The 401(k) industry has become too distracted by issues that do not directly impact what truly matters – driving successful retirement savings behavior and outcomes for American workers.

Now is the time for plan providers, plan sponsors and consultants to focus not only on fiduciary considerations, fees and unnecessary plan customization but also on what has proven to make a real difference – independent professional advice on saving and investing.

Getting 401(k) investors engaged in advice can play a critical role in improving their behavior and results. We see this in the plans we serve at Schwab, and it is also increasingly apparent industry-wide, according to various research firms and 401(k) plan providers.

Why worry about 401(k) success?

Today, a 401(k) account is the only or primary source of retirement savings for millions of Americans, and yet only about 60% of workers are currently saving for retirement, according to the Employee Benefit Research Institute’s 2010 Retirement Confidence Survey.

And the impact of not engaging in retirement savings isn’t just on a worker’s future.  Financial uncertainty affects people’s daily work and productivity.

According to The Personal Finance Employee Education Foundation in 2009, 30 million workers – one out of every four in the United States – report they are seriously financially distressed and dissatisfied with their personal finances. As a result, the foundation estimates that up to 80% of all workers spend 12 to 20 hours per month at work on money issues.

Redefining success: Advice matters

In analyzing what drives positive outcomes in terms of high savings rates and more appropriate asset allocation, one fact stands out: Advice matters.

Yet despite a growing number of industry reports on the effectiveness of advice, only a small portion of 401(k) participants use advice today, which means the majority of workers are essentially flying blind with no help or guidance on how to manage their retirement investing and saving strategy.  

And there is a cost to this: According to a February 2010 report, the Labor Department estimates that individuals in 401(k) plans make investment errors that cost them between $5.5 billion and $10.9 billion annually. It further suggests that the cost of such errors might be cut in half with investment advice.

To dig deeper into these industry-wide statistics, Schwab Retirement Plan Services, Inc., recently conducted a two-part study surveying 401(k) plan participants nationwide and analyzing our own client base to determine drivers of success.

More than half of survey participants said that if advice is free, they will gladly take it. Those who received some form of professional advice felt they are better prepared for retirement, citing in particular:

  • Improved savings rates. Seventy percent of participants who receive and implement 401(k) advice increase their savings rates. For those who accept advice, average savings rates double, from 5% to 10% percent of pay, compared to those not receiving advice.
  • Greater diversification. Plans serviced by Schwab that offer independent retirement plan advice typically employ a minimum of eight asset classes. The average non-advice participant invests in 3.7 asset classes.
  • More disciplined investing behavior. During the recent market downturn, participants who received and implemented 401(k) advice were less reactive during volatile market conditions. More than nine out of 10 advised participants remained in their portfolio investments from July 2008 through 2009, which means they may have benefited from the market rebound.

Just offering advice is not enough

Yet even among plan participants who have access to advice in their 401(k) plan, a significant number do not take advantage of it.

Based on the analysis of Schwab data, more plans are electing to offer advice, increasing from 42% of Schwab-serviced plans in 2005 to 74% of plans as of June 30, 2010. But among those plans that offer advice, less than 10% of participants actively use it.

Many say they are too busy, have more immediate financial concerns, such as day-to-day expenses or saving for near-term needs like a car, a house, or a college education, or they don’t think they have enough saved to bother with an advice consultation.

Especially in today’s economic environment, it is natural for people to feel their finances are too tight to focus on retirement because it feels far off in the future. But the fact is that we have to find a better way to guide people into getting a head start on retirement savings.

What employers can do

When assessing 401(k) plan effectiveness, it’s easy to get caught up in distractions and overlook what really matters—getting every participant closer to a state of financial well-being in retirement.

For plan sponsors, distractions may include concern that providing financial advice is a fiduciary trap, worrying about pulling every penny possible out of plan costs, or succumbing to the temptation to add layers of customization to a 401(k) plan and then expecting participants to navigate the resulting labyrinth on their own.

It’s important to recognize that employers are not being reckless in focusing their attention on fiduciary concerns, costs, and delivering what they believe their employees need. In fact, these considerations of course still need to remain in the mix to a degree.

But the evolution of the 401(k) industry over more than 20 years, coupled with a hyper-competitive plan provider environment, has unnecessarily amplified these issues and created distractions for employers and providers alike.

Forward-thinking employers and plan providers are working together in search of a long-term solution, challenging themselves to design plans that focus first and foremost on answering the question: How will this directly impact not only employee participation, but outcomes as well?

By looking past the day-to-day distractions, employers can recalibrate their focus to what really matters.

For example, despite overwhelming evidence that advice can help participants achieve better outcomes, plan providers spend an average of $2 to $3 per participant on advice offerings, compared to $8 to $10 per participant on glossy highly customized educational materials, such as informational brochures and packets, according to the 2009 Sterling Resources Industry Profitability Study.

And while plan providers and sponsors have created award-winning, Madison Avenue-quality educational brochures, the fact is that these materials simply do not yield the same results as professional advice.  

Based on research data, Schwab has identified five strategies for employers to help increase 401(k) participants’ use of advice:

  • Offer one-on-one consultants. Fifty-one percent of 401(k) investors prefer a personalized touch over online tools (23%) or brochures (4%).
  • Communicate the benefits of advice. Nearly two-thirds of participants surveyed said they need some form of motivator to prompt them to take advantage of personalized advice. More than one-third (34%) of survey respondents said they would like some kind of evidence that getting advice will be worth their time.
  • Work with a trusted third party. Among the most trusted sources of advice were financial advisors (74%) and financial institutions (59%), according to participants Schwab surveyed nationwide.
  • Know when to engage. Most survey respondents cited “approaching retirement” as the top reason to seek help with planning, when it may be too late. But other top life events prompting people to seek help include changing jobs (29%), stock market volatility (28%) and loss of spouse or partner (23%).
  • Simplify. According to Schwab’s recent survey of 401(k) plan participants, 53% say they find retirement benefits even more confusing than health care benefits.

Across the industry, the data shows what works and what participants prefer. Now, it’s just a matter of moving past the distractions to focus on what we know achieves better outcomes. That’s success.


James McCool is executive vice president of Institutional Services at Charles Schwab.


Combating workplace worry

  • 68% of Americans surveyed have worried about their finances at work
  • 56% of these “worriers” want advice on their investments
  • 82% say they are more focused at work when their personal finances are in order

SOURCE: 2010 Schwab Rules of Engagement Study

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