Retirement Plan Participants Not Utilizing Help

Plan participants increasingly realize they are responsible for generating their own retirement income, but many still pass over investment advice offerings, a survey from Schwab Retirement Plan Services finds.

Nine in 10 participants surveyed indicated they are relying on themselves for the money needed to live in retirement, and most use a 401(k) as their primary or sole source of retirement savings. Despite this, respondents say they are much more likely to have someone change the oil in their car (87%) than have someone help them choose their 401(k) investments (24%).

According to the survey, participants on average spend roughly the same amount of time reviewing and choosing investments for their 401(k) as they do investigating new cell phones, which are often traded in from year to year. And, they spend more than twice as much time researching their cars before buying than they do evaluating their 401(k) options.

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Today, many 401(k) plans offer some type of professional, personalized investment advice, but while many of the participants surveyed believe they would likely benefit from this type of assistance, relatively few are actually taking advantage of it. Less than one quarter (23%) of those with access to professional 401(k) advice say they have used it. Yet, among those not using advice, roughly half (49%) believe they would achieve better investment results if they did so.

In addition, the survey found 70% of participants surveyed say they would feel extremely or very confident in their ability to make the right investment decisions if they enlisted the help of a financial professional, while only 39% feel that same level of confidence when making investment decisions on their own.

Six in 10 participants are most likely to seek help with retirement planning once they start to approach retirement age, but Schwab notes getting help sooner may lead to better outcomes.

According to Steve Anderson, head of Schwab Retirement Plan Services, the survey didn’t explore why participants are not using the help offered to them, but Schwab did not find the results surprising. “It’s similar to behaviors we’ve observed in the industry for some time,” he tells PLANADVISER. “Plan sponsors may create tools for participants, but if they have to seek them out by going to a website or making a phone call, rarely do they take advantage.” He adds that the 401(k) concept may be daunting and confusing to participants, so they shy away. “It has to do with participant inertia in making decisions about things with which they are not comfortable.”

Anderson believes plan sponsors need to use what the industry has learned from behavioral finance and enroll participants in a program that offers help or advice. He says a trend Schwab thinks will take hold in the industry is the use of managed accounts as default investments for 401(k)s, rather than target-date funds. He contends offering managed accounts that use multiple data points from recordkeeping and payroll systems—such as age, salary, account balance, savings rate, estimated Social Security benefits, marital status, and state of residency—to create individual portfolios for each participant will improve participant outcomes. “Anything short of that is leaving something on the table; the industry needs to move forward with its use of data,” he says.

According to Anderson, Schwab has found 85% of employees whose employers offer managed accounts are staying in them. And, participants who used third-party, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions.

He adds that plan sponsors are in a position to make prudent decisions for employees that can make a difference, including automatic enrollment, automatic deferral increases and automatic investment defaults. “When it comes to the default investment, employers that really want to help participants should reenroll and move all employees into the default and let those who have the time and knowledge to invest on their own opt out,” he contends.

Anderson also addresses the issue of higher costs for managed accounts. “Using data to provide better results to individuals requires a fee for service, but plan sponsors can drive overall costs down by using indexed investment products,” he says. “[The industry] needs to drive more expense out of products and provide more advice.”

Schwab’s nationwide survey of 1,000 401(k) plan participants finds that a 401(k) plan is considered a crucial benefit by an overwhelming majority. When asked which benefits are “must haves” aside from health insurance, nearly nine in ten respondents (87%) say a 401(k) is a “must-have” benefit—more than disability insurance (45%), life insurance (42%), extra vacation days (34%) or the ability to telecommute (15%).

However, the survey finds many participants are still unsure exactly how their retirement benefits work:

  • Half of those surveyed say their 401(k) plan investment information is more confusing than their health care benefits information;
  • Roughly one in three (34%) admit they feel a lot of stress when it comes to allocating their 401(k) dollars; and
  • More than half (59%) wish it was easier to choose the right 401(k) investments.

Other survey findings included:

  • A majority (86%) of participants who get matching contributions from their employer say they are contributing at least enough to receive the full company match;
  • More than half of survey respondents (57%) have increased their 401(k) contributions in the past two years, with many saying they did so because they were concerned about having enough money to retire comfortably; and
  • While many 401(k) plans allow participants to take loans against their account, three-quarters (76%) of respondents have never taken a 401(k) loan.

The online survey was conducted by Koski Research among 401(k) plan participants who worked for companies with at least 25 employees, were current contributors to their 401(k) plans and were 25 to 75 years old. The study was conducted between May 27 and June 4. Findings can be found at http://www.aboutschwab.com/press/research.

Collective Investment Fund Pursues Endowment Style

A new collective investment fund from Alta Trust Company strives to bring an endowment investment philosophy and liquid alternative opportunities to defined contribution retirement plans.

Alta says it partnered with ETF Model Solutions LLC to develop and launch the Endowment Collective Investment Fund. As the firms explain, the Endowment Collective Investment Fund (CIF) seeks to improve risk-adjusted returns of traditional portfolios of stocks and bonds by adding alternative investments. The CIF incorporates asset classes such as private equity, hedge strategies and real assets to create a “three-dimensional portfolio.”

Alta says managers of university endowments, public pension systems, and corporate defined benefit plans have historically utilized lower-correlated alternative investments to improve the risk-adjusted returns of their portfolios. Demand for this style of investing is increasing among DC plan sponsors and participants, according to recent industry research (see “DC Sponsors Drawn to Alternatives”).

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Rather than private placements or limited partnerships, the Endowment CIF uses liquid alternative investments, such as exchange-traded funds and mutual funds, to obtain its alternative asset allocations. ETF Model Solutions believes that the three-dimensional approach offers four major benefits when compared to most proprietary target-date or balanced funds, as follows:

  • Added protection for the plan sponsor, as both the trustee and the manager of the CIF serve in a fiduciary capacity;
  • Reduced portfolio volatility compared with portfolios with greater equity allocations, due to its hedge strategy holdings;
  • Protection from inflation due a greater allocation to real assets, such as commodities, precious metals, real estate and infrastructure investments; and
  • Lower interest rate risk due to a smaller allocation to fixed income investments.

The Endowment CIF utilizes a core-satellite portfolio construction with low-cost, cap-weighted equity and fixed-income ETFs comprising the core allocation, with fundamentally-weighted funds utilized in an attempt to gain alpha. The strategically-managed Endowment CIF is presently targeted to an allocation of 40% global equity, 20% global fixed income and 40% liquid alternative investments.

Alta maintains selling agreements with most major retirement plan platforms, thus plan advisers can likely offer the Endowment CIF to their plan sponsor clients through their existing platform relationships, according to the firm. Plan sponsors can add the Endowment CIF to their retirement plans through a simple participation agreement, according to Alta, while also maintaining their current third-party administrator and recordkeeping relationships.

CIFs are pooled investment funds available only to qualified retirement plans, such as defined contribution 401(k) and defined benefit plans, and are regulated by state and federal organizations, such as the U.S. Office of the Comptroller of the Currency (see “Time to Consider a Collective Trust?”).

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