NEW ORLEANS – Today, many Americans have no incentive to save for retirement, but advisors can do something about that, according to LIMRA Chief, Robert Kerzner.
Advisors can, and do, have a motivational impact on clients, he explained in an interview in advance of his opening remarks this morning at the annual Retirement Industry Conference here. The annual conference is sponsored by LIMRA, LOMA and Society of Actuaries.
“When I was an advisor, I would show my clients the cost of waiting (to save for retirement) for just one year,” recalled the president and chief executive officer of LIMRA, LOMA and LL Global. Interest rates were higher in those years than now, so the difference was significant, he said. “That gave people the motivation they needed to start saving … today.”
In the current economy, interest rates are much lower, at 2 percent or less, so interest rates aren’t going to be a strong motivating factor. But LIMRA research has found that advisors, and advice, do influence consumers to the point that they start taking action to prepare for retirement, he said.
“If advisors understand how people make decisions, they can alter the behavior in ways that make them more effective with their clients.” That can influence clients and convince them to act, he said.
It’s important for the retirement industry give retirement savings issues more attention, the research executive maintained, because many Americans are not saving for retirement, or not saving enough.
Four in five workers surveyed by LIMRA are saving less than 10 percent in their retirement plans, Kerzner pointed out, and 56 percent of younger Americans, ages 18 to 34, are not contributing to any retirement plan at all. In addition, 55 percent of all pre-retirees have less than $100,000 in financial assets, according to a LIMRA analysis of Federal Reserve Board data.
The incentive problem
In his speech, Kerzner planned to review factors that contribute to this problem, such as the decline in pensions, myths and unrealistic expectations about retirement, and the pressure of everyday expenses on ability to save.
But he will zero in on the lack of incentive to save for retirement, and how the industry — including advisors — can help address the problem.
The lack of incentive to save reflects what behavioral economics experts call “present moment bias,” Kerzner said. That’s the tendency of people to put off until tomorrow what they could do today. “It’s human nature…. People will say, retirement is a long way off, so I’ll deal with that later.”
A sense of hopelessness about retirement often accompanies the lack of incentive, he indicated.
For instance, people may look at a chart that shows how much money a person will have in 30 years if saving $2,000 a year at today’s “near zero” interest rates (around 2 percent in his example) versus saving at 8 percent (a figure more common to the 1980s).
When they see the difference in total savings after 30 years — $94,068 at 2 percent versus $372,204 at 8 percent — many see no reason to start saving today or tomorrow, Kerzner said.
“They say, ‘it won’t help me to get there.’”
As a result, consumer confidence is eroding, Kerzner said, pointing out that two-thirds of Americans say they are not confident they are saving enough money to last throughout their retirement. This erosion has been aggravated by the volatility and economic stress of the last decade.
How to motivate
But Kerzner is not talking about doomsday. Behavioral economics research is helping not only to identify retirement savings problems, but also pointing the way to how to motivate people to do the right thing, Kerzner said.
The research shows that, without confidence, people will often do nothing, he explained. They’ll just stand on the sidelines and procrastinate, even if they have several choices. But if provided with something that evokes a visceral or in-the-bones response, people often do find the motivation and confidence to act, he continued.
That’s why some carriers are putting age progression technology on their websites, to help people visualize or experience their older or future selves, he said. Seeing what they might actually look like often evokes a response to do something today.
That’s different than just providing content about retirement on a website. “Understanding something won’t get people to take action,” Kerzner stressed. “Websites alone will not improve financial literacy, and they won’t get people to act.”
This is where advisors come into the picture. Advisors are in the position of being able to prompt people finally to take steps to save, he contended. For many people, “advice is the missing ingredient.”
Current research shows that people who work with an advisor have more confidence and also save more, he explained. “Confidence not just a feel-good. People who have confidence know why they should stay the course and keep putting money into retirement savings.”
LIMRA research shows that half of pre-retirees who have worked with an advisor have estimated how many years their assets will last in retirement. By comparison, only 23 percent of pre-retirees who do not work with an advisor said the same thing.
Other LIMRA findings show that pre-retirees who have advisors have also done a greater percentage of other retirement planning activities than those without advisors. These activities include calculation of assets available for retirement, determination of likely income and expenses in retirement, and estimation of the cost of activities in retirement.
“We also know that people who work with advisors are less likely to dump their portfolios” (during difficult economies, say) than those who don’t work with an advisor, Kerzner added.
“Not everyone needs the same kind of advice, nor does the advice model need to be the same for everyone,” he pointed out. So companies and advisors will need to explore approaches, and in some cases, be willing to make changes — if, for instance, a technology materializes that improves the advice model.
Research shows that trust and personalization are keys to effective advice, so work will need to be done in those areas, he indicated. “People have to believe it’s their retirement income plan, personalized for them, in order to buy into the assumptions.”
A priority issue
What’s in it for advisors and companies? It’s a huge market, the LIMRA executive pointed out. Nearly 20 million households are prime candidates for retirement income planning, he said, citing a 2012 LIMRA study.
The magnitude of the under-saving problem and the magnitude of the market potential have prompted LIMRA to refocus its core resources and research around retirement, Kerzner pointed out. Companies, regulators and legislators can use the research to help people better plan for retirement, he said.
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