Clients May Need More than Retirement Help

Budgeting – it may be the first step to improved retirement savings.

Topics like household budgeting, emergency savings, managing credit and debt are not taught in grade school, high school or college, notes Joseph Topp, vice president of investment consulting services at Francis Investment Counsel LLC.

Research by LIMRA reveals 52% of middle market consumers list developing a monthly budget and following it as one of their top financial priorities. Another 77% say they want someone who is willing to educate them and explain what they do not understand about finances.

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“We’re going to look back and marvel at the educational needs that exist today,” predicts Topp. “We have the Millennials who are so tuned in electronically that they are not used to carrying money, or manually balancing a checking account, or taking their paycheck to the bank and depositing it and pulling out spending money.”

On the other end of the spectrum is the older generation whose members are not as electronically tuned in. This is where advisers can step in, providing education and tools appropriate for their clients. For example, recognizing a purely electronics approach does not reach everyone, Francis Investment Counsel LLC delivers most counseling face-to-face in individual advice sessions.

Topp suggests advisers incorporate financial fundamentals into the curriculum of their retirement plan education including household budgeting, emergency savings, long-term care insurance, social security, principles of estate planning, the importance of a will, managing and monitoring debt and managing and monitoring credit scores.

With advisers’ assistance, clients have the opportunity to understand better budgeting techniques to improve their financial outcomes now and years down the road. Topp concludes participants should understand the principles of “pay yourself first” and how to utilize those principles properly.

LIMRA research shows a majority (70%) of consumers say it is very important to have enough for retirement, however many think they do not know enough about how much to save and do not know what the most efficient ways to save are.

“I think all households, particularly from Generation X, Generation Y and Baby Boomers, realize retirement has become their personal responsibility,” says Jafor Iqbal, assistant vice president at LIMRA Secure Retirement Institute. “We have found in our studies that any way you look at it, most people will be required to create more than 50%, 60%, or 70% of their income from their own retirement savings. That’s a huge responsibility, but also a huge opportunity for advisers to come forward and help them. Sometimes they don’t know how to execute that personal responsibility, but advisers can help them with that and give them peace of mind.”

In order to meet their clients’ needs, Iqbal suggests advisers take the following action: show clients how to create a retirement income plan and illustrate their projected expenses in retirement, their income in retirement and after they save, and how long their money will last in retirement.

In addition, more than 50% of consumers admit they are not at all knowledgeable about financial products. Specific tools can assist in providing a better understanding of how to budget in the current financial marketplace.

Iqbal explains that simply working with an adviser puts clients a step ahead. Those working with an adviser save about 14% of their earnings for retirement, compared to those without an adviser who save only half that amount (7%) on their own.

Using Participants to Help Participants

Retirement plan providers have been testing behavioral science themes with retirement plan participants, and positive investing outcomes are clearly emerging from the effort.

Drew Wineland, vice president and participant experience manager at Wells Fargo Institutional Retirement and Trust, in Minneapolis, Minnesota, tells PLANADVISER as part of its initiative to focus on participant experience, Wells Fargo wanted to deliver something more proactive, personal and relevant. The firm first considered on-site employee meetings at which its retirement educators or counselors would present to smaller groups of 25 or so employees, but decided to try a discussion format instead.

In an event for Millennial employees, Wells Fargo chose two Millennial participants in a client’s retirement plan, and one participant who was closer to retirement, to be on a panel with its retirement educator. The panel facilitated a direct peer-to-peer discussion.

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“We saw participants open up and ask questions and have authentic dialogue about their challenges and how to prepare for retirement,” Wineland says. 

For example, when discussing what is keeping them from taking fuller advantage of the company’s retirement plan, the employees talked about student loan debt—which Wineland notes is especially high for employees at this client, as it is a medical services facility. “The group opened up more about this when they heard one of the panelists speaking about how he manages student loans and still saves for retirement,” he says. “Understanding they are not alone in that situation and that there are ways to address it was helpful to employees.”

In addition to the pilot with its client, Wells Fargo held a similar discussion group with its own employees. It measured results in several ways, assessing employees’ satisfaction with the meeting, what they learned, and how likely they were to take a positive action in response to the peer discussion.

“We received good remarks; there were high levels of satisfaction. Employees said they like hearing from others like them,” Wineland says. He adds that action rates, such as for increasing contributions to the plan, were twice as high as those following normal lecture-style group meetings and in line with action rates seen after employee one-on-one meetings with counselors. 

“A fresh approach is energizing to them,” Wineland adds. “And, I think there’s definitely something to using social norms and people valuing and trusting those like them.”

Steve Jenks, head of marketing at Empower Retirement, in Denver, says Empower also has found peers to be very powerful motivators for retirement plan participants. Empower has made available to all clients over the last year-and-a-half a feature called “How Do I Compare?”

The theory behind the offering ties to a theory presented in 1954 by Leon Festinger: individuals evaluate their own opinions and abilities by comparing themselves to others in order to reduce uncertainty in these domains, and learn how to define the self. Jenks says when talking to plan sponsors, he’s found that they are often approached by employees asking “What should I do?” regarding their retirement plan, and often they say, “Will you tell me what other people are doing?”

The peer comparison tool, available on the home page of Empower’s website for plan participants, shows them what their actions look like compared to people of similar age, gender and income, and shows them the pre-retirement income they are on track to replace in retirement compared to their peer group, then gives them the option to increase their savings.

According to Jenks, last year, the first full year the tool was available, Empower saw 12% of online deferral increases were generated by this tool, and the amount of the increase was higher than for participants who increased their deferrals without using the tool—25% increase compared to 18%.

Jenks says Empower has seen that peer comparisons have a universal appeal to all demographic groups, but, anecdotally, it is probably most powerful for Millennials. “They are a demographic that is more used to openness and comparison than older generations,” he notes.

An important point to note, according to Jenks, is if individuals are compared to others who are doing better, they will be driven upward in actions. “The important point is to compare people to the best, not just the average,” he says. “If you compare them to the average, you’ll get a bunch of ‘C’ students. Compare them to the ‘A’ students and give them ability to easily make a change, and they’ll act.”

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