Not a week goes by, it seems, when a research outfit doesn't release a new report attesting to Americans (most especially baby boomers') lack of preparedness for retirement. Myriad reasons are offered for the abysmal state of planning, among them the slow economic recovery, wages that fail to keep pace with the rising cost of living and a culture that prizes spending over savings.
A growing number of experts also are assigning blame to the substandard retirement and investment planning that Americans are receiving through their employers. Paltry 401(k) fund options, high asset management fees, inadequate plan oversight and the limited availability of employer-sponsored financial planning services are, say critics, major contributing factors to the retirement planning shortfall.
And the gap is widening. A report published by the Washington, D.C.-based Employee Benefits Research Institute, “2013 Retirement Confidence Survey: Perceived Savings Needs Outpaced Reality for Many,” shows that worker confidence in the affordability of retirement continues to decline. The survey observes an increase in the percentage of workers who are not confident in their ability to pay for basic expenses (16 percent, up from 12 percent in 2011, but statistically equivalent to 13 percent in 2012), medical expenses (29 percent, up from 24 percent in 2012) and long-term care expenses (39 percent, up from 34 percent in 2012).
Cost of living and day-to-day expenses head the list of reasons why workers do not contribute (or contribute more) to their employer’s plan, with 41 percent of eligible workers citing these factors.
“The EBRI survey points up the need for more comprehensive retirement planning education at the worksite,” says Jeffrey Tulloch, vice president of the PlanSmart and Retirewise Programs at MetLife, New York. “As a nation, we are much better at saving and procrastinating than we are saving and implementing a retirement plan. Most of us need someone—a financial advisor—to spur us to action to provide a pathway to a comfortable retirement.”
The financial education that American workers receive through their employer-sponsored 401(k), 403(b) or other retirement plan, many contend, is not fulfilling that need. Too often, say experts, information is limited to an all-employee group meeting with the retirement plan provider to discuss investment fund options, the company match to employee plan contributions, plus additional resources available to employees — online calculators, call center representatives and the like.
Frequently, there is no follow-up meeting between individual employees and an investment advisor to determine how best to allocate retirement savings based on the plan participant’s risk tolerance, age, financial goals or other criteria. Result: Many employees fail to enroll in the plan, defer too little of their pay to meet retirement needs or allocate plan contributions inappropriately.
One problem, observers say, is that plan providers still largely operate within a regulatory straight-jacket. The prohibited transaction rules under the Employee Retirement Income Security Act (ERISA) and the Internet Revenue code prevent a fiduciary investment advisor from recommending plan investment options if the advisor receives additional fees from the investment providers.
A 2011 investment advice regulation from the Department of Labor’s Employee Benefits Security Administration provides an exemption to the prohibition. But the exemption only applies, says EBSA, if “investment advice is provided through “a computer model that is certified as unbiased by an independent expert or through an advisor compensated on a ‘level-fee’ basis,” meaning that the fees do not vary based on investments selected.”
Critics say the exemption has failed to significantly boost face-to-face meetings between investment advisors and plan participants. Some also question whether the exemption's disclosure requirements inhibit rapport-building between advisor and client because of perceived conflicts of interest.
"Transparency in the planning engagement is generally in the consumer's interest," says Anthony Domino, the managing director of Associated Benefit Consultants, White Plains, N.Y. "But it is often hard to communicate potential conflicts of interest without creating confusion.
"Because I may be conflicted doesn't mean that my advice is bad," he adds. "Too often, clients are dismissive of advisors who disclose a conflict of interest or who disclose their fees."
Market-watchers also say that investment options offered to plan participants often are too limiting. The menu of choices available — a mix of equity funds, fixed income funds and money market funds — may not provide a sufficiently broad array of non-correlating assets to sustain investment growth objectives while also insulating plan participants from market volatility.
Credit for the limited selection is due the mutual fund companies, which critics say maintain a “stranglehold” on the fund options offered participants in 401(k)s and other profit-sharing plans. In recent years, many of these plans have migrated to “target date” or “life cycle” funds that automatically reapportion employees’ plan portfolios to progressively more conservative allocations as they approach retirement age.
The aim: to protect pre-retirees’ nest eggs from market downturns. So whereas, for example, an employee might have 70 percent of retirement assets invested in equities and 30 percent in fixed income assets 20 years from retirement, at five years from retirement the allocation might be reversed.
The problem, says Ric Lager, is that no one — neither the retirement plan provider nor the plan sponsor — is held responsible for the performance of plan participants’ account values.
“No one is liable for a portfolio’s performance, so it’s up to plan participants to hire an independent advisor to provide the needed investment oversight," says Lager, a principal of Ric Lager & Company, Inc., Golden Valley, Minn. “The approach advocated by the mutual fund companies, ‘buy-and-hold,’ has never worked as a long-term strategy at any time since 401(k)s came into being in the early 1980s.
"No one is motivated to fix the problem,” he adds. “The mutual fund companies simply want to get their share of the fees that are eating up mutual fund accounts in a buy-and-hold relationship.”
Lager adds that if 401(k) plan participants enjoyed a higher standard of care, rank-and-file employees would pay less in mutual fund fees and have a more diversified asset allocation. The implementation of a "risk management game plan" — including the use of tactical asset allocation techniques — would also help insulate plan participants' portfolios when the market turns south.
