401(k) Managed Accounts – Simply a Method of Delivering 401(k) Advice
401(k) managed accounts and 401(k) advice are often considered two entirely different things in the retirement plan industry. Apples and oranges? I find this odd, to put it lightly. The ’01 SunAmerica Opinion opened the door for participants to receive advice or account management on a fee for service basis. Specifically, the following is the text from the SunAmerica Opinion, which simply states both investment advice and “discretionary asset allocation” (aka account management/managed accounts) are available:
Under the Program, asset allocation services may be rendered to Plan participants either through the “Discretionary Asset Allocation Service” or the “Recommended Asset Allocation Service” (collectively, Services; singly, Service). Through the Discretionary Asset Allocation Service, a specific Model Asset Allocation Portfolio will be implemented automatically with respect to a participant’s account (Account). Through the Recommended Asset Allocation Service, a specific Model Asset Allocation Portfolio will be recommended to a participant for investment of his or her Account and the participant then may choose to implement the advice, or to disregard the recommendation and invest in a manner that does not conform to the Model Asset Allocation Portfolios. Read More
However, when the Pension Protection Act (PPA) was written in ’06, it spoke only to investment advice. Why the concern? An advice-only solution for 401(k) investors causes a lot of concern for us. Here’s why:
Advice on it’s own simply doesn’t work well.
Unfortunately, it’s true. In our experience, which has been reiterated by numerous advisors, the majority of participants that receive advice will not implement it. This point was reinforced in an article below from CFO.com:
“And even if you do go through the questionnaire, few people actually act on the advice, and even fewer go back and do it again next year.” – Robyn Credico, senior retirement consultant at Towers Watson
Read Full Article
While a person that would expect all people to act rationally would assume 401(k) investors would immediately implement the necessary changes to their portfolio, it simply doesn’t work that way for everyone. When given the choice of “do-it-for-me” or “it’s-your-responsibility-to-implement,” the choice is clearly to delegate the responsibility. For example, we have an employer client that has by far the largest percentage of “advice only” participants of any of our clients, yet they only represents a little over 4% of the total clients using our services.
We look at 401(k) advice as a service that can be delivered in one of two ways, either in a “do-it-for-you” format (managed account) or in a manner which the participant implements the advice themselves (pure advice). When participants and plan sponsors consider this, the following human behavior issues have been key to the discussion:
- Remembering Their Login: If ever there was a study of how many people do not know there 401(k) login, the results wouldn’t be pretty.
- Trading Mechanism: Even sophisticated investors can get tripped up using the 401(k) provider’s online trading mechanism, especially when it comes to redemption fees (we have had advice clients cost themselves hundreds of dollars by not navigating this carefully) as well as remembering to reallocate contributions (if a part of the advice).
- Advice Becomes a To-Do: When a 401(k) investor has considered using independent advice, and given the option between implementing changes themselves or having a research analyst do it for them, we simply ask them how many emails they get in an average day. Why? If our advice is one of the 30-50 emails they receive in a day, then we effectively become a “to-do” on their list. “I’ll get to it this weekend…okay, maybe next weekend…” Unfortunately, time and responsibilities can get in the way of doing some of those things you know you need to, but simply haven’t gotten to yet. It’s just like that coffee table I was going to refinish…two years ago. The ability to delegate this responsibility is refreshing to investors, especially when there is no additional cost for doing so.
- Anchoring to Investments: This is a common issue for investors who are waiting for a specific fund to get back to $X. Just think about those Fidelity Magellan investors waiting to get back to where they were ten years ago…
- Second Guessing of Advice: We have also found that many “advice only” clients will second guess the advice provided them without any analytical or rational justification. As with anything, advice comes down to trust, and some people simply do not trust advice until it has “proven its worth.” It would be synonymous with an avid “car guy” questioning whether a belt should be replaced without using the tools or having it on the hoist to see that it was indeed about to break.
All in all, when you look at the scenario from a 401(k) investor’s perspective, as well as that of a plan sponsor who understands human behavior, a managed account is simply a more effective implementation of advice. Both the employee and employer want to make sure that if such a service is being paid for, the intended benefit (individualized, age, time horizon and risk appropriate asset allocation) is received and experienced. In the little niche world we live in, we do not consider 401(k) advice and managed accounts/account management as two different realms, instead, they are simply the same concept with two different delivery approaches.
Such a realization begs the question, should managed accounts be held to the same conflict-free standard as is 401(k) advice? That will be discussed in the next post.
We welcome your thoughts and comments on the matter.
According to the article, ‘…few people act on the advice, and even fewer go back and do it again next year.’ Delivering advice is a challenge our industry has not overcome yet. Is the only solution full delegation of investment decisions by participants?
