The Retirement Plan Puzzle: Advisor is the Key Piece

by Tom Allen and Mark Hebner - Friday, 29 January, 2016

The retirement plan industry has come out of the shadows in the last three decades. For the better half of the last century, the topic of retirement plans could have rivaled watching the grass grow in terms of entertainment and intellectual curiosity. Why? Most citizens whose heyday of working years was in the middle of the 20th century didn’t have to worry about retirement. Their employers took care of it for them through pension plans. For pension plans, the company makes contributions to a trust, investment professionals oversee the management of those funds, and the employee gets a check in the mail every month from retirement to death while the employer bears all of the risk. Not a lot of wiggle room for excitement.

Fast-forward to today and we have seen a complete reversal in the industry. From the years that former President Jimmy Carter served in the White House up until today, most workers are more familiar with the 401(k) plan. Originally devised in 1978, the 401(k) revolution was born out of the dwindling defined benefit space as a way for American citizens to save for retirement. The 401(k) is in no way as dull as its pension plan cousin. There are record keepers, third party administrators, payroll systems, open-architectures offering thousands of different mutual funds, and possibly an investment professional who ideally is guiding plan sponsors through the entire process. Most importantly, there is an overlay of fiduciary responsibility across the entire process that charges the plan sponsor to establish policies and procedures for reviewing all of these aspects to ensure that plan participants are being charged “reasonable” fees for the features they are receiving.

It’s a headache, and most studies about the effectiveness of 401(k) plans, overall, do not paint a rosy picture. According to the 2015 Retirement Confidence Survey published by the Employee Benefit Research Institute (EBRI), 22 percent of American citizens are now “very confident” that they will have enough money in retirement. Similarly, the Transamerica Center for Retirement Studies found that 80 percent of survey respondents believed that they will have a much harder time achieving financial security compared to their parents generation.[1] We believe much of this disparity has to do with the lack of clarity and guidance within the 401(k) industry.

But there is positive trend amongst retirement plan participants.

John Hancock’s 2015 Financial Stress survey showed that working with a financial advisor doubles retirement readiness. Specifically, “70 percent of those who work with a financial advisor are on track or ahead in saving for retirement, versus 33 percent of those not working with an advisor.”

This makes intuitive sense. As we have written before, the advisor brings clarity to the retirement plan puzzle. Ideally, this individual is helping plan participants answer the question about how much someone should be saving and helping them build an asset allocation around their retirement goal. The advisor is the bridge between an employee’s paycheck and their retirement readiness. This not only includes designing the investment lineup. This must also include acting as a consultant to the plan sponsor to talk about plan features that address some of the behavioral impediments that affect all of us. These features include automatic enrollment, automatic escalation, and utilizing target-date funds as qualified default investment alternatives (QDIA). Most importantly, the advisor should help the plan sponsor with developing comprehensive investment education for participants. Ultimately, knowledge is power and giving participants the knowledge to make good investment decisions will give them the power to take ownership in preparing for retirement.

You can find information about IFA Retirement Plan Services here or call 888-643-3133.

[1] 16th Annual Transamerica Retirement Survey: A Compendium of Findings About American Workers. Transamerica Center for Retirement Studies.