IMHO (In My Humble Opinion): A Little Free Advice
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Anyone who has ever conducted even a single employee meeting knows the one question you can count on being asked is: “What do you think I should do?”
At the risk of offending those who offer investment advice for a living, I do not think it should be that hard a question to answer for most participants. Not that one would know that from working through even the most basic online advice tools available today.
Most advice models are based on two primary pieces of information-when will you need the money “back,” and how much risk can you stomach? Most are no doubt based on the premise that the individual in question will revisit those initial assumptions from time to time.
Of course, almost by definition, a retirement plan saver is a long-term investor. Even those that are age 65 today have an investing horizon of better than 20 years, according to actuarial tables. That in spite of the fact that participants may well have interim savings goals. While a growing number of investment advice models can accommodate them, most workers do not anticipate the timing well enough for those goals to be part of a truly integrated financial plan. Consequently, for most participants, the “when you need it back” is decades from now.
As for revisiting those assumptions, your average retirement plan investor “sets it and forgets it.” If investment education efforts really were sinking in as much as we would all like to think they are, we would have seen movement sometime over the past three years-and we have not, except on the fringe. Consequently, that first decision seems to be extremely critical, since it tends not to be revisited and, when it is, well, it is often poorly timed. Participants still all too frequently move from equity investments on days when the stock market tumbles-locking in losses as they trade at the end-of-the-day price.
The average 401(k) plan today offers participants about a dozen fund options-and most participants gravitate toward three or four of those (see “2001 DC Survey,” page 44). I realize that those windows are widening, and that self-directed accounts are on the upswing-that some participants do have favorite funds, or a burning desire to pick stocks.
Still, I think many participants would just as soon not have to pick funds.
The bottom line? Participants need some help-not necessarily more options-and many need more than “education” in order to deal with the ones they have. They need someone to tell them what to do-or at least a manageable universe of choice. They are long-term investors with a desire to live “comfortably” in retirement. This is not rocket science.
A growing number of plan sponsors are offering investment advice-but most still do not. There are some great tools available, mind you-just a lot more complicated than the average worker wants to contend with. Some say it is early in the game, but the adoption rates (or lack thereof) for most of these tools seem a testament to the need for a kinder, gentler alternative.
The Retirement Security Advice Act is again winding its way through Congress. Most of the controversy surrounding the bill involves lowering current restrictions that effectively bar firms that manage money from offering advice for a fee. Concerns remain that unscrupulous money managers will steer uninformed participants toward choices that benefit the provider at the expense of the participant. There is a pervasive skepticism that no amount of disclosure can enlighten the investing public sufficiently-and there is already far too much “imbedded” in those fund fees. These concerns are not without merit.
However, these same investment management firms put their money (and ours) where their mouth is every single day. They have a track record-and they can be held accountable for their actions. These firms manage billions of dollars every day-it may be time to see what they can do for the rest of us.
-Nevin Adams
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This article first appeared in the November 2001 issue of PLANSPONSOR Magazine