401(k) plans are like cell phones. We purchase them because we like the bells and whistles. Unfortunately, we rarely use the bells and whistles.
Here is the problem: Unlike cell phones, the bells and whistles on 401(k) plans can change a person’s future. Providers and advisors must continue to innovate and deliver solutions to their clients.
I agree, Ross. Innovation, creativity of plan design, and understanding of human behavior in that plan design is critical for the end user to find success. I think a lot of people look at 401(k)’s like cars, they know they need one in order to get them where they need to go. However, they do not want to have to be a certified mechanic throughout their years of driving in order to end up at their destination.
We look at managed accounts/advice in the same light. 401(k) investment management is a reluctant responsibility for most, and those that are eager often do not have/use the tools they need to succeed. Simply put, a cost efficient, effective managed account/advice solution can be a huge relief for diligent savers and those they know they need to get to an end goal, but need a highly trained mechanic to make sure their vehicle can get them there.
I love the car analogy. The “belt is going to break” is great because worn belts (or even tires) look fine to the “car guy,” or typical driver, while they looks dangerous to the skilled mechanic. The analogy extends when we consider that not only “car guys” but all car owners are skeptical of the need for many recommended services. They often feel that the mechanic is trying to make money by performing unnecessary services. I have found that participants feel that “recommendations” (education) on asset allocation, or even the recommendation to increase contributions benefit the advisor, or investment company, or even the plan sponsor. Many times I’ve heard less sophisticated participants express that they thought the plan sponsor somehow “got” some of the money they contributed.
Great analogy. I will use it. We’ve added this post to the “news you can use” section of our blog because it’s very usable. Thanks Chad.
Well, your anecdotal comment that advice doesn’t work is sorta contradicted by the recent Hewitt / Financial Engines survey (1/25/10) which said that participants who received advice earned about 2% more per year (net) than participants who didn’t get advice.
I can appreciate that one could simply manage the plans and accounts and then not even give advice — i mean why, really, if the plan is managed?
But, I might suggest that the mechanism of providing advice can be improved from simply conferring with people then hoping they do it to something more effective. For example, why not give advice and also give out allocation change or enrollment forms. Then the advice-giver can then send in a batch of these with actual changes. Why not simply log into the provider site and show people how to actually do it? Or, in at least one provider i know of, they pass out wireless handhelds and participants can very easily do some modeling and even change deferral or asset allocation, online, in real time.
Paul, I read that report a couple of months ago….I think they counted target-date funds, advise participants, and managed accounts collectively as “help” which makes me wonder what the incremental return would have been for advice only. Unless the participant selects a managed account service or maintains an automatic opt-in, I think there are great limitations to online delivery of advice.
Another issue I’ve been thinking about is whether financial literacy is best delivered through the Plan Sponsor channel. While this channel provides a compelling point of aggregation, is advice more appropriately delivered, on a more holistic basis, outside of the work place? On the other hand, the less than affluent masses will not attract a savvy financial adviser, so perhaps the Plan Sponsor channel is best for households other than HNW and affluent. Yet these are the very people who will be less comfortable with online delivery.
Are you pondering basic social policies or how to help those enrolled in your clients’ k-plans?
I’d argue, that basically, anyone under about age 45 who has access to a 401k plan, is going to have a high likelihood of not only comfort but actual online access; regardless of profession. This number goes up dramatically as an inverse to age… for example, most 40+ individuals had typing as a basic school requirement. Since “No Child Left Behind” typing was replaced by computer use; and today, in most public schools from about the 5th grade through high school, kids use computers. In fact, given any college experience (2- or 4-year) computers become mandatory for social networking as well as school work, Many have full online access on their PHONE. Kids in the 3rd grade have iPhone’s for godsake… thus the whole sexting, twitter, online bullying and other (positive) social media newsworthy events.
However, ignoring social policy issues, which i might suggest is being addressed by various large mutual fund ad campaigns and other “fishbowl” marketing events; I would advocate that ANY 401k plan should offer and receive from its vendors solid participant education/advice, delivered in a personal format. For example, In my business, i meet with plan participants on their shop floors, in their break rooms, and wherever else they work. I meet with their enrollment or plan allocation forms in-hand. We educate, they complete, we collect —
As you suggest, retirement plans help aggregate participant assets, making qualified investment professionals available, under a fiduciary standard (at the plan level if not exactly at the advisor level). And, one can take any potential “uncomfort” with the plan and the computers right out of the equation.
