Data & Research March 14, 2014

Recordkeepers Strongly Influence Outcomes

Retirement plan participants’ savings rate is the most important factor for ensuring successful retirement savings outcomes.
Reported by

A new study focused on determining the influences, other than demographics, on participant deferral rates. Importantly, the study found the greatest independent impact on deferral rate is the employer match. This factor alone has two times the independent effect on deferral rates than age or household income, each taken separately, according to the survey. In addition, the data shows the participants’ level of financial literacy and level of confidence in being able to amass sufficient financial resources to comfortably retire are key drivers of deferral rates.

However, the survey also found the actions and effectiveness of a plan’s recordkeeper can have a positive or negative composite effect on deferral rates almost as powerful as the effect of the match.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“One of reasons we were interested in doing this study is that when plan sponsors do a recordkeeper search, there’s not really an effective way to measure how well a recordkeeper engages plan participants,” Laurie Rowley, co-founder and president of The National Association of Retirement Plan Participants (NARPP), tells PLANADVISER. With the study, NARPP develop the FELT (Financial Empowerment, Literacy and Trust) score index comprised of factors, controlled by recordkeepers, that have a positive effect on deferral rates, she says. When evaluating which recordkeeper to use, the index shows which providers are helping participants save more, based on a combination of participant trust in the recordkeeper, education provided by the recordkeeper, and other areas of support.

According to the study, currently, only one in four (26%) participants feel they can “always trust” their (respective) recordkeeper to do what is right. This varies widely by recordkeeper from a low of 15% to a high of 38%.

“Intuitively, trust affects every relationship we have,” Rowley says. “We found trust impacts how often participants contact their recordkeeper, and also impacts the likelihood participants calculate what they need for retirement—one of the most important things participants can do prepare for a secure retirement.”

Among the 23 recordkeepers profiled, an average of 14% of participants indicated they contact their recordkeepers more than once every month, an average of 23% of participants do so once every month, and 30% reported they contact their recordkeepers several times a year. Ten percent said they never contact their recordkeepers. The study included responses from 5,000 participants among the 23 recordkeepers.

An average of 46% of participants has calculated how much they need for retirement.

One bothersome finding of the study, according to Rowley, is participants’ understanding of basic investment terminology was low. For example, only 38% of participants, on average, said they understand very well what diversification means—the percentage among women was even lower at 27%. “These are terms participants will need to know throughout their lifetime savings journey,” Rowley says. “If plan sponsors and recordkeepers do not educate them, they are setting participants up for failure.”

When asked about education provided from their recordkeepers, an average of 37% of participants in the study said the information presented to them is always in their best interests. Only one-third (34%) indicated the information helps them understand the basics of investing, and only 30% reported that fee information is presented in a way that is easy to understand. One-quarter of participants said sometimes the financial education feels more like product advertising or sales.

Rowley suggests plan sponsors consult with recordkeepers about how to educate participants. “Just because there is auto enrollment or automatic investing help via managed accounts or other vehicles, doesn’t mean [participants] don’t need to know the jargon,” she contends. “What if they change to an employer that doesn’t auto-enroll? Plus, this may be why there is such low level of engagement among participants who are auto-enrolled versus those who make the choice on their own.”

Information about the study, or about the FELT score index may be obtained for free by emailing Rowley at laurie.rowley@narpp.org.

Data & Research March 14, 2014

IRI Criticizes DOL’s Fiduciary Redefinition Efforts

The overwhelming majority of clients feel their advisers are serving their best interests and meeting fiduciary responsibilities, according to research from the Insured Retirement Institute (IRI).
Reported by

A strongly positive perception of the work of retirement plan advisers is just one finding among a list of survey outcomes covered in a new IRI fact sheet, which outlines the importance of financial advice and the need to protect workers’ access to retirement planning services and information. The IRI releases the fact sheet at a time when the retirement planning industry is awaiting a rule proposal from the Department of Labor (DOL) that could change or expand the definition of “fiduciary,” potentially restricting access to certain types of inexpensive advice and account rollover services.

