Many DC plan participants nearing retirement would benefit from working with a financial advisor, but a lack of investable assets is a barrier for less affluent participants.
In fact, nearly a third of retirement investors with less than $250,000 in household investable assets indicate they do not have enough investable assets to justify using an advisor, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition. However, this is an issue that many wealth managers are addressing with the incorporation of digital advice offerings, the report notes.
Not surprisingly, the use of professional financial advice is correlated positively with household investable assets, Cerulli finds. More than half of participants with $500,000 or greater in investable assets rely on a professional for retirement advice, compared with about one in five (21%) with household assets of less than $100,000. In sum, less than a third (31%) of retirees indicate a financial professional is their primary source of retirement advice.
Advice Solutions
Yet, even though several digital advice solutions with low minimum investment requirements exist in the market today, retirees almost never identify these platforms as their primary source of retirement advice, the report observes.
According to Cerulli’s data, the vast majority (95%) of DC recordkeepers now offer a managed account program with personalized investment management and an advice solution on their DC platforms. And some DC managed account programs tout low investment minimums and fees relative to retail advisors. In fact, some providers suggest their managed account programs are “democratizing” professional financial advice, which has not been as accessible to less affluent investors, the report emphasizes.
Moreover, some DC managed account providers are placing more emphasis on their decumulation solutions to help DC participants “strategically convert” their various sources of income into a retirement “paycheck,” which could make the in-plan investment and drawdown experience more attractive to retirees. To that end, Cerulli believes that plan sponsors and providers will increasingly position these programs as in-plan retirement income solutions.
“Services like retirement planning and decumulation become easier to scale across client accounts—regardless of minimums—with digital platforms,” says Shawn O’Brien, Associate Director at Cerulli. “Some defined contribution managed account providers have implemented ‘hybrid’ advice platforms, which sit between traditional planning and advice and purely digital (‘robo’) advice to capture investors when they are ready for more customized investing and financial planning.”
Fees are another blocking issue for participants, however. Cerulli data indicates that fees are “top-of-mind” for participants considering financial advice. Nearly all participants (93%) view competitive pricing as at least somewhat important and the perception that professional advice is not worth the cost is a leading reason why participants steer clear of a financial advisor.
However, for wealthier investors nearing retirement, Cerulli suggests the value of working with a dedicated financial advisor or private wealth manager cannot be understated and, in many cases, is worth the asset-based fees.
To that end, providers offering financial planning and wealth management services should inform participants of the benefits of working with a dedicated financial advisor. “While purely digital advice solutions tend to be lower cost and more easily accessible, many retirement investors prefer the comfort of working with a human advisor when making significant, consequential financial decisions,” says O’Brien. “Human advisors are arguably better equipped to address the behavioral finance side of investing than are purely digital solutions.”
Financial Wellness
At the same time, the immediate financial concerns of many plan participants often prevent them from accumulating the retirement assets they need, the report further observes. Less affluent participants are typically more concerned with paying their monthly bills, credit card debt, lack of emergency savings and student loan debt.
To address this issue, Cerulli suggests that third-party recordkeepers work with plan sponsors to create financial wellness programs to help participants sort through these competing obligations. And for participants nearing retirement, providers should direct “at risk” participants to retirement planning tools that can help them assess their retirement readiness, and inform their saving and investing behavior.
“For providers, a financial wellness program can serve as a medium for engaging investors early on in their financial lives, establishing themselves as a trusted financial services provider and laying the foundation for more comprehensive, potentially life-long financial relationships,” the report emphasizes.
Recordkeepers that work with third-party firms as part of their financial wellness initiatives should evaluate partners’ technological capabilities to ensure the participant experience is as seamless as possible.
Moreover, plan fiduciaries looking to make their 401(k) plan more “retiree-friendly” will need to ensure the plan allows for flexible, low-cost withdrawal options, as well as an appropriate menu of retiree-focused investment options, such as a variety of fixed-income strategies, managed payout funds and diversifiers, the report further suggests.
