There is no doubt that auto features within 401(k) and 403(b) plans have improved the potential for a successful retirement for millions of workers. But there is a downside leaving most unable to handle the decumulation phase of retirement planning.
Auto enrollment, auto escalation and professional managed investments like target date funds have been a godsend for the defined contribution industry getting millions more workers saving for retirement, increasing their savings rates and helping them make wiser investment choices. But have we taken a short cut that hinders participants when it comes to retirement income?
Ozempic has also been a godsend for people with type 2 diabetes helping them lower insulin while losing weight. But ultimately, wouldn’t people be better off if they ate heathier and exercised more?
There are 80 million people in DC plans of which about 3% have a personal financial advisor who can help with retirement income planning. So even if auto features have increased the assets of just even 10% more of DC participants enough to make them more attractive to wealth advisors, have we trained them