Top-Performing Advisers Look Past Averages

Stress testing the impact of individual behavior and circumstance, along with market returns, can be especially useful. 

For the second year in a row, J.P. Morgan Asset Management invited PLANADVISER to sit in on the firm’s defined contribution (DC) adviser summit, an event held each year in New York as a frank peer-to-peer discussion among the firm’s top-performing advisers.

One clear theme that emerged is that advisers are looking for ways to move beyond just thinking in terms of basic averages and unsophisticated data sets.

As Anne Lester, portfolio manager and head of retirement solutions for J.P. Morgan Asset Management, asked, “We all talk about averages, but how many people actually meet the definition, and do we understand what a given average is actually telling us?” For an example she observed that the average life expectancy for a 65-year-old American woman is 86. “How many American women die at age 86? Only 8.5%.”

Lester explained that employers, financial advisers and individual investors often will of course have to rely on averages and medians to start a retirement planning conversation—retirement age, life expectancy, investment returns. Yet averages can be hugely distorting because, in fact, no one is average.

“The strongest retirement plan, whether it is for a single individual or a 401(k) plan for a large group of employees, will be designed for the edges as well as the middle,” Lester noted, “and for every point along a wide continuum of life choices and experiences.”

Advisers at the DC summit seemed to broadly agree they have an opportunity to play an even more important role in helping their clients understand the consequences of their choices and calibrate their tolerance for the spectrum of risks faced in retirement.

Stress testing the impact of individual behavior and circumstance, along with market returns, can be especially useful, Lester stressed.

“In planning for retirement, individuals should assess their particular circumstances and concerns and not assume that they can safely rely on the averages,” she urged. “Do they have a family history of longevity? Did they start saving for their retirement in their 20s, 30s or only in their 40s? Are they healthy? Are their savings in cash or do they diversify their investments?”

It is only after an individual understands what variables are under their control and how they might influence them that true retirement planning can commence.

NEXT: Thinking deeply about data

Defining and determining averages is a science unto itself, but there are some basic principles that all advisers should be keeping in mind as they serve DC retirement plans, Lester argued. At the very least, thought should be given to the fact that a wide gap will often show up when looking at stats like DC plan account balance mean average versus the median in a given plan population.

Broadly speaking, she agreed the median is usually a more informative figure when considering a given feature or characteristic of a defined contribution plan. But the simple mean average is often much easier to determine than the median, meaning it is used more often than not.

To underscore the point, Lester cited data provided by the Employee Benefits Research Institute (EBRI), showing that across all U.S. DC plans the average account balance is something like $76,000—but it is just $18,000 at the median for those participants younger than 40. Participants older than 40 show a median account balance of $25,000.

The J.P. Morgan expert went on to explain that “even two folks with a similar financial picture today can end up having entirely different experiences” down the road—yet another reason to think more individualistically about advising retirement plans. Crunching the numbers for a theoretical average individual, the analysis suggests a combined 16% savings rate between employer and employee contributions should be sufficient to establish lifetime retirement readiness by age 65. However, if the same individual ends up requiring a two-year stay in a nursing home, he would need to save 21% a year to have sufficient funds to last until 90.