In the absence of better hand-holding from 401(k) providers, Lager recommends that employees redirect their plan contribution, and the corporate match, to self-directed brokerage accounts that offer a greater range of investment products — and at significantly lower cost. Lager estimates that employes could save from 25 to 40 basis points in asset management fees.
The ability to direct funds to such brokerage accounts will likely surprise retirement plan participants, he adds, noting most employers don't advertise alternative investment options because of the close relationship established with the plan provider. Yet while many new and revised retirement plans permit these accounts, Lager says that less than two percent of plan participants elect to use them.
Access to quality planning
Cutting asset management fees, to be sure, will not close the retirement gap identified in the EBRI study. The larger issue, say experts, is that many employees aren't receiving comprehensive financial planning. The discipline embraces not only investment and retirement planning outside of the employer-sponsored plan, but also a needs analyses encompassing the full range of insurance solutions: life insurance and annuities, disability income, long-term care, health and critical illness products.
That's starting to change. Major life insurance and financial services companies and their affiliated advisors are now targeting the worksite market to fulfill employees' unmet needs.
Example: ING U.S.' Retirement Readiness program, which the company piloted in the fourth quarter of 2012 and is now rolling out to businesses nationwide. Offered through ING Financial Partners, the program avails employees of two services: (1) Retirement Snapshot, a single-session "check-up" on an individuals' current retirement savings situation; and (2) multi-session financial planning for those requiring a comprehensive financial analysis of retirement income needs, tax-efficient withdrawal strategies, executive benefits and philanthropic objectives, among other planning needs.
The Retirement Readiness program extends to assistance in navigating company retirement plans. To that end, ING advisors help educate employees about plan investment options, how best to allocate assets, the importance of saving, plus retirement objectives and expectations to consider. Group seminars on these topics, say ING execs, aid in boosting employee enrollment in, and contributions to, company retirement plans.
"Businesses have typically provided assistance for in-plan needs," says Rich Linton, president of individual markets at ING-U.S., Windsor, Conn. "Now employees are asking for holistic planning to help with personal finances, whether focused on financial literacy or financial planning. And their employers are asking us how we can help."
He adds that financial professionals assigned to work with the employees, a mix of career agents and independent advisors who have received specialized training under the program, comprise many of ING Financial Partners' 2,400-plus field reps.
While the Retirement Readiness program complements ING's 401(k) plan administration services, other life insurers are adding financial planning to other group insurance offerings they market to employers, such as disability income, life, auto, home, critical illness, vision and dental insurance.
Among the companies piggybacking retirement planning to their group offerings is MetLife. The program includes a four-part seminar series, each two-hour session of which covers components of planning: retirement goals and objectives; creating and protecting wealth; asset accumulation and income distribution vehicles; and in the final session, a discussion of current employee benefits, including the company retirement plan, plus government programs like Social Security and Medicare.
Jeffrey Tulloch, vice president of MetLife's PlanSmart and Retirewise Programs, says the seminars benefit all stakeholders: They offer employees a primer on financial planning basics; they help to promote, and gather leads for, the company's own individual planning services (employees can indicate in a post-seminar survey their interest in a follow-up appointment with a MetLife advisor); and they support the employer's efforts to expand rank-and-file participation in the company retirement plan.
"When we launched the Retirewise program 5 years ago, many 401(k) providers were up in arms because they thought we were looking to replace their program, which isn't the case, as we don't underwrite 401(k) plans," says Tulloch. "Employers and plan providers have come to realize that we're helping them drive up participation in their plans."
How much interest is there among American workers in such individualized planning? According to MetLife's 2012 Employee Benefit Trend study, 72 percent of American workers say they want employer-sponsored programs to help them manage their current and long-term financial security.
Tulloch says that about 50 percent of employees who attend the Retirewise seminars request a follow-up meeting with a MetLife advisor. He was unable to say, however, how many of these meetings result in the implementing of a financial plan or product sale.
Building a rapport
For Anthony J. Domino, Jr., success in securing employes' buy-in is a function of the number of annual follow-up visits he makes to company worksites. The managing director of Associated Benefit Consultants, White Plains, N.Y., Domino estimates that between 6 and 10 percent of employees he addresses annually in group gatherings to review the company 401(k) plan agree to a follow-up meeting. So five years into a plan, between 30 and 50 percent will be engaged in individual planning.
To facilitate the planning, Domino uses software — including web-based apps from eMoney Advisor and The Living Balance Sheet — that offer a holistic view of employees' retirement plan accounts. The technology, he says, saves time on fact-finding, allowing him to devote more time to explore retirement plan objectives and recommendations.
Among the critical issues to be reviewed in planning engagements are the merits of investing pre-tax earnings into a 401(k) versus after-tax earnings in a Roth IRA. Many employees, say experts, don't consider the tax implications of their investment choices. As a result, they often pay more in income tax in retirement because plan distributions, when combined with other sources of income, place them in a higher income tax bracket than when they were working.
"Most employees are confused about whether to contribute to a Roth IRA or a traditional 401(k), says Jeff Palmer, a financial planner who offers investment advisory services through Prudential Financial Planning Services, a division of Pruco Securities, LLC. "If I can determine the net effective rate from an employee's income tax return, then I can help the employee make that judgement call.
"The Roth IRA can be a great tax play for the income distribution years," he adds. "Unfortunately, many employees don't realize this and end up with a large tax bite in retirement because they put all of their plan contributions into a tax-deferred 401(k)."