by Ryan W. Smith
It is well known that Americans have long been behind the curve when it comes to retirement savings. However, in recent years a new trend is emerging, thanks in part to more and more financial advisors assisting their clients in managing retirement savings along with regular investment accounts. In years past, this was not always the case. Recent data shows promising signs, but there is still more that can be done to increase 401(k) participation rates.
With enrollments and contributions to 401(k)s rising each year from 2012-2015, a renewed focus on increasing 401(k) enrollment in the financial advisory industry has mostly been a success. According to data from Bank of America Merrill Lynch, 84% of employees who made changes to their 401(k) contributions in 2015 increased them, while total contributions in all retirement plans offered by employers increased 16%. 2016 data is still unreleased as of press time.
Despite a plethora of data showing positive signs, here are some things that financial advisors can do to help their clients not already participating in a 401(k) to begin taking advantage of the benefits of these retirement savings vehicles.
1) Simple Enrollment Processes
A well-designed enrollment plan, including auto enrollment, has been shown to both participation rates and contribution rates. These plans work well, many believe, because it reduces the number of decisions an enrollee must make to finalize the enrollment process. Nearly half, 47%, of plans under Bank of America Merrill Lynch’s management have at least some auto enrollment features built into them.
2) Automatic Contribution Increases
Removing obstacles to assist employees in saving for retirement is a continual process. Bank of America Merrill Lynch has stated that 85% of the auto enrollment plans mentioned above also utilize an automatic increase in 401(k) contributions, usually set to coincide with employee salary increases.
According to Bank of America Merrill Lynch data, auto enrollments were up 22% in 2015, contributions from auto enrollment employees were up 21% and employees taking advantage of automatic increases in contributions rose 23% in 2015.
3) Higher Default Contributions
While it might seem counter-intuitive, it appears that automatic enrollment plans with higher default contribution levels also see higher participation rates. According to Bank of America Merrill Lynch data, those plans with a 10% default contribution rate have an 88% participation rate. This compares to only 78% participation in plans where the default contribution is just 3%.
4) Online Research Hits Positive Note
In 2015, Bank of America Merrill Lynch data shows that the educational resources for retirement plans on their website garnered large increases in usage rates. For example, there was a 27% increase in the number of sessions and a 57% increase in the number of unique visitors in the retirement section of the firms’ website. For their full website, there was a 3% increase in the number of sessions and just an 11% increase in the number of unique visitors.
5) If You Aren’t Mobile, You Aren’t Moving
Bank of America Merrill Lynch data shows that 8% of 401(k) related online transactions were entered through mobile devices. This would include trades as well as contact and other information updates, but the data is clear. For better participation rates in 401(k) plans, having access to a mobile app needs to play a central role.
For all advisors who are working with 401(k) participants, who are trying to trying help their existing clients enroll in retirement savings plans or are just introducing themselves to this aspect of the financial industry because of the DOL’s Fiduciary Rule, it is important to note that many clients have never considered their investments and their retirement savings as part of an entire financial plan. This trend is changing as more and more advisors use software like AdvisoryWorld’s SCANaltyics and Proposal Generator to look at a household’s entire financial situation, account by account.
Many advisors are working to increase contribution amounts for existing clients while also trying to obtain new business using the above methods. For these existing clients, portfolio analysis tools like AdvisoryWorld’s SCANalytics can help show the differences in investment methodology. For example, using SCANalytics reports to show the impact of Dollar Cost Averaging on a portfolio.
The five ways to increase 401(k) participation rates listed above are not entirely in the control of a financial advisor. However, many prudent financial advisors will still assist their clients in looking at all available avenues for retirement savings. Employers and retirement account managers who utilize methods like those above to increase participation rates are also more likely to have lower fees, due to technological efficiencies and overall assets-under-management economies of scale.
It might not be most prudent to enroll a client in an employer-based plan, but those avenues have tax-advantages other paths might not. Being able to look at the entire picture, knowing how employers are managing 401(k) enrollment, investment options and research access, will best help employees and investors choose the option best suited to their long-term financial health, hopefully well into their retirement years.