Session 53 PD, Retirement Advice and the Employer's Role. Moderator: Anna M. Rappaport, FSA, MAAA

Transcription

1 Session 53 PD, Retirement Advice and the Employer's Role Moderator: Anna M. Rappaport, FSA, MAAA Presenters: Michael S. Finke Gregory A. Ward, AFC, CFP

2 Retirement Advice and the Employer s Role Session 53: 2015 Annual Meeting Presenters: Michael Finke Greg Ward Moderator: Anna Rappaport October 12, 2015

3 Disclosures The opinions expressed and conclusions reached by the authors are their own and do not represent any official position or opinion of the Society of Actuaries or its members. The Society of Actuaries make no representation or warranty to the accuracy of the information. This presentation does not constitute legal or tax advice, and individuals are encouraged to consult their financial professionals. 2

4 Agenda Stage Setting Research perspective Options in the workplace today Interactive discussion 3

5 Setting the Stage: Drivers for the SOA Poor financial and retirement literacy Shift to DC with reliance on employee decisions Majority of Americans: Do not receive unbiased advice Advice market mixed: Some great, some ok and some bad Employers seeking ways to get value from DC dollars and improve retirement security within DC context Employees more likely to save in employer plans and more trusting of employer sponsored information Bottom line: Employer help for better employee decisions is important 4

6 Two SOA Projects Committee on Post-Retirement Needs and Risk added employer sponsored retirement advice to agenda two years ago Research paper: Models of Financial Advice for Retirement Plans: Considerations for Plan Sponsors, by Michael Finke and Benjamin Cummings: Employer Guide to retirement advice coming soon (practical information for employers) All PRNR work is available on website: 5

7 Models of Financial Advice for Retirement Plans Considerations for Plan Sponsors 6

8 Financial Advice in Retirement: Evidence of Need > $250,000 11% Retirement Savings $100k to $250k 11% $50K to $100k 9% < $1,000 36% Source: EBRI $25k to $50k 9% $10k to $25k 8% $1k to $10k 16% 7

9 60% What Did Near-Retirees Wish They Had Done to Prepare for Retirement? 50% 40% 30% 20% 10% 0% Started Saving Sooner Saved More Invested More Aggressively Source: TIAA CREF,

10 Concern About Retirement Finances 9

11 Financial Literacy Particularly Low Among Less Educated Americans 0 Basics Borrowing Investing Protection <HS HS Some Coll College Grad Source: Texas Tech Financial Literacy Assessment Project 10

12 Who Pays for Financial Advice? (By Income & Type of Advice) Middle Income Upper Income No Advice Transaction-based Comprehensive (Source: Finke, Huston, and Winchester, 2011) 11

13 Why Don t Middle Income Use Financial Advice? Not Enough Assets Not Enough Income Total Sample (Source: Finke, Huston, and Winchester, 2011) Middle Income Only 12

14 Who Pays for Financial Advice? (By Age & Type of Advice) < Transaction-based (Source: Finke, Huston, and Winchester, 2011) Comprehensive 13

15 Have You Ever Talked With a Financial Advisor? Yes 17% No 83% Source: Bi and Finke,

16 Have You Ever Calculated Retirement Needs? Yes 24% No 76% Source: Bi and Finke,

17 Participants Want Quality Advice 2014 Retirement Confidence Survey (EBRI) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Employees Retirees Fully implemented advice Mostly implemented advice Why Not Follow Advice? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Employees Retirees Not trusting the advice Other plans or goals 16

18 Quality Heterogeneity Inconsistencies in Training and Incentives of Advisors 17

19 The Financial Advisor Industry RIAs Quality? SEC AUM Fiduciary 18

20 The Financial Advisor Industry Registered Reps GSRE Exam FINRA Commission Suitability 19

21 Certification as a Quality Signal 20

22 Principal hires Agent Asymmetric Information Self Interest Self Interest ADVISOR Agent Provides Services PLAN SPONSOR PLAN PARTICIPANT Who is the fiduciary? 21

23 Financial Guidance Continuum Financial Guidance Financial Education Financial Advice 75% of employers offer some sort of guidance to help their participants with their investments (Aon Hewitt, 2013) 22

24 Tale of Two Advices Investment Advice Focuses on investments within the plan Concepts: Risk, return, risk tolerance, asset allocation, portfolio optimization, rebalancing decisions Retirement Advice Focuses on preparing for a secure retirement Concepts: Accumulation strategies, savings rates, risk capacity, needs analysis, mortality risks, distribution strategies, withdrawal rates 23

25 Technology & Advisor: The Future of Retirement Advice? Retirement Savings $250,000 $200,000 $150,000 $100,000 $50,000 $0 Haven't Calculated Calculated Used a Computer Program Advice and Computer 24

26 How Advice is Implemented Today 25

27 The Movement Towards Advice 1x1 Managed Accounts Automated Services Guidance Regulated by: DOL, SEC, FINRA, etc. ERISA, PPA, 404(c), etc. Calculators Target Date Funds Default Investment Options Plan Design and Automation Financial Wellness and Education 26

28 The Foundation of Advice 1x1 Managed Accounts Automated Services Guidance Calculators Target Date Funds Default Investment Options Plan Design and Automation Financial Wellness and Education 27

29 Financial Wellness and Education *Employees could select up to 2 answers Source: PwC Employee Financial Wellness Survey The survey incorporates the views of over 1,700 full-time employed adults representative of the U.S. population by age and gender. 28

30 Financial Wellness and Education 83% of companies feel a sense of responsibility for the financial wellness of their employees 1 93% of large employers plan to implement or expand existing financial wellness programs in Bank of America Merrill Lynch, 2015 Workplace Benefits Report 2 Aon Hewitt, 2015 Hot Topics in Retirement 29

31 Financial Wellness and Education New Financial Wellness Model Financial Planning is unbiased, available to all income levels The focus is holistic integrating ALL aspects of financial planning, including employee benefits Heavy focus on helping employees develop positive savings habits College Funding Home Buying Estate Planning Budgeting & Saving Retirement & Investing Taxes Benefits Planning 30

32 Financial Wellness and Education Cash Flow and Debt Management Workplace benefits Establishing good money habits and behaviors Delivery methods include workshops, webcasts, online, and print. 31

33 Plan Design and Automation Designed to overcome participant inertia Plan Design Feature Prevalence Benefits Automatic Enrollment 50.2% of all plans 1 Increase plan participation Automatic Rate Escalation 44% of all plans 1 Allows employees to gradually increase plan contributions Automatic Rebalancing 72% of record keepers 2 Controls portfolio risk during market volatility 1 Plan Sponsor Council of America, 57th Annual Survey of Profit Sharing and 401(k) Plans 2 Deloitte, Annual Defined Contribution Benchmarking Survey 32

34 Plan Design and Automation May give employees false sense of security Plan Design Feature Challenges Solutions Automatic Enrollment Average contribution rate lower than voluntary enrollment plans Increase default enrollment rate Automatic Rate Escalation May disengage employees from retirement planning process Offer incentives for participating in retirement education Automatic Rebalancing Relies on participant to choose asset allocation Offer incentives for participating in investment education 33

35 Default Investment Options 77% of plans offer a Qualified Default Investment Alternative (QDIA) 85% of plan sponsors use a Lifecycle/Target Retirement Date Fund as the default investment election Source: Deloitte, Annual Defined Contribution Benchmarking Survey 34

36 The Transition to Personalization 1x1 Managed Accounts Automated Services Guidance Calculators Target Date Funds Default Investment Options Plan Design and Automation Financial Wellness and Education 35

37 Target Date Funds 83% of plan sponsors offer Lifecycle/Target Retirement Date Fund as a core investment option Pros Cons Automatic Diversification Not personalized Automatic Rebalancing May have higher fees Automatically becomes more conservative as the target date approaches Simple to use Does not take other assets into account May be too aggressive or too conservative for some investors Source: Deloitte, Annual Defined Contribution Benchmarking Survey 36

38 Calculators 61% of employees have not used a retirement calculator Employee Self Assessment of Retirement Preparedness Not prepared for retirement 81% Prepared for retirement 19% Of those that are not prepared 76% 24% Have not run a retirement projection Have run a retirement projection Source: Financial Finesse, 2014 Year in Review 37

39 Guidance 8 in 10 plan sponsors believe providing access to one-on-one guidance from a financial professional can have a positive impact on the amount of money employees save for retirement Education Generic, not personalized Delivered by employer or plan provider Guidance Custom, personalized to the individuals unique circumstances Delivered by financial professionals Minimal effect on behavioral change Delivered through workshops, webcasts, online and print High impact on behavioral change Delivered through phone-based one-on-one coaching and in-person sessions Source: Bank of America Merrill Lynch, 2015 Workplace Benefits Report 38

40 Guidance & Advice It's a very simple principle: You want to give financial advice, you've got to put your client's interests first. President Barack Obama, February 23, 2015 Guidance Advice Does NOT make any specific recommendations regarding a product or investment Delivered by financial professionals that do NOT require a securities license NOT subject to fiduciary standard under proposed DOL regulations Recommends specific products and investment decisions Delivered by financial professionals with securities and insurance licenses Subject to fiduciary standard under proposed DOL regulations 39

41 Personalized Advice 1x1 Managed Accounts Automated Services Guidance Calculators Target Date Funds Default Investment Options Plan Design and Automation Financial Wellness and Education 40

42 Automated Services Investment advice customized to the user s inputs Online Advice Non-discretionary 37% of plans covering 70% of participants offer online advice 1 Example: Financial Engines Robo-Advice Discretionary 8% of large advisory firms offer some kind of robo-advice 2 Example: Betterment, Wealthfront 1 Vanguard, How America Saves Investment News survey 41

43 Managed Accounts 22% of plans offer managed account advice Providers include GuidedChoice, Morningstar, and ING Customized Look at outside assets Discretionary Human interface Source: Vanguard, How America Saves

44 Personalized One-on-One Advice One-on-one meetings with a financial professional are the best way employers can provide employees information about managing their 401(k)-type plans 1 Among employees who tapped inperson retirement advice, 68% chose to either save more, change their future allocations or rebalance their portfolios 2 1 Wells Fargo/Gallup Investor and Retirement Optimism Index 2015-first quarter survey TIAA-CREF proprietary research 43

45 How to Deliver Advice Evaluate the culture, work environment, and demographics Delivery Method Best For Target Audience On-site workshops Webcasts Financial wellness and education Financial wellness and education Manufacturing facilities and Baby Boomers Gen X and Millennials Over the phone Guidance/Managed Accounts Remote or field workforce Online Automated Services/ Managed Accounts Sophisticated investors In-person counseling sessions Guidance/One-on-one advice Pre-retirees and Women 44

46 Retirement Advice and the Employer s Role Session 58: 2015 Annual Meeting Presenters: Michael Finke Greg Ward Moderator: Anna Rappaport October 12, 2015