6 Min Read
By Mark Miller
CHICAGO, Feb 28 (Reuters) - Would you like some investment help with that 401(k)?
A growing number of employers are adding unbiased third-party investment guidance options as they work to improve their retirement plans. The advice can add to your investment costs, but it's coming from the best type of planner: independent advisers who have the fiduciary responsibility to put client interests first.
Most of us could use the help. Surveys show far too many workplace retirement savers "set it and forget it" - failing to bump up annual contribution rates, and rebalance or match investment allocations to their ages.
A Deloitte Center for Financial Services study released on Thursday reflects deep pessimism about retirement prospects. It shows 58 percent of Americans don't have a retirement plan, and 39 percent don't think their returns will be sufficient to provide "decent retirement income."
Yet most also reject help of any sort: 57 percent prefer handling their own retirement planning, and 38 percent said they don't need professional advice.
Several innovative 401(k) products are nonetheless pushing ahead with advice components. They are aimed at driving down plan costs by focusing heavily on index mutual funds, which seek to replicate the movements of a specific financial market or asset class and tend to have lower management fees as a result. Some of the savings are plowed back into investment advice.
"That's always been the catch," says Brooks Herman, research director for Brightscope, which analyzes and rates 401(k) plans. "How do you keep fees down and still deliver advice, which can be very valuable to participants?"
Last week Charles Schwab Corp released first-year numbers for its low-cost 401(k) product, dubbed Schwab Index Advantage, which launched in January 2012. It brought investment expenses in Schwab plans down 77 percent to a rock-bottom 15 basis points by giving retirement savers a menu of 15 stock and bond funds.
The plan also auto-enrolls participants in an investment advisory service that adds another 45 basis points to expenses (A basis point is .01 percent.)
It's possible to opt out, but nearly 90 percent of participants use the service, Schwab says. In return for their 45 basis points, savers get fairly comprehensive planning: Regular personalized consultations on allocation and rebalancing help from advisers from the third-party service GuidedChoice.
The adviser also works with participants to build a retirement plan that includes targeted investing and any other retirement accounts one may have, along with Social Security and defined benefit pensions.
"We have such rich data on participants in the record-keeping systems, but it often sits dormant" says Steve Anderson, executive vice president of Schwab Retirement Plan Services. "This gives us an opportunity to capture all that information and build a more personalized portfolio, and engage in one-on-one consultations."
About one-third of all U.S. plans currently offer the third-party investment advisory service either online or by phone, according to Aon Hewitt, the employee benefits consulting firm; 25 percent offer in-person consultations.
So far, the participation rate is relatively small: 15 percent of plan holders used a personalized advisory service in 2011, Aon Hewitt says.
Schwab is a relatively small player in workplace plans - the new Index Advantage service has signed up 50 corporate clients to date.
Workplace plan giant Vanguard has also jumped in, offering Retirement Plan Access, a low-cost platform that targets small plans ($20 million in assets or less).
A heavy reliance on Vanguard's low-cost index funds keeps fees at 35 basis points or less - way below industry averages for small plans. Average total fees levied on accounts in plans with $25 million or less in assets was 1.29 percent in 2011, according to Brightscope.
About one-third of the plans are sold through registered investment advisers (RIAs), who work with plan sponsors and provide personalized advice. The additional costs are tacked onto the agreements between advisers and plan sponsors, says Jing Wang, who heads up the Vanguard service.
Vanguard's program is gaining momentum. It has signed up 800 plans with $1.3 billion in assets since it launched in October 2011. "One reason it's working so well is that the investment costs are low enough to give advisers room to build in advisory fees," Wang says.
Vanguard also offers three levels of optional online help from Morningstar, including a learning center, a tool that can help with investment decisions and a managed account option. Ten percent of plans are using this option, which adds 45 basis points to costs.
TIAA-CREF, which provides retirement plans to academic, research, medical and cultural organizations, also is marketing a low-cost index fund plan to small nonprofits, with total expenses running 50 basis points to 150 basis points, depending on the investment options selected by plan sponsors.
Many of them are sold through RIAs, who in turn advise participants. "We're seeing a trend away from product to a focus on outcomes," says Bruce Corcoran, managing director for nonprofit sector at TIAA-CREF.
The focus on small plans is especially encouraging, since it's the most underserved part of the workplace market. The U.S. Bureau of Labor Statistics says just 49 percent of workers at companies with 100 or fewer workers have access to a retirement savings plan on the job.
Against that backdrop, here's the most encouraging statistic: Vanguard says 25 percent of the plans enrolling in Retirement Plan Access are startups, companies that previously offered workers nothing at all.