Some Participants View Recordkeeper as Adviser

Research from financial analytics firm Cerulli Associates shows more than a quarter of 401(k) participants look to their plan’s recordkeeper as their primary source of retirement advice.

Strikingly, the group of plan participants turning to a recordkeeper for advice (at 28.2%) is significantly larger than the group consulting a professional financial adviser (16.3%). Cerulli suggests that, while independent advisers are probably the best-positioned to provide unbiased retirement planning advice for workplace investors, it’s encouraging that multiple avenues of advice exist for a segment of savers often lacking in financial sophistication.

“There is no shortage of recommendations about how plan sponsors and recordkeepers can engage plan participants to save more of their salaries for retirement,” comments Bing Waldert, director at Cerulli. “But these various strategies—personalized communication, auto-escalation of contributions, smartphone apps, and others—only produce results if investors can afford to increase contributions.” 

The third quarter issue of “The Cerulli Edge – Retirement Edition,” probes methods for involving plan participants more deeply in the retirement planning process, finding the role of 401(k) recordkeeping providers is paramount to successful outcomes. Researchers suggest advisers and plan fiduciaries should leverage recordkeeper tools to review plan participant demographics and establish messaging and advice that stimulates action. Recordkeepers are also in a great position to help plan and execute important plan design changes, Cerulli says.

“Regardless of their personal financial situation, when employees join an employer, many confront decisions about retirement investing,” Waldert continues. Despite the numerous success stories associated with auto-enrollment, eliminating personal contact between the adviser and the participant may not be in the industry’s long-term best interest, he adds.

Cerulli recommends a balanced approach between auto-enrollment features and phone conversations with receptive plan participants to shore up deferrals of at least 10% of salary. Communications that address debt, budgeting, and other barriers to saving could help plan participants address challenging hurdles, the research contends.

The research also suggests engaging Generation Y has been a particular challenge for the retirement planning industry, in part because of the inherent difficulty in generating enthusiasm about a transition to retirement that will not occur for decades. Recordkeepers, therefore, could play an even more important role in building engagement among this younger group of retirement savers.

Cerulli urges advisers to work with recordkeepers to make communication more actionable, automate enrollment, emphasize target-date and managed investments, and increase auto-enrollment rates to between 6% and 8% of salary. These steps would significantly reduce complexity and help younger workers ultimately increase savings and retirement readiness, Cerulli says.  

Making these efforts is not just the right thing for advisers to do, Cerulli suggests. Ultimately, Generation Y is likely to build a larger asset base over time compared even with the Baby Boomers, and advisers will have to work diligently to win access to this challenging but potentially lucrative market segment.

As further evidence of the importance of securing younger clients, Cerulli observes that retirement account distributions are anticipated to outpace contributions by 2016. By 2019, the gap will be nearly $58 billion.

Information on how to obtain a copy of “The Cerulli Edge – Retirement Edition,” is available here.