Advisor Today - September/October 2012 - (Page 22)
| By Dan Hall
Boosting Retirement Plan Participation
Behavioral ﬁnance insights can boost employee participation and contribution.
lthough employers, advisors and providers have educated employees to properly plan and save for retirement, employee participation and contribution rates remain low in deﬁned contribution 401(k) or retirement plans. But with the help of a retirement plan provider that is focused on retirement readiness and expert insight from behavioral ﬁnance research, advisors can help individuals make better decisions when it comes to participating, saving and investing. This can lead to individuals meeting their long-term savings goals and eventually a comfortable retirement. Behavioral ﬁnance insights, which use social, cognitive and emotional factors to understand an individual’s ﬁnancial decisions, can help explain what makes individuals tick when making retirement-planning decisions. Three main challenges often prevent individuals from taking advantage of their 401(k) plan: deciding whether to participate, how much to save, and how and where to properly invest those savings. Challenges 1. Choosing to participate. Many factors can prevent an employee from choosing to participate in his retirement plan. First, individuals tend to dodge change. Many retirement plans still use the opt-in approach in which employees must make a conscious effort to enroll. In many cases, inertia kicks in and often deters individuals from enrolling. 2. How much to save. Even if an individual chooses to enroll in his company’s plan, he still may not be saving enough to comfortably retire.
The problem is that although the participant establishes a plan contribution rate, he might not re-evaluate this contribution rate to determine if it will meet their long-term savings goals. 3. How and where to invest. To best determine how much money to save and where to invest it, participants need to make assumptions based on life expectancy, health status and income ﬂows, among other things. Because these factors are highly variable, they are often forced to make less-than-optimal decisions that could have serious implications for their ﬁnancial future. Applying behavioral ﬁnance insights To overcome these challenges, advisors can help drive participants’ decisions by working with a provider who offers retirement plans that utilize automatic enrollment and managed accounts. Automatic enrollment is a plan feature that changes the enrollment default from opt-in to opt-out. Employees are automatically enrolled in their employers’ retirement plan unless they choose not to participate. Automatic enrollment helps reduce the number of active decisions an employee has to make, negating the hesitation and decision avoidance caused by complexity and procrastination. While automatic enrollment is a step in the right direction, managed accounts take automatic enrollment a few steps further by getting participants to a state of retirement readiness. A managed account solution is a goal-based savings and investment plan that is professionally implemented and actively managed.
The approach offers a comprehensive retirement planning solution that is all about addressing the needs of each participant to determine an optimal savings rate and asset allocation. To do this, managed accounts factor in an individual’s future retirement income needs, current savings, future increases in income, cost-ofliving increases and more. From this customized information, a retirement income gap analysis is created, which shows individuals their projected retirement savings. The analysis then compares this projected retirement savings with the amount of savings that the individual will actually need for retirement. This can often be an eye-opening experience for individuals and can reinforce why it is so important to take action now. After this initial analysis, a savings and investment plan is produced that focuses on achieving the participant’s projected retirement income needs. Once a participant’s savings and investment plan is implemented, the participant’s account is then reviewed regularly. If he is falling behind on his savings goals, tactical solutions can then be implemented, such as increasing the savings rate or revising the asset allocation strategy. And lastly, to keep the savings motivation high, a quarterly report may be given to each participant with a clear and simple illustration of the progress made toward reaching these goals. ■
Dan Hall is vice president of Retirement Plan Sales at The Standard. He has more than 27 years of experience in retirementplan sales and management. Contact him at email@example.com.
22 ADVISOR TODAY | September/October 2012
Table of Contents for the Digital Edition of Advisor Today - September/October 2012
From The Editor
Making the Transition
Will We Avoid the Fiscal Cliff at the End of 2012?
Boosting Retirement Plan Participation
Protecting Younger Workers’ Greatest Asset
From Term to Perm
Demystifying Life Insurance
Four Under Forty
My Best Sales Ideas
NAIFA Government Relations
Insuring People in the World of Sports
Advisor Today - September/October 2012