In Practice October 15, 2012

Accumulators May Be Better Target than Pre-Retirees

High-net-worth younger investors, or accumulators, could be a key market for advisers, according to a study by the research firm Hearts & Wallets.
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Instead of the traditional bread-and-butter “pre-retiree” market, a study found that accumulators are looking for financial advice but are held back from seeking help with financial tasks because they are unsure about whom they can trust, said Chris Brown, principal at Hearts & Wallets.

“Hearts & Wallets has identified three screaming unmet needs as key to motivating the many investors who would be interested in new services but are afraid to act,” Brown said. These investors want to be told what advisers do; how they are paid; and how to evaluate advisers. “The firm that clearly articulates the advice value proposition has a tremendous opportunity to claim this attractive market segment.”

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Accumulators face bigger financial advice gaps than older people, according to “Trended Engagement Model: Reasons for Seeking Help and Taking Action.” Advice gaps are the difference between the number of people who find a financial task difficult and the number of people actually seeking help.

“Knowing how to find the right resources” and “handling market volatility emotionally” are the biggest advice gaps for all life stages. Four in 10 accumulators find retirement planning difficult, but are not getting any help. A similar proportion is not seeking help in getting started saving and investing.

“This study reaffirms the importance of including accumulators in any client acquisition plan,” said Laura Varas, principal of Hearts & Wallets. “For too long the industry has focused on pre-retirees as the golden goose. Neglecting accumulators by leaving them unsatisfied in financial advice will result in this segment creating relationships with other options, perhaps even category newcomers or technology solutions, to the long-term detriment of industry stalwarts.”

(Cont’d…)

Overall, investors found financial tasks less difficult in 2012 than in 2011. Retirement planning continues to lead as the most difficult task. The second-most difficult task is getting started saving and investing. Wealthier investors had an easier time with financial activities than their less affluent counterparts.

Among affluent and high-net-worth accumulators there was also a general easing of difficulty. Still, one-third of these investors ranked choosing appropriate investments, retirement planning and knowing how to find the right resources as very difficult.

As with the general population, fewer affluent and high-net-worth accumulators sought help with financial tasks than in 2011 or 2010. The biggest challenge for accumulators was marked by the biggest drop in seeking help.

Only 23% of and high-net-worth accumulators sought help in choosing appropriate investments in 2012 versus 30% in 2010. After seeking advice the most common action was increasing savings.

The trend away from seeking help with financial tasks continued in 2012, Brown noted. “This reflects investors’ decreased engagement, which is related to the low trust Americans have in financial services providers,” he said. “Only one in five Americans places full trust in their primary and secondary providers, down from one in four in 2011. Our focus groups continue to suggest that until investors’ three unmet needs are satisfied, trust and engagement will remain low.”

 

(Cont’d…)

Affluent and high-net-worth pre-retirees have the most difficulty with choosing appropriate investments and a variety of tasks Hearts & Wallets calls “income choices.” It is important to recognize how small the pre-retiree market really is.

According to the research firm’s Portrait of U.S. Household Wealth, true pre-retirees are those who consider themselves within five years of retirement rather than falling within a certain age group. By this definition, only 4.8 million households, controlling $3.1 trillion in investable assets, are pre-retirees. Only 55% of true pre-retirees are 55 to 64 years of age. The rest are either younger or older.

An important finding for advisers is that affluent and high-net-worth pre-retirees are likely to change their investment mix. There was a big jump, from 2010 to 2012, in the number who purchased health, long-term care or life insurance. There was also a big jump in those who plan to purchase an annuity and consolidate accounts with fewer providers.

The annual survey of more than 5,400 U.S. households tracks specific segments and product trends. Hearts & Wallets defines accumulators as mid- and late-career investors, age 28 to 64, who do not consider themselves pre-retirees. They represent a market segment of about half of all U.S. household investable assets.

Hearts & Wallets, in Hingham, Massachusetts, researches retirement market trends for the financial services industry.  For complete data on this study, contact Hearts & Wallets.

 

 

Data & Research October 15, 2012

Plan Sponsors Should Create a Realistic IPS

Plan sponsors and fiduciaries can learn from federal court findings in Tussey v. ABB Inc., and should avoid overly detailed investment policy statements (IPS), a white paper asserted.
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The court found that ABB’s plan sponsor and other plan fiduciaries failed to follow the plan’s IPS; failed to monitor recordkeeping costs paid through revenue sharing and hard dollars, and to negotiate rebates for the plans; failed to prudently deliberate before removing and replacing investment options in the 401(k) lineup; selected more expensive share classes for the plan’s investments when less expensive ones were available; and allowed revenue sharing from the 401(k) plans to subsidize unrelated corporate services. (See “Employer to Pay for Failing to Monitor RK Costs.”)

This case can teach valuable lessons, according to Janus Capital’s white paper, including that fiduciaries should routinely review and revise the IPS to ensure that their fiduciary actions are consistent and the IPS is up to date and reflects both the plan sponsors’ intent and the new regulatory environment. Plan sponsors and their advisers should also ensure that the IPS is not overly detailed and restrictive as to cause unintended liability. They should continue to remain vigilant by developing an ongoing process for determining whether plan fees are reasonable in light of the services provided, and thoroughly documenting the basis for all investment decisions.

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The white paper outlines other lessons plan sponsors and fiduciaries can learn from this case including:

Fiduciaries have an ongoing obligation to monitor plan fees: A November 2005 Mercer report showed that ABB overpaid for Fidelity’s plan recordkeeping services, and ABB fiduciaries ignored the analysis and its conclusion that fees were too high. It also showed that the revenue sharing from the 401(K) plans appeared to be subsidizing other services provided to ABB by Fidelity (including recordkeeping for the company’s defined benefit plan, its deferred compensation plan, its health benefits and its payroll). Plan assets cannot be used to subsidize other employer plans because it is a violation of ERISA’s “exclusive benefits rule.” 

 

(Cont’d…)

Fiduciaries should prudently select and remove investment options: The court determined that the ABB fiduciaries violated their duty of prudence when they failed to follow their own IPS requirements for the selection and removal of an investment fund, choosing more expensive funds to avoid paying a per-participant hard-dollar recordkeeping fee.

Fiduciaries should adhere to plan documents: The court also found that the plan’s IPS required that any rebates associated with plan investments would be used to offset or reduce the cost of providing plan administrative services. It concluded that revenue sharing would have been considered a rebate. Rather than offsetting the administrative costs of recordkeeping as provided in the IPS, all revenue sharing was paid to Fidelity. The IPS also required that when the plan was offered a choice of mutual fund share classes, the class with the lowest cost of participation should be selected.

Additional tips from the white paper include:

  • Consider how the plan size might be used as leverage in a negotiation for lower fees;
  • Benchmark the fees and expense ratios before deciding to pay for recordkeeping through revenue sharing;
  • Regularly benchmark the cost of plan services to obtain current independent data on the going market price for services;
  • Determine whether the revenue sharing and other payments are reasonable in light of the services provided; and
  • Ensure that one employer plan is not subsidizing the services provided to another plan, where bundled providers offer multiple services and receive compensation through revenue sharing.

 

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