By Mark Miller
CHICAGO Feb 28 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
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
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.