Paul: Wireless Handheld devices? Wow! What an awesome example of technology “coming to the rescue.” I think that the closer you can get the horse to the water, the more likely they are to drink it. However, it’s very costly to send professionals and handheld devices out to the workplace and spend time providing education / advice. It may become cost prohibitive in relation to smaller plan sizes.
Dave: Delivering financial planning services to other than HNW and affluent households is a challenge that needs to be addressed. It’s arguable that these are the people that can benefit the most from access. I definitely think that the “plan sponsor channel” is one of the very best access points for these households. I agree that holistic advice is best delivered outside the workplace. However, in my experience, that is unrealistic for most individuals that fall into that group. I think a “back of the napkin financial plan,” drawn up in the breakroom is better than nothing at all. By and large the situations they are in are less complex than HNW and affluent, and they can benefit from the most basic education, and “recommendations.” Many individuals within the less than affluent masses have serious misconceptions that can be cleared up by an authority. Furthermore, many of these beliefs are held collectively in the workplace. Clearing up a misconception for one person may impact the entire organization.
As far as comfortability with online delivery, they have to meet us halfway. They must become comfortable. This is 2010.
Paul, you bring up interesting points. First, in my comment that “Advice on it’s own simply doesn’t work well,” my point was to explain that when it is up to the participant to implement the advice, it can go undone. Thus, the fee associated with the advice essentially loses its value. Instead, a managed account implemented by a dedicated research analyst can be much more efficient and effective for the participant. Thus, it’s advice, just done for the investor.
I appreciate any advisor meeting with participants in a 1on1 capacity, as it is far and away the most effective approach. However, my question in light of the “asset allocation worksheets” would be: How are ongoing changes implemented? Does the advisor actually have to meet with those participants on a 1on1 basis again and collect the sheets again? My fear would be that the advisor is eventually going to run into a ‘bandwidth’ issue. The allocation would get the participant started, but the ongoing advice could prove very difficult. I actually wrote an article on just that point that you might find interesting:
http://bemanagednow.com/2010/03/26/a-model-for-401k-advice-pt2-must-be-ongoing/
Dave, you also bring to light an interesting question as to whose responsibility it is to improve “financial literacy.” It’s similar to whether the parents or teacher are responsible for a student’s learning. My take would be that since a plan sponsor cannot actively provide advice, their best avenue would be to take a look at the behaviors of their employees and dynamics of the plan, then determine what type(s) of tools would be best for them. That could include education with target date funds, personal advice/managed accounts, etc. Variables including median account balance, the company’s 401(k) culture, etc., can lead to a better understanding of which tools would be most effective.
Holistic financial planning in the plan sponsor channel…an interesting question. I think it can be done at the micro market level, but the reality of it is, most individuals have 85%+ of their assets in 401(k) plans. Thus, how that advisor would be compensated comes into question, as the revenue might not justify the expense. Thus, an efficient delivery of advice/managed accounts can come into play, as a participant can easily engage a service within 10-20 minutes, including a thorough review of their current allocation and any issues existing with it. People with greater needs can then seek such planning services with an advisor outside of the workplace.
Finally, we have experienced a dramatic change of opinion regarding the internet in the past 2 years. Sonny is right, people have to grow with the internet, it’s not going anywhere. In our experience, it’s already happening, as people have come to appreciate and expect the efficiency it provides themselves and the companies they do business with today.
Belated follow-up: Just as a follow-up to the technology / handheld devices theme. We are indeed in the 21st century. It can be done — you just need the right partner for the plan. I’ve worked on several national cases as well as small single-site companies where enrollment and educational meetings are held at “company stores”. In many of these larger companies, handhelds are already part of the job — have you been to a restaurant like an Uno’s pizza shop, where the server enters your order on a handheld at your tableside? With the right servicing partner even companies as large as these (or as small as single site organizations) can get an enroller to go in and work through not only the presentation but the worksheets and enrollment forms online, in real time on something very similar.
My observation is that most employee education is limited to enrollment meetings. That obviously has its place, but for many participants contributing to their plan is not a priority when they don’t know how to create/manage a house hold budgets, don’t understand taxes, are stuck in credit card quicksand, and do not understand basic concepts like diversification and DCA. (I have provided financial planning workshops a week after an enrollment meeting, and attendees could not tell me the whats/whys of divers/dca.)
I would love to learn a second language, and I can use Rosetta Stone to do it on my own. But I don’t. However, if I had a workplace class that would teach me that language, I’d do it. Same with financial education. Putting the tools in their hands and telling participants to now make choices without teaching them why we use those tools might be expecting a lot. I look forward to companies providing more comprehensive financial literacy training for their employees. Then I think you’ll see more of them using advice services when they understand the science behind advice.