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AdvisorNews - April 2014

Participant Behavior and What It Means to Maximize It

June 6, 2013 ( – Engaging employees in their retirement plans involves simplicity, connection and accurate diagnosis.

Plan sponsors must keep their retirement plan information simple while also making it personal; they must realize that money is connected to emotions and use behavioral finance accordingly; and they must accurately diagnose what employees must do to progress in their retirement planning, said Carol Waddell, head of product and marketing at J.P. Morgan Retirement Plan Services, during the 2013 PLANSPONSOR National Conference panel “Participant Behavior and What It Means to Maximize It.”

Engagement is not just defined as how much attention employees pay to their retirement plans but also as how much their attention leads to action, she said. J.P. Morgan found that, in its book of business, 38% of participants were disengaged; 10% were passive, meaning they rely on the employer to make automatic transactions on their behalf; 30% were interested; and 22% were active.
The first communication tactic that retirement plan professionals can use to increase participant outcomes is simplicity. Even the simplest experiences must be well-packaged in order to be effective, Waddell said. She cited retirement income projections as one example—J.P. Morgan puts participants’ retirement income replacement number front and center on their online accounts.
The company’s call center also mentions that number to participants during every conversation, and the number is embedded in every communication participants receive concerning their retirement accounts. “The more consistently people see this number, the more likely it is to drive action,” Waddell said.

The second communication tactic is connecting emotions to money—behavioral finance can be used to influence participant outcomes, Waddell said.

She mentioned several behavioral-finance schools of thought that plan sponsors should keep in mind, including social norms—the “everyone is doing it” mindset. J.P. Morgan uses social norms on its website by showing participants how their peers are saving for retirement. The “people like you” profiles demonstrate how the participant deviates from the norm and how he can change his behavior.

Waddell also mentioned the idea of placement, which, she explained, is how the presentation of choices affects selection. Research indicates that voters tend to pick the first choice on their ballots, so, likewise, things such as savings rates can be affected by the order in which they appear. For example, an enrollment card could first give the choice of an 8% contribution rate, followed by 6% and 4%. “So placement and the number of choices become critical,” Waddell said.

Diagnosis is the third communication tactic. The retirement industry must use more sophisticated, personalized metrics to understand individuals’ retirement behaviors and needs. On top of that, more targeted strategies must be used to enhance the data. “The messages we use really need to vary dramatically for these audiences,” she said.

Waddell closed the conference session by commenting on the future of engaging participants. Going forward, games will be a big engagement tool. When J.P. Morgan launched its first game, it saw a “dramatic” spike in website usage, she said.

Small-Plan Market Can Be Big Opportunity

July 08, 2013 --- Time and resource management were named as key challenges to participating in the multi-billion dollar micro- to small-plan retirement market, a survey found. ---

Guardian Retirement Solutions hosted a series of G2 Summit events throughout the year for financial advisers looking to expand their 401(k) business. The Summits delved in practice management, and fiduciary and regulatory requirements. In a survey Guardian uncovered some information about how advisers view the micro and small-plan 401(k) market.

“On the whole, the G2 Summit survey responses validated our thoughts on how financial advisers view the micro-small plan retirement market, which is why we originally developed the series and the white paper,” Jason Frain, vice president of 401(k) product management and development, retirement solutions at The Guardian Life Insurance Company of America, told PLANADVISER. “We were surprised that concerns about fiduciary requirements and government regulations were seen as less of a challenge than effectively managing time and resources. The G2 Summit presentations demonstrated that these challenges can be easily addressed by working with the right support partners and it definitely resonated with the financial advisers in attendance—100% at each Summit said they were likely to take on more retirement business.”

Nearly 65% of survey participants believe there is a large opportunity in the micro-small plan 401(k) market. Fifty-one percent of survey respondents at the G2 Summits view time management as a key challenge to doing business in the retirement plan market. Resource management ((39%) was the next most often-cited challenge, followed by fiduciary responsibilities (27%) and government regulations (23%).

All respondents said they were likely to take on more micro-small plan 401(k) retirement business following the Summit after learning how the right support partners can help them effectively manage this business.

Financial professionals looking to expand their business see a large opportunity in the micro- to small-plan retirement market, according to a series of surveys conducted at Guardian Retirement Solutions 401(k) G2 Summits: Gain and Grow, which were interactive educational events for financial professionals.

