Data & Research December 27, 2013

Growth of 529 Plans Slows

Assets in 529 college savings plans continue to set yearly records, but growth in both the adviser-sold and direct-sold channels is slowing, research shows.
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Growth in direct-to-investor 529 products has slowed significantly, according to “529 Advisor Study, 2013,”a report by investment research and consulting firm Strategic Insight (SI), an Asset International company.

In 2013, sales of direct-to-investor products were 9% of inflows, down from 14% last year, as more investors turned to professional help in managing savings efforts. Advisers can expect direct-sold products to continue the trend of declining market shares.

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The retirement and institutional channel, on the other hand, will remain central to 529 product distribution strategies. According to SI, asset growth and sales in these channels will be propelled by a number of demographic trends and the increasing need for retirement savings.

SI researchers expect the fastest growth to come in the intermediary channel.

Intermediaries, on SI’s analysis, will benefit as aging investors transition from other channels, such as seeking professional advice when rolling over assets from a 401(k) account. 

Wirehouses are expected to hold onto their strong position, with 44% of projected 2013 year-end fund assets, but they also have to deal several issues. These include problems in adviser and asset retention, and tarnished brand images following the financial crisis. 

Regional firms have expanded based on strong records for customer satisfaction and consistent service, SI says. The independent adviser channel, conversely, has backtracked in the past few years, because of mergers, acquisitions, firm closures, consolidations and adviser retirements.

SI researchers also point out that the registered investment adviser (RIA) segment stands out as the most independent section of the intermediary channel, and consists of more than 27,000 firms of varying sizes, making wholesaling a challenge. SI expects the RIA population to increase the most of any intermediary channel. Advisers with dual registration (with an RIA and a broker/dealer) have also become an increasingly important part of the channel. 

One channel that remains relatively untapped is the employer channel. According to SI, expanding into this channel is ideal for expanding both assets and automatic funding into 529 plans.

About a third of parents (30%) say that they use a 529 plan to save for college, SI found in its research, but just 7% report that they enrolled in it through an employer. The employer channel can be useful in expanding industry assets, SI says, because 90% of the 529 users who enrolled that way use automatic funding for their accounts. Auto enrollment is an effective way for savers to continually contribute and grow their accounts, which is good for both advisers and their clients.

For that reason, SI urges product providers to allocate more resources to support employers directly and to consider utilizing benefits fairs and other initiatives to encourage employees to save more. 

Looking more generally at the 529 space, total assets have grown to about $183.5 billion, as of the end of the second quarter of 2013. That’s an all-time high and 64% higher than the pre-recession year-end high of $112 billion, measured in 2007. 

Assets in plans sold by advisers have been steadily declining year over year. In fact, the adviser channel accounted for 62% of the 529 savings plan industry assets in 2003, but only 49% as of the second quarter.

Investors have been returning to the industry since 2008, with direct-sold plans gathering the majority of net flows. The growth of the intermediary channel will be critical to the future of all 529s, even direct-sold plans, where financial advisers play an important part in enrollment.

More on the survey and how to obtain the full results is available at http://www.sionline.com/.

Data & Research December 27, 2013

Build a Better Plan With Better Choices

A good plan uses the right architecture, and the right architecture factors in steering the behavior of participants, a paper says.
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Behavioral economics and “choice architecture” are essential tools that plan advisers can use to help plan sponsors improve retirement readiness, says Christopher Goldsmith, vice president of Sibson Consulting, a provider of HR benefits, compensation, and talent and performance management.

Advisers should keep in mind the difference between extrinsic and intrinsic motivation when working with plan sponsors. “The ability to retire on a certain income is an extrinsic motivator,” Goldsmith explains. But when the talk turns to people outliving their assets and becoming a burden on society, then advisers can appeal to the intrinsic reward that strikes a chord with plan managers. “You have to appeal to people emotionally,” Goldsmith says. “That is what creates behavioral change.”  

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Sibson has previously issued white papers that discuss how behavioral economics can educate employees. Plan architecture  can specifically encourage (or discourage) employee engagement in the plan, Goldsmith tells PLANADVISER. “Everyone responsible for participant communications is a choice architect, whether they know it or not,” he says.

Improving communication is an opportunity, according to Goldsmith.  “Plan advisers ought to look at the state of retirement readiness in America and recognize there is great room for improvement in plan sponsor decisions and participant communications,” he points out.

Effective communication is influenced by human biases in both the senders and receivers of messages, according to Goldsmith. “Each consumer financial decision is a product of rational, emotional, deductive and inferential reasoning,” he says. “Effective choice architecture recognizes that emotional and inferential reasoning are at play. Ineffective choice architecture assumes all participants thoroughly research alternatives and deduce the best option for their personal circumstance.”

A one-size-fits-all communication campaign is unlikely to achieve anywhere near optimal results, according to research by Sibson. Participants have a range of desires and goals. Some seek strong returns, while others seek capital preservation. Some participants have time and energy for personal research, while others rely on the defaults offered in a plan. Some participants have expertise in investing and finance, and others are financial neophytes.

As a result, Goldsmith says, the firm is beginning to study how to use variable choice architecture that factors in human biases and preferences. The best kind of communication varies the content and the way it is framed to suit different participants while still meeting compliance requirements.

Compliance Drives Messaging

“Many plan sponsors are anchored in the way they have been communicating and doing business for years,” Goldsmith says. “Their messaging is premised on the rational investor model and legal compliance concerns. That style of messaging has been positively reinforced by legal counsel and actuarial advisers for decades.”

Of course some of this is critical, he says, and it is important to keep on top of meeting regulator concerns. But so much communication is not participant friendly. A good example is the language used to describe distribution options, according to Goldsmith.

Participants are given a barrage of legalese—about annuities, joint survivor benefits, lump-sum distributions—to decode. The language and choices can be ridiculously complex, he feels. But if plan sponsors reframe these distribution options in a consumer-friendly way, most people have an easier time making a choice that is right for their situation.

A good question to ask is, “What does this mean to you in terms of creating an income stream?”

Participants need to think about what their assets mean in terms of creating an income stream, and what they will be able to afford. The choices need to be simple and consumer-oriented.

Goldsmith believes behavioral economics, a close cousin of behavioral finance, is a critical discipline to understanding and communicating with retirement plan participants and improving retirement readiness.

Behavioral economics focuses on consumer decisions while behavioral finance focuses on investor behaviors, Goldsmith explains. “Retirement plan participants are both consumers and investors,” he says. “Plan sponsors ought to research both fields of study to develop helpful applications for their plans.

Repeating the same timeworn messaging is not likely to reach participants. Effective campaigns that improve retirement readiness recognize that not all participants are alike, in either their goals or their expertise or their life stage.

More about behavioral economics is on Sibson’s website.

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