The gap between guidance and advice is significant, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “Two-thirds of people that engage in an advice session take action by revisiting their asset allocation or increasing savings,” Ray told PLANADVISER. “The take-action rate with guidance is much lower.”
The best way for people to get advice is from an adviser through the employer retirement plan, TIAA-CREF found in its second Financial Advice Survey. “The challenge we saw from the survey is that people want to get advice, but they don’t know who they can trust,” Ray said. “They appear to trust their employers, so providing it through a channel that employees are comfortable in is important.” A third of employers offer advice, according to Ray, and often people find their way to advice on the Internet. “But just doing it online doesn’t suffice for most people. The opportunity of getting advice face to face or on the phone is a much more effective way of delivering it.”
With the number of older and aging workers, Ray said, many people need advice more than ever. Younger participants, age 18 to 34, have longer to prepare for retirement, but Ray pointed out that many of them graduated and hold a substantial amount of personal debt. “Advice might be tailored to different populations: how do you build a budget; how to you manage debt? People in their 50s will need to know how to build a nest egg and manage it through retirement,” he said.
Plan sponsors as well as employees should be aware of the difference between advice and education—an important difference—as well as the variation in effectiveness for each. “A lot of service providers have been providing guidance,” Ray said. Participants learn about asset allocation and different ways of investing their savings, but they are not given advice on the investment level. They are not given advice about what percentage of their assets should be in various funds.
The level of care to provide advice is so much higher, Ray said. Providers are “on the hook” for the advice they give, since it must put the best interests of the participant first. The good news is that more employees are engaged with their participant plans.
Because of the drop in the use of defined benefit plans, people are increasingly wondering where their retirement savings will come from. “In all sectors it is going to come down to what they put away for themselves,” he said. Younger people realize they will need to start early. “It’s not like homework. You can’t cram one night before retirement.”
The decisions that surround how to handle the accumulated assets must also be addressed, Ray said. The question is not just when someone retires but how a person retires. What form of income should they plan for? How much should be placed into a lifetime income vehicle? Who can help make these decisions? “The cognitive ability to make these decisions also begins to decline,” he pointed out.
Perhaps the initiative should be National Lifetime Income Week, Ray suggested. “That’s the challenge everyone is going to have to deal with,” he said. “Say someone has been saving for 30 years and has a big nest egg. Giving that big chunk of money to a firm in order to receive regular checks is a very difficult decision to make.”
The numbers—10,000 people will turn 65 every day for the next 16 years—point to the coming crisis. “Quite honestly, one challenge is that we don’t teach financial discipline to kids starting at a young age,” Ray said. Even high schools and colleges rarely address personal finance and savings behaviors. One way to make a difference would be changing the curriculum to encourage saving at a young age, instead of starting with younger workers in their 20s.
“I wish National Save for Retirement Week was every week, instead of just one week of the year,” Ray said. “Especially for young people, because of the importance of starting to save when you are younger. It’s a great initiative, but maybe National Retirement Month would be more effective.”