Financial Advisors Should Focus More On Helping Retirement Savers Manage Held-Away Assets In Their 401(k)s, Which Often Is A Meaningful Part Of Their Portfolio
For many Americans, employer-sponsored retirement accounts make up the vast majority of their nest egg and are essential to a secure retirement. Unfortunately in 2022, many individuals watched as their 401(k) plummeted by an average of 20% while inflation continued climbing, leaving retirement savers understandably concerned.
Consequently, Principal Financial Group reported a subsequent 20% increase in client call center activity, and I’m sure many financial firms are facing similar swells. The situation is very high stakes for anyone with a 401(k) and even more so for adults approaching and in retirement.
If you follow the WSJ’s “Here’s what retirement looks like” series, you may have recently read about Dana and Elsie Jones, residents of Houlton, Maine. In 2008, Mr. Jones’ retirement account significantly dipped. In reaction, he sold the stock and invested in a stable value fund with 1% annual returns, a common response typically driven by fear or unease.
A decade later in May 2019, the average 401(k) retirement plan balance had increased by 466% since the market bottom. This seemingly simple portfolio change left the Joneses out of the entire market recovery and upswing.
The markets will do what they will, and hindsight is 20/20. It was good to read that the couple is financially managing in retirement despite these setbacks. Still, if you’re a financial advisor reading this, you may wish you could have helped. Every day, financial advisors help folks balance risk and stay the course toward their retirement goals in the face of uncertainty and life changes.
A December 2021 study by eMoney found that 34% of Americans said they manage all their investments, but only one-third of these ‘do-it-yourself’ investors said they feel confident in their approach.
We know from working with advisors that clients are often asking for assistance with their 401(k). The good news is that advisors have typically risen to the occasion. For years, wealth managers have been providing guidance using plan prospectus and statement documentation or even taking care to log in and manage these accounts while claiming custody of these held-away assets.
Advisors who take custody and trade these accounts often ask us why all advisors aren’t going to those same lengths. If the 401(k) is a meaningful percentage of your client’s household assets, how can financial professionals not treat them with the same time, care and level of service as the directly-held accounts?
The great news is that studies, including those from Vanguard and Russell Investments, have shown that professionally-managed accounts can generate 3% to nearly 5% higher returns on an annual basis for investors, compared with investing on their own. So, are Americans getting the help they need on their full portfolio of assets, including their 401(k)? Not quite.
First, we have an education challenge for those retirement savers who may require more bespoke advice than a target date fund. Many don’t know how to get help: Studies have shown that nearly three in five Americans want financial advice but are not sure where to get it. For those Americans who do retain a financial advisor, the level of 401(k) advisory service may be limited.
Advisors who have been providing “free” plan account advice are sometimes hesitant to provide more proactive management due to the operational costs and assumed client resistance to fee-based service. This is a self-fulling cycle.
The 401(k), which may be a significant savings and tax allocation vehicle for the client, remains a second-class service to directly-managed AUM in terms of proactive monitoring, analysis and rebalancing – and the client is left with management homework. We’re seeing improvements, though.
The nation’s second largest retirement plan provider, Empower, recently added the capability for its wealth management professionals to manage and trade clients held-away assets, including 401(k)s, 403(b)s and more. This allows the advisor to make more informed decisions to implement a comprehensive investment strategy, improving client outcomes. It’s moves like these that will ultimately help families like the Joneses.
Advisors we work with at Pontera are successfully offering a more comprehensive service to their clients by managing their 401(k)s and other retirement assets in concert with the rest of their portfolios, which ultimately produces happier clients and better retirement outcomes.
Firms that exercise this muscle are also able to help more clients who hold the majority of their assets in retirement accounts. By viewing held-away and custodied assets in the same lens, advisors are able to deliver a better client experience and provide better holistic advice.
David Goldman is the Chief Business Officer at Pontera, a fintech platform that enables advisors to manage, rebalance and report on clients’ retirement accounts including 401(k)s and 403(b)s.