Do Employees Need (or Even Want) Help with Asset Allocation Decisions?
November 22, 2011When it comes to investment planning, sometimes it pays to get a little help (or at least a second opinion). But what are the best options for providing guidance to employees and how does online advice fit into the mix? Retirement plan participants have a variety of options available when seeking help regarding their investment selections. Professionally managed accounts, target-date mutual funds, online advice, and the use of financial advisors outside the retirement plan are some of the most common sources of investment guidance employees typically utilize. While these tools are proven to be effective, there is still a need to increase usage rates in order to improve the confidence employees feel relating to the way their investments are allocated.
According to the most recent Financial Finesse quarterly report, only 33% of employees report feeling confident in the way their investments are currently allocated. While these are uncertain times in our economy, only one out of three employees indicating confidence with their investment plans is still very concerning. It may be no coincidence that a summary of the Aon Hewitt/Financial Engines ® joint study found that nearly 1/3 of 401(k) participants reported using employer-sponsored investing tools , so perhaps these are the employees who feel the most confident about their asset allocation. So what about the employees who don’t have access to these tools or are simply not taking advantage of the tools available to them? The need for investment guidance and education is seemingly apparent – with nearly half (49%) of these same employees stating they don’t know if their investments are allocated appropriately, and 18% reporting no confidence at all.
The Aon Hewitt/ Financial Engines® study also revealed that employees who took advantage of available investment guidance experienced higher annual returns than workers who did not. During volatile market conditions, the benefits of receiving help were magnified. Between 2006 and 2010, the average annual returns were 3% higher for those seeking help through professional management, target-date funds, or online advice in comparison to non-help seekers. Furthermore, non-help seeking participants were more likely to experience common investment mistakes such as (a) getting out when the market is down and missing recoveries, (b) taking on either too much or too little risk, (c) failure to rebalance their investments regularly, (d) placing too high a percentage in company stock, and perhaps one of the biggest mistakes, (e) complacency, or taking no proactive investment planning measures. It is important to note that participants using help experienced higher investment returns with lower overall portfolio risk.
While the benefits of using help are positive signs, it also shows there is room for improvement in reaching out to employees with financial education and help with their asset allocation choices. Additionally, as more employers consider adding online advice, it is important to understand who is most likely to benefit from an investment standpoint and what the usage expectations should be. The total online advice rate of participants receiving specific savings and investment recommendations for their 401(k) accounts within the last 12 months was 5.7%, which includes the use of online asset allocation tools such as Financial Engines®. Academic research indicates that online advice appeals to younger employees with higher 401(k) balances. These workers using online advice also tend to be more engaged, technologically savvy, and desire greater control over their investment portfolios. Other employees may be more comfortable with having the ability to meet one on one with a financial professional, in person or over the phone, to receive investment guidance.
So, what can be done to help employees avoid costly choices with their 401(k) options? Automatic enrollment into qualified default investment alternatives (QDIAs) and plan re-enrollment can have a positive impact on the use of help. Professionally managed accounts, target-date mutual funds, and online asset allocation advice are typically the core of investment guidance at the plan level. Beyond that, it is essential to provide the workforce with the tools needed to analyze where they stand and how to best maximize their potential investment returns, given their desired risk levels. Unbiased financial education tools should also be available to help employees understand important concepts such as asset allocation, rebalancing, and diversifying beyond company stock. While this could include online materials such as financial education articles, newsletters, calculators, and links to websites with supporting information, multiple help resources such as one-on-one consultations, educational workshops, and webcasts are also helpful in order to reach the diverse needs of the workforce population.
The need for investment guidance and retirement planning help is greater than ever. Retirement confidence is extremely low, with only 15% of employees report being on track to replace 80% of their income (or their goal) in retirement (down from 17% in 2010), according to Financial Finesse’s most recent quarterly report. Economic concerns, home equity declines, and the less than average stock market performance over the last decade have contributed to employees’ lack of retirement preparedness. Despite the market volatility last quarter, the percentage of investment related questions received here at Financial Finesse rose only slightly this quarter to 14% from 12% as investors were either content to ride out the storm or simply becoming complacent and paralyzed to take action regarding their asset allocation choices. The good news is there are many useful financial tools available to help employees with one of the most critical financial decisions they can make- investment asset allocation within their 401(k) plans.