In basic terms, the DOL is considering whether to expand the definition of fiduciary to cover more types of service providers and advice relationships (see “New Restrictions Loom for IRA Rollovers”). The DOL, alongside other federal regulatory bodies such as the Securities and Exchange Commission (SEC), has said it is concerned that converging business models and the widening use of technology may be causing conflicts of interest not currently addressed by the Employee Retirement Income Security Act (ERISA) and other regulations.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The IRI opposes this interpretation in its fact sheet and elsewhere, calling the redefinition a “rule in search of a problem.” On the IRI’s assessment, expanding the definition of fiduciary will likely have the unintended consequence of depriving lower- and middle-income Americans of access to affordable retirement planning services and advice. This could occur in cases where providers of certain low-cost advice and investment solutions—often provided digitally or through remote call centers—will decide it’s too risky to take on fiduciary status for all clients, especially those with smaller account balances and less profit to offer.

It’s a similar argument to the one put forward recently by the Congressional Hispanic Caucus in an open letter to Secretary of Labor Thomas Perez (see “Congressional Hispanic Caucus Weighs in on Fiduciary Rule”), though the caucus appears at least partially open to a redefinition, so long as it truly cuts down on conflicts of interest. Other Congressional groups, such as the New Democrat Coalition, have expressed similar views.

“Time and time again, our studies have shown the benefits of planning for retirement with the help of a financial professional,” says Cathy Weatherford, IRI president and CEO. “Those working with a financial adviser are more likely to have retirement savings, more likely to have determined a savings goal, and overall are more confident with their financial preparations for retirement.”

Weatherford says other studies, coming from inside and outside the IRI, have concluded that working with an adviser leads to better savings behaviors and greater retirement assets.

“Given these findings, it’s imperative that we protect the client-adviser relationship and help ensure that all Americans have the opportunity to attain a financially secure and dignified retirement,” she says.

The new research results contained in the IRI fact sheet are from a January survey of Americans, age 51 to 67, that shows most investors are satisfied with their relationship with their adviser. Key findings from the study and underlying survey show the following:

  • Eight in 10 respondents said they are better prepared for retirement because of their financial planner;
  • Three in four said they are likely to recommend their adviser to a friend or relative;
  • Eighty percent said they are aware of potential conflicts of interest their advice provider may face;
  • The overwhelming majority of clients agreed that their adviser acts in their best interest; and
  • Less than 5% of investors share the views expressed by DOL to justify its proposed tightening of fiduciary rules, with less than 1% strongly agreeing with the DOL’s perspective that merging business models and technology developments have potentially increased conflicts of interest for certain types of advisers and financial services providers.

In interpreting these figures, the IRI suggests that working with a professional adviser clearly increases the probability that an individual will save. Furthermore, savings rates increase with the length of time a client works with a financial adviser. As a result, professional advice has a positive and significant impact on financial assets, the IRI says, even after accounting for other variables.

Compared to those who go it alone at the same age and wage level, investors working with a financial advisor for four to six years will have about 58% more assets at the end of that time period, says the IRI. Those with an advice relationship lasting seven to 14 years typically see about 99% more in accumulated assets. A 15-year relationship yields approximately 173% in additional assets over those saving and investing without an adviser.

The IRI says professional advice also has a positive influence on other retirement planning behaviors, including increased usage of tax-advantaged savings vehicles, improved asset allocation, greater portfolio diversification and less speculative investing.

The redefinition proposal addressed by the IRI was originally offered in 2010 but was withdrawn the following year in response to industry pushback, particularly concerning IRA investors, the majority of whom have small accounts under $25,000.

According to the IRI’s analysis, most IRA investors today have full-service brokerage accounts. In fact, more than 30 million households—27 million of which are from the lowest wealth segment—hold assets solely in these normally commission-based accounts.

Under the originally proposed rule, advice provided through these full-service brokerage accounts could have constituted a conflict of interest and triggered prohibited transactions if the broker received additional profits from making the recommendation. As a result, these investors would potentially be forced to leave their current accounts and move to either a fee-based adviser account, which are only available to investors with enough assets to meet the applicable minimum balance thresholds applied by most providers, or low-support brokerage accounts. Neither result would be desirable, the IRI says.

In a recent conference call with reporters on the separate topic of fee disclosure within defined contribution plans, top DOL officials declined to provide an update on what the final fiduciary redefinition may look like. However, Phyllis Borzi, Assistant Secretary of Labor for Employee Benefits Security, confirmed the DOL plans to re-release the final proposal in August of this year.

More information is also available at www.irionline.org.

«