus on explaining why using investment advice is important to retirement security.

In addition to monitoring usage, plan sponsors can measure the impact investment advice is having on participant behavior by monitoring three metrics—utilization, savings rate and diversification—at least annually.

Getting Started

Plan sponsors that want to begin offering investment advice should take care when choosing a provider. For one thing, it's important to understand the difference between investment advice and guidance. “It can be a fine line between advice and guidance, and there may be providers offering guidance that plan sponsors think is actually advice,” said Edwards.

In general, investment advice involves using a tool or working with an advisor that provides the individual with specific investments and allocations—for example, to invest X percent in fund A and Y percent in fund B—based on risk tolerance and other factors, said Edwards. Guidance, on the other hand, will be less specific and will be couched in words like “may”—for example, an individual may want to invest in a blend of 60 percent stock and 40 percent bonds funds based on their age and risk tolerance—without providing specific investments.

Strategies for Employers: Engaging Plan Participants in Advice

Based on its research, Schwab identified these strategies to help increase 401(k) participants’ use of professional advice:

Offer one-on-one consultations—51 percent of 401(k) investors surveyed say they prefer a personalized touch over online tools (23 percent) or brochures (4 percent).

How participants the money—65 percent need some kind of motivation to use advice, and more than one-third (34 percent) of them said they would like some kind of proof that advice would improve their investment returns.

Work with a trusted third party—According to the survey, 74 percent of people trust personal financial advisors and 59 percent trust financial institutions as a source for savings and investing information and guidance.

Know when to engage—Unfortunately, the majority of 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, but 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).

Fiduciary Concerns

Of course, fiduciary responsibilities weigh heavily in the choice and monitoring of an investment advice provider. In early 2010, the U.S. Department of Labor released a revised proposed rule on investment advice for American workers covered by 401(k) plans and other defined contribution retirement arrangements (see the SHRM Online article "DOL Issues New Proposed Rule on Investment Advice"). The proposed rule requires plan sponsors to have a plan fiduciary manage the advice arrangement. In addition, advice must be provided in one of two ways: through the use of a computer model certified as unbiased, or through an advisor compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).

Some plan sponsors remain concerned that offering investment advice could increase their fiduciary liability. However, Gray sees it differently. “An investment advice structure may help reduce the plant sponsor's fiduciary liability because the plan sponsor is helping participants to make better informed investment decisions and, ultimately, that's what the plant sponsor's fiduciary responsibility is all about,” he said.

No Panacea

Although investment advice has proven effective to those participants who use it, it is not a panacea for effective retirement planning and alone will not ensure that employees are ready for retirement when the time comes. “The real problem is people aren't saving enough,” said Allison. “Savings is the main driver of where someone is in retirement. If people are not saving enough, it doesn't matter how well they invest because they are still going to end up falling short of their goal.”

Allison suggests that plan sponsors make investment advice one element in a holistic solution to retirement planning that includes automatic enrollment into the plan with automatic increases in contribution levels to address the savings deficiency issue. In addition, a plan can use target-date funds with communication and education around what those funds are, what they do and how they are invested.

In the end, however, retirement planning doesn’t happen in a vacuum. Most employees are balancing a multitude of financial obligations. Therefore, employers might need to offer “more holistic financial counseling and education to address the other areas of an employee's personal finances that may be inhibiting the employee's ability to save,” said Allison.

Joanne Sammer is a New Jersey-based freelance writer. Her articles have appeared in numerous publications, including HR Magazine.

Related Articles:

Pointers for Designing an 'Ideal' 401(k) Plan, SHRM Online Benefits Discipline, November 2010

Most 401(k) Investment Advice Is General, SHRMPoll Finds, SHRMOnline Benefits Discipline, September 2010

Helping 401(k) Participants Pays Off,SHRM Online Benefits Discipline, February 2010

Finding the Right Investment Adviser for 401(k) Participants, SHRM Online Benefits Discipline, August 2008

401(k) Advice Can Pay Off for Employees, SHRM Online Benefits Discipline, June 2008

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