Support Partners Are Key
At the end of each of the eight G2 Summits, all respondents said they were likely to take on more retirement business after learning how the right support partners can help them effectively manage this business. The events featured presentations by investment management firms, recordkeepers, third-party administrators, fiduciary support providers and financial behavioral experts.

More than 50 million Americans now participate in employer-sponsored 401(k) plans with assets totaling roughly $3 trillion. Ninety percent of all 401(k) plans are small businesses with less than $10 million in total plan assets and 80% of all 401(k) plans are in the micro market, holding less than $2.5 million in assets.

“Financial professionals don’t have to go it alone in the micro- to small-plan market,” said Steve Davis, national sales manager, Guardian Retirement Solutions. “With 401(k) assets expected to reach $4 trillion by 2015 the potential for financial professionals in this market is huge. Our post-event surveys revealed unanimous agreement among our financial professional audience that with the support of the right service providers, they can seize this opportunity to grow their business.”

Small Businesses Care About Retirement Too

By Joel Kranc
July 24, 2013
Many sole proprietors and small businesses operators were forced to tap into their retirement and 401(k) savings during the Great Recession in recent years. But investments back into those plans have been growing and are higher than they were five years ago, according to a new survey.

A ShareBuilder 401(k) – a subsidiary of Capital One – survey says nearly a quarter of small businesses now offer a 401(k) plan (compared to 10% in 2008). The majority of small business owners (58%) say their current retirement savings is higher than it was five years ago.

“Though the Great Recession had a negative impact on many Americans’ retirement plans, it appears it was also a wake-up call when it comes to planning for the long-term,” says ShareBuilder 401(k) President Stuart Robertson. “A record percentage of small businesses are reporting ownership of a retirement plan—a sign that more small business owners are prioritizing their own and their employees’ need to save for the future.”

The nationwide survey of small and medium-size business owners shows an important shift in sentiment and behaviors related to 401(k) planning and investing when compared to a similar survey conducted in 2008. Sixty-five percent of those respondents now feel confident they are saving enough for retirement, compared to 44% five years ago; 82% of all small business owners view 401(k)s as an effective approach to saving for retirement; of the 28% of businesses with a 401(k) plan that either stopped offering a match or lowered their match over the past five years, 56% have since reinstated it; and 58% of small business owners describe their current retirement savings as higher than it was five years ago.

The survey also shows that employers have changed their view regarding their obligation to offer retirement plans to employees, with 89% of small business owners with more than one employee that offer a 401(k) plan reporting it is an important factor for attracting and retaining the best talent. Also, 50% of those who offer a 401(k) plan believe offering a plan is their responsibility as a business owner.

“We still have a long way to go,” says Robertson, “but we are pleased to see a significantly higher number of businesses offering plans and that many others with plans are reinstating matching contributions.”

New Retirement Trend: Managed 401(k) Plans

By Chris Kissell
Published July 24, 2013
Millions of Americans use a 401(k) plan as their primary vehicle for retirement savings. The decisions investors make when managing these plans can make or break their golden years.

In too many cases, workers are "just not engaged in the process," says Joshua Itzoe, a Towson, Md.-based partner and managing director of the institutional client group at Greenspring, a wealth management and retirement plan consulting firm.

"I joke that most people spend more time each year figuring out who they are going to start on their fantasy football team than how their 401(k) account is allocated," he says. "I wish this wasn't the case."

Itzoe and other investing experts believe the "managed 401(k) plan" -- a variation on the standard 401(k) -- often is a better way to save for retirement.

In the managed 401(k) approach, financial pros take over all the investment decisions and create a portfolio based on an investor's age and financial goals.

These programs offer guidance, such as suggesting when a worker needs to increase the amount of savings to reach retirement goals, but do not let the employee make actual investment choices.

If a managed 401(k) sounds ideal, temper your enthusiasm. This option is available only if your employer offers it. And very few do, according to Michael Kitces, partner and director of research at Pinnacle Advisory Group in Columbia, Md.

"Virtually none that we see are offering this," Kitces says. "I literally cannot recall the last time when we saw the employer that was offering a managed 401(k)."

A better mousetrap?
Still, Kitces believes the managed 401(k) approach is a good one and can result in better returns for investors.

As the stock market boomed in the 1990s, investors started to believe they could invest at least as shrewdly as professionals. However, numerous studies have shown the opposite to be true, Kitces says.

