By Cyril Tuohy
Financial advisors and retirement plan sponsors have taken their lumps this year as media and lawmakers have questioned the high fees that middlemen receive to advise and manage plans that lag the indexes.
Now it’s time to turn the tables. What do advisors and plan sponsors think about the financial planning habits of workers?
A total of 74 percent of financial advisors think employees are not saving enough, according to a survey titled “A 360-Degree Approach to Preparing for Retirement.” The study by CREATE-Research and sponsored by The Principal Financial Group found that 70 percent of advisors said that employees don’t start saving early enough and 69 percent said workers live beyond their means. In addition, 66 percent of advisors surveyed said employees overestimate their ability to plan ahead, and 62 percent said workers put off having a financial plan in the first place.
Overall, CREATE-Research found that financial advisors don’t think that much of the retirement planning habits of their potential future clients.
But there are some interesting trends that may change the habits of workers, starting with the concept of “nudge economics” enshrined in the Pension Reform Act of 2006. The Pension Reform Act made changes to the defined contribution system.
Those changes include automatic enrollment, minimum default contributions and automatic escalation, all of which are nudging employees to put their retirement plans on autopilot -- at least to get them started.
Few people noticed the benefits of the Pension Reform Act as the 2008 financial crisis robbed many investors of wealth. Now there’s good news for the invest-and-forget school of thought and advisors might want to take notice.
The average 401(k) balance for participants consistently participating in their 401(k) plans for the past four years from 2007 to 2011 was up 23.5 percent at year-end 2011 compared with year-end 2007, the Employee Benefit Research Institute has found.
By the end of 2011, the average account balance among consistent participants was 60 percent higher than the average account balance among all participants in the Employee Benefit Research Institute/Investment Company Institute database, said Dallas Salisbury, president and chief executive officer of EBRI.
“The data confirm that, even through tough economic times, the discipline of 401(k) plans — staying the course by investing and continuing contributions — served savers well,” Paul Schott Stevens, president and chief executive officer of the Investment Company Institute, said in a statement.
Investors have benefited from dollar-cost averaging and compounding as the value of reinvested dividends goes up in a rising market. They have also benefited from the federal government, which figured out long ago that if it was going to pay for its operating expenses, it was safer to take money out of people’s paychecks and leave them with after-tax income before mailing out tax refunds.
“The idea of getting money away from you before you get your greedy little paws on it is a good one,” said Kenneth A. Moraif, senior advisor with Money Matters, a financial planning firm with offices in Texas, Oklahoma and Arizona. “The rest of your budget and your spending will reconfigure itself to fit the dollars you have available to it.”
“That’s why the government takes money out for taxes instead of having you write a check for the amount due,” he added.
Altering investment behavior today still isn’t enough to secure a comfortable retirement for millions of workers many years from now, and advisors recommend setting aside as much as 17 percent of salary for retirement.
With 74 percent of 401(k) plans defaulting to contributions of only 3 percent of salary, according to the Profit Sharing Council of America, there’s no chance any worker will make it to retirement with a large enough nest egg without taking more action on their own.
New developments on the product side of the equation promise to help investors in the decumulation phase as well. Those products will need to be anchored in high income, inflation protections, hybrid annuity portfolios, capital protections, low volatility products and annuities, according to the CREATE-Research survey.
“For many retirees, annuities do not provide the flexibility to achieve other goals such as bequests and long-term care,” the authors of the report said.
Annuities, though, don’t plan to stand still either. They, too, are changing to meet demand for more guaranteed income in a low interest rate era, particularly with Congress considering new laws favoring guaranteed-income vehicles for public and private sector retirement programs.
For financial planners, it’s important to connect the contribution phase with the outcome phase through a “clear line of sight,” according to one advisor interviewed for the CREATE-Research report. Connecting the accumulation of principal early on with the income available much later from that principal and interest may do more than anything else to motivate workers to plan for retirement.
Then who knows? The results may even nudge the opinions advisors have of their would-be investors and clients.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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