Got five minutes? The topic of this blog post is covered in our Fiduciary Five Podcast series hosted by Chuck Hammond of the 401(k) Study Group. The Fiduciary Five Podcast…your fiduciary questions, answered in about five minutes. To listen to the related podcast, click here.
We’ve all seen the TV commercial where everyone is walking around with their magic retirement number under their arm. It’s an effective commercial in that it’s memorable and clever. It gives the impression that once the last digit of your magic number flips into place – boom, the next day you can retire. If only it were that black and white. While this works in advertising, it’s really not how it works in real life. However, there are ways the people can reach a level of comfort regarding their retirement readiness.
There is a metaphor I like to use: Imagine you’re driving from the east coast to the west coast and you’re trying to predict the exact minute you will arrive at your destination. That’s impossible to predict because so many factors can impact that arrival time…traffic, pit stops, weather etc. But the right tools and information can help ensure you are on the right route to your destination. Retirement can be viewed the same way. You can’t determine the exact number you will need to retire but with the right tools, information and advice you can get yourself on the path for retirement success.
The biggest challenge our industry faces today is providing universal retirement readiness. In other words, helping participants cover their expenses after leaving employment for the rest of their life. Many participants may not have access to a financial advisor that can provide them a comprehensive financial plan. Even in workplace retirement plans where an advisor provides education or advice, it’s usually general or broad in nature, not comprehensive. So, the participants will often turn to online financial calculators for information. Unfortunately, the results produced by many of these calculators are often misleading. This is sometimes the fault of the calculator and other times its user error…
If you do a Google search for “retirement calculator,” it produces a staggering 13.5 million results. Most, if not all, major 401(k) providers and recordkeepers have at least one retirement calculator available on their website. Even the US Department of Labor’s website has one. Recently, several articles have emerged focusing on a study conducted by a group of researchers at Texas Tech University. The study analyzed 36 retirement calculators using a hypothetical case study of a couple in their late 50s that earn $50,000 each, with plans to retire at age 63 and 65. The study concludes that, “In most cases, the available offerings are extremely misleading” and provide flawed projections estimating greater odds of having enough money in retirement. Yikes!
These retirement calculators are interactive and differ widely in the level of input required by the user. In developing these tools for participants, programmers are forced to perform a balancing act of making the calculator simple and easy enough for the average participant to use, while still providing actuarially sound projections. The fact is, a retirement projection is complex and each of the many assumptions used can have significant impact on the results that are produced.
Many retirement calculators use general defaults for personal information like investment returns, retirement date, income replacement, inflation and life expectancy. The assumptions used can vary widely and have a profound impact on results. However, participants often lack the financial knowledge to feel comfortable overriding these assumptions to more accurately reflect their life circumstances. Of course, to increase the calculator accuracy, there are many more personal variables that can be taken into consideration: Are someone’s savings pre-tax, Roth or some combination of the two? Are they married or single? What is a reasonable estimate of healthcare costs in retirement? The list goes on and on.
So, the challenge is that if the calculator is too simple and uses too many defaults, the projections may be misleading or, simply put, wrong. However, if the calculator is more robust requiring too much input by the participant, there’s a good chance the calculator won’t get much use. There is the conundrum. Keep it simple, but risk incorrect results or make it more complex, but risk information overload leading to non-use? Which is worse?
In this fiduciary focused landscape, the challenge for the advisor is similar to the challenge of the financial calculator programmers. When advising clients on which platform to use and why, the advisor needs to be able to articulate how easy or difficult each calculator is to use for the participant and how that impacts the accuracy of the information the participant is receiving. A good prudent practice is to conduct a fiduciary assessment of the participant online tool. This would include the followings steps:
- Understand and document the underlying key assumptions the calculator uses in determining participant readiness.
- Obtain and review the participant disclosures, then share that information with the plan sponsor as part of the selection process and the ongoing review of that vendor partner.
This analysis can prove helpful, but the bigger question that needs answering is how the calculator can be used to improve the overall fiduciary compliance of the plan. One of my colleagues once said, “Fiduciary compliance is the sum of all the plan participants,” and I could not agree more. If this is the case serving as a fiduciary advisor, one will need to be able to quantify and measure the impact of what they do at the participant level.
Advisors will need to be able to identify vendor partners that can help them easily and profitably:
- Identify those participants that are not on track for a successful retirement and/or are not properly invested to meet their retirement goal
- Engage those participants in changing their behavior to get on track and
- Measure the success of engaging those participants.
One of the main benefits of working with Unified Trust is that we provide a results-driven managed account solution used in conjunction with intelligent plan defaults. We do much of the heavy lifting and help advisors identify those participants in the plan that need additional assistance to get to their retirement goal. We provide tools to engage those participants to get them on the right track, and tools to measure the overall plans success. We work hand in hand with advisors to help you drive value and have a major impact on participant and plan success.
In working with us, advisors will be able to provide clients the ideal fiduciary service model – one that manages and minimizes the fiduciary risk for the plan sponsors and their committees and dramatically improves the number of successful retirement outcomes for participants. While we don’t hand out numbers for participants to carry under their arms, we do it by giving them a good and accurate number where it counts…on their quarterly retirement statement!