"The odds are overwhelmingly likely that employees will do a grossly inferior job" when compared to professionals, Kitces says.
Itzoe also is a proponent of the managed 401(k) approach. In his book "Fixing the 401(k)," Itzoe cited a 10-year research study that evaluated the performance of nearly 15,000 401(k) participants.

The study found that participants who followed something akin to a professionally managed approach -- such as turning over investing decisions to a professional, purchasing target-date mutual funds or closely following an asset-allocation model -- earned returns that were 1.9% higher per year on average than participants who relied on their own wisdom in choosing investments.

"Compound that over a working career, and it is a substantial amount of money," Itzoe says.

Despite the odds, many investors continue to go the do-it-yourself route. Such investors typically earn mediocre returns, largely because they fail to properly diversify, do not rebalance regularly, and often take on too much or too little risk, Itzoe says.

Roger Wohlner, a fee-only adviser with Asset Strategy Consultants in Arlington Heights, Ill., advises institutional and individual clients about 401(k) choices. He is a proponent of managed 401(k) plans.

"I think they are a good idea, and I think people want them," he says.

The standard 401(k) approach that asks workers to make their own investment decisions does not always work well, he says.
"We assume everyone is comfortable doing this, and they're not," he says. "I think a lot of participants are just uncomfortable allocating their money."

Left to their own devices, people often let fears drive investment decisions, which can lead to inadequate returns.

"Because people are scared, they put an inordinate amount of cash in money market funds and guaranteed products," he says.
Managed 401(k) plans take such emotion out of the investing process and allow for a more tailored, individualized approach than
one-size-fits-all alternatives such as target-date funds, he says.

The danger of risk tolerance questionnaires

By Chris Carosa
August 15, 2013 • Reprints

So I’m sitting with a corporate exec the other day going over her 401(k). She’s a middle-aged woman who definitely knows her stuff when it comes to finance and investments. She gives me all the usual data – you know, currently salary, current retirement savings value, annual contribution, expected Social Security, retirement date. I put it in the spreadsheet blender and – presto! – out comes the rate of return she needs from now until her last day of work in order to retire in comfort. I call this her “Goal-Oriented Target” and it is quite achievable – somewhere between 4 to 5 percent.

I’m about to move on to the next step when, out of the blue, the CEO of the company ambles by. He’s what some might call a “ragged veteran” of sorts. He’s seen a million-and-one investment advisors, hopping from one to another whenever the underperformance bug hit. No doubt familiar with all the tools of the advisor trade, he confidently asks the woman, “This is all fine and good, but how does this relate to your risk tolerance?” She politely smiles a respectful smile and says nothing.

I stop dead in my tracks.

Sensing the woman knows more than she’s letting on, I immediately congratulate the old man for asking the perfect question to follow up our half-hour of rigorous mathematical calculations. I turn to the woman and ask her if she’s familiar with the risk tolerance test administered by brokers, mutual fund companies and virtually any website remotely connected to investing. She says, “Yes.” Then I ask her, rather bluntly, which was OK because she sensed where I was going, “Would the results of any of those tests change your Goal-Oriented Target?”

“No,” she said, understanding perfectly my point.

“That,” my head now swung to the firm’s leader, “is why we don’t ever want to let an employee – or any investor for that matter – get mislead by the results of a risk tolerance questionnaire.”

Here’s the awful reality of the above story. Not only is it a dramatization of real life events, but, in real life, the company CEO is the plan sponsor who has the fiduciary responsibility to avoid promoting investment “tools” that can mislead employees. That’s why academic researchers have questioned the use of risk tolerance questionnaires since at least 1999 and why so many professionals today decry their unidimensional shortcomings (see “Should 401(k) Plan Sponsors Ban Risk Tolerance Questionnaires?”, Aug. 13, 2013).

It remains that, no matter what one’s risk tolerance, it is mathematics that rules the day when it comes to retirement savings. For those aficionados, it is specifically the internal rate of return calculation based on net present value, annual contribution rate and the net future value of funding to fill the retirement spending gap not addressed by Social Security, pensions and other outside income.
Facts, not feelings, rule the day when it comes to living a successful retirement. Gone are the days of the 1980s when modern portfolio theory ruled the roost, self-esteem (or feelings) carried weight, and everyone’s ideal of the perfect male was Alan Alda. The sooner we lead 401(k) plan sponsors and investors out of that utopian wasteland, the better. And there’s no better way to start than to state with blunt certitude the irrelevance of (if not outright danger in using) risk tolerance questionnaires.