Best Practice #2: Offering Individual Consultation

August 21, 2013—Welcome to the Alliant Best Practices Series for 401(k) Plan Sponsors, in which we offer 10 best-practice essentials for helping plan participants achieve retirement plan success. Here’s the second best practice in our series.

 “We don’t expect people to fly their own airplanes or take out their kids’ appendixes, and yet we expect them to manage their retirement portfolios. In my careers I’ve done all three, and investing is by far the hardest.”

— William J. Bernstein, PhD, MD

Author, The Four Pillars of Investing

In our last post, Simplify the Investment Decision, we discussed how important it is to make it easier for plan participants to make good choices for their retirement investments by keeping the menu of good choices clean and simple (while still providing a robust, underlying solution of well-diversified investments). In fact, the title of a recent Charles Schwab press release says it all: “Majority in Survey Say 401(k) Investments [Are] Harder to Understand Than Health Care Benefits.”

That means there’s another essential we need to cover in the quest to simplify the investment decision. Even a short menu of choices designed for successful outcomes will only get you so far. It’s important for participants to choose the right selection for their needs. It’s equally important that they feel confident that they’ve made a good choice, so they have the temerity to stick with their long-term plans through changeable markets.

The aforementioned Schwab release reached similar conclusions on how to alleviate the stress and confusion experienced by so many plan participants. The survey found that “investment confidence nearly doubles when workers have the help of a financial professional.”

To attach some numbers to how improved confidence can lead to improved outcomes, AARP reported on a separate, 2009 industry-sponsored survey of more than 400,000 retirement plan participants. It found that “participants who relied on professional help provided through their employers earned 1.86 percent more a year in their savings plans than coworkers who followed their own advice.”

Professional Portfolios Call for Professional Advice
In short, plan participants need professional advice. An advisor who is legally and logistically dedicated to offering plan participants upfront and ongoing personalized advice can:

  • Simplify and clarify the setting – Plan participants don’t need to make investing any sort of second career. But outcomes can be expected to improve when they have regular access to an advisor – to answer basic questions and explain timeless investment essentials.
  • Put investment decisions in their proper context – One of the most important of those investment essentials is recognition that investing is about appropriately balancing individual goals and personal financial circumstances with the ability and need to take on market risk in pursuit of those goals. When there is no advisor available to help participants make deliberate portfolio decisions in this proper light, the alternative is all too often decision-making based on guesswork, emotions and ill-timed reaction.
  • Provide a solid yardstick (gap analysis) – Gap analysis is another valuable service worth seeking from a professional advisor relationship. To paraphrase a quote attributed to Winston Churchill, gap analysis enables us to “let our advanced worrying become advanced thinking and planning.” Employing gap analysis software guided by practiced oversight, an advisor can help participants envision any gap between the retirement income they feel they will need versus the guaranteed income they’ve got. This gives them a good visual of how increased savings is expected to play out over the years, so they can better plan for, employ and stick with a practical savings plan for closing the gap and retiring on time.
  • Serve as a long-view advocate – Last but certainly not least, a professional advisor who is available to participants on an ongoing basis can spell the difference between a promising start versus the stamina needed to make it to the finish line. Numerous academic studies in behavioral finance have demonstrated that, despite our best intentions, we humans tend to allow base emotions to override sensibilities in our financial decision-making. We react inappropriately to market news, ultimately buying high (when markets are exuberant) and selling low (when markets are in a panic). On this count, a consistent voice of reason throughout can be invaluable in reminding participants to stick with their own long-term plans in the face of short-term market distractions.

Plan Sponsors Also Benefit
If all of these points weren’t enough, it’s worth nothing that you, the plan sponsor, also benefit by providing participants with professional advice. By delegating fund selection as well as investment advice to an advisor who accepts fiduciary levels of responsibility for providing both, you can minimize your personal liability and streamline your administrative tasks.

Next Up, Financial Education
Implicit in the benefits professional advice brings to plan participants is the concept that a little informed understanding can go a long way in helping plan participants save and invest confidently toward their on-time retirement. In our next post, we’ll describe the type of financial education that best contributes to that worthy goal.

Do you like what you’ve read so far in our Alliant Wealth Advisors 401(k) Solution Best Practice Series? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.