In Practice October 19, 2006

Overcoming Bad Assumptions

While there has been a lot of talk the past year about the need to boost participation and deferrals, we don't seem to be making much progress.
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While there has been a lot of talk the past year about the need to boost participation and deferrals, we don’t seem to be making much progress.

A recent survey from the Profit Sharing/401(k) Council of America (PSCA) on employee participation in 401(k) plans was only up slightly from the prior survey (77.7% in 2005 versus 77% in 2004) and the average pre-tax participant deferrals were unchanged at 5.4% of pay for non-highly compensated workers and 6.9% of pay for highly compensated workers (as defined by the ADP tests).

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This is not good news for advisers. Despite an increased awareness of the longevity issues and the decline of pensions, people are still not saving anywhere near enough to create a sizable retirement nest egg. So, the important question is why are participants not contributing more?

• First, according to multiple surveys, participants appear to be making three key unrealistic assumptions: that they will work past age 65, that their post-retirement expenses will be less than during their working career, and that their employers will provide more in the way of retirement benefits than current trends suggest is realistic.
• Unfortunately, health care coverage costs continue to outpace inflation by a considerable amount.
• Many have postponed their child-rearing years, and have to contend with soaring college expenses at a time when they might otherwise have directed more money to retirement savings.
• For younger workers, their debt load coming out of college imposes a significant financial drain on their limited resources – leading many to postpone savings for retirement.
• Finally, some workers have responded to the impact of recent market downturns by pulling back on their 401(k) savings.

To counter these trends, real world examples might do the trick – helping them visualize how that 401(k) balance – projected into the future – equates to a regular monthly paycheck, for example. You can also help them reposition their assumptions by referencing what studies show happen in the “real” world.

In Practice October 19, 2006

Retirees Content with Adviser Relationships

The good news is that retirees appear to be quite content with their existing adviser relationships — all the more reason for advisers to establish those connections prior to retirement, according to a new report.
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The good news is that retirees appear to be quite content with their existing adviser relationships – all the more reason for advisers to establish those connections prior to retirement, according to a new report.

“Financial advisers targeting retirees for new relationships face a nearly insurmountable challenge,” says “Converting Retirement Income Planning Into Practice: Fulfilling the Needs of Current and Future Retirees,” a survey conducted by the Financial Research Corporation and Synovate’s Financial Services Practice of 600 retiree households in which the couple or individual had been retired from a primary career for three years or more and had at least $100,000 of investable assets

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The survey reported that almost 90% of retirees surveyed are either “very satisfied” or “somewhat satisfied” with their current adviser relationships. Further, retirees appear to be firmly entrenched in relationships with their primary financial advisers: 57% said their relationships have been in place for ten years or more, 22% indicated they have had relationships lasting five to ten years and only 11% were in relationships with their advisers for less than three years. Additionally, FRC reported that 25% of retirees had consolidated their investment accounts, effectively firing at least one provider. This resulted in those surveyed having an average of 1.2 adviser relationships per household, a number that increased with household wealth.

Relation-slips?

 

This is good news for Fidelity, Bank of America, Merrill Lynch, Vanguard, and Charles Schwab, who were the leaders in terms of total retiree relationships. However, when it comes to customer loyalty, retiree respondents ranked A.G. Edwards, Morgan Stanley, Wachovia, UBS, Smith Barney, Ameriprise, Edward Jones, Merrill Lynch, Fidelity and Schwab 1 – 10 in customer loyalty, respectively, demonstrating an affinity for full-service broker-dealers.

FRC reported that only one in five retirees considers a single firm to be their primary provider for both banking and investment services and of those who reported using a single firm, most used banks, followed closely by wirehouse broker-dealers. Despite the prevalence of advisers among this group, retirees are only generating about a third of their income from investments, the report said. As a result of the income levels of those in this survey (23% had between $250,000 and $500,000 and 31% reported wealth of between $1 million and $2 million), only one-quarter of their income was coming from Social Security, FRC reported.

A minority of retirees have created formal, written retirement income plans, but many have sought retirement income advice, often informally. Retirees are turning to their advisers most frequently for guidance choosing appropriate investments, while also asking for help with estate planning and taxes. Overall, 50% of retirees have sought some advice on retirement income planning. The most common action resulting from retirement income planning is to change the investment mix, cited by 50% of surveyed retirees.

Tasks of lesser importance include determining how to make withdrawals from multiple investments or determining the income that can be safely withdrawn, which FRC attributes to a lack of recognition of these things as needs in a retirement income strategy. A scant 6% of those surveyed asked their advisers for help in budgeting expenses and income; the report says that retirees generally have a clear picture of their expenses in three categories: necessities, luxuries and an in-between segment of “lifestyle enhancers.”

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