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The Time Is Now for Advisors to Show Value to Participants and Plan Sponsors

Financial advisors are keenly aware of the gaps in retirement readiness for most Americans. However, while the data may seem bleak, the opportunity is ripe for advisors to add tremendous value in the retirement planning process – both to participants and plan sponsors.

According to research, Americans are generally pessimistic about the financial health of older generations, with a whopping 72 percent saying that 30 years from now, those aged 65 and older will be less prepared for retirement than their counterparts today.1

Concerns are also growing around the role Social Security will play, with 83 percent of those who have not yet retired doubting that they will receive benefits at current levels when they eventually retire. In fact, four in 10 of this group believe they will not receive any Social Security benefits when they retire.

These startling statistics mean that financial advisors are in a key position to provide guidance to help participants financially prepare, while also broaching discussions with plan sponsors about regulatory changes, plan performance, plan costs and fiduciary responsibility.

“We continue to see the shift over the past few years of advisors moving away from an investment-centric approach with their plan sponsors to a more holistic participant retirement readiness strategy,” says Bob Darrow, Paychex Senior Manager, National 401(k) Wholesale Channel. “There are many industry factors that contribute to that shift – specifically the emergence of institutional fiduciary products, as well as better tools and analytics from the recordkeeper partners they work with.” 

What retirement means to most workers

Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies (TCRS), explains: “Retirement is no longer associated with a gold watch and metaphoric sunsets. Today’s workers expect to extend their working lives beyond age 65. Their vision of retirement balances continued work with freedom and more time to pursue personal interests.”

According to a recent study by TCRS, workers most often associate retirement with the words “freedom” (55 percent), “enjoyment” (53 percent) and “stress-free” (43 percent), despite the magnitude of preparations and challenges involved.2

Qualifying the nature of retirement is critical information for advisors and plan sponsors because it can often help them better shape discussions with workers. Most plan participants can easily relate to the notion of “freedom” or “stress-free”, which can motivate them to increase retirement contributions.

“Although the technological advances help advisors create scale in their practice, we find that our clients still place significant value on face to face meetings between the advisor and their participants,” explains Darrow. “Retirement means different things to different employees, and it’s important that guidance and advice are not a ‘one size fits all’ solution.”

Alerting plan sponsors and employees to government updates

While government updates are commonplace to advisors, they need to be clearly communicated to plan sponsors and employees. For example, when the annual 401(k) plan contribution limits increase (as they did for employees and employers in 2019), advisors should encourage upping monthly contributions to take advantage of the change.

Knowing how many plan participants will turn 50 in the year ahead is also equally important for advisors. Why? Because those employees can now take advantage of up to an additional $6,000 in annual plan contributions as part of the IRS’s “catch-up” clause.

Recognizing generational nuances

Plan sponsors should recognize other generational nuances as it relates to how different age groups view retirement methods. When data is compelling, consider adopting (or promoting more heavily) a specific feature. For example, TCRS found that:

  • The majority of workers (76 percent) say they would be likely to use an automatic feature that would increase their retirement plan contribution by one percent each year.
  • Millennials (78 percent) and Generation X (75 percent) are somewhat more likely than baby boomers (73 percent) to say they would be likely to use this feature.
  • Some workers (9 percent) are not at all likely to use this feature – a finding that is more common among baby boomers (12 percent) and Generation X (11 percent) than millennials (7 percent).

“QDIA, Target Date Funds, Auto Enroll, Auto Increase and other features have collectively improved the health of 401(k) plans across the board. However, it’s important for advisors to know how different age demographics view and utilize these features differently,” says Darrow. “We see advisors differentiate themselves by working closely with the plan sponsor to understand what’s important to the client’s specific workforce.”

Proactively raising important conversations with participants

Instead of the collective hand-wringing over the lack of retirement readiness at a national level, advisors should focus on the outcomes they can control, and create strong outreach to participants at key milestones.

The value that advisors provide in retirement planning is not limited to increasing participation and contributions. It’s as vital to be the eyes and ears for plan sponsors so that they are up to speed on regulatory changes, plan performance, plan costs and fiduciary responsibility.

Plan sponsors may sometimes be unaware of their fiduciary responsibility. Advisors have a responsibility to explain who is or is not serving in a fiduciary role in terms of the retirement committee, record keepers and other vendors, especially those providing advice directly to participants.

Russell Warye, president of Benefit Partners Financial Group, says that while clear communication to all plan sponsor representatives is imperative, there are different strategies for different contacts.

“CFOs are of course focused on costs and aspects such as average deferral percentages. But HR directors may want to drill down on website portal metrics, including who is using the website and what are the most popular features.”

In an attempt to streamline processes, don’t make the mistake of offering packaged programs and telling the plan sponsors what they need, cautions Warye.

He says advisors need to instead ask questions to learn what plan sponsors want. He suggests partnering with a plan design specialist who can ask creative questions to create custom plan options that are specific to the company and its participants.

Overall, knowledge is power, and advisors who best navigate the retirement landscape to the benefit of both participants and plan sponsors will truly differentiate themselves.

 


1. https://www.pewsocialtrends.org/2019/03/21/retirement-social-security-and-long-term-care/

2. https://transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2019_sr_what_is_retirement_by_generation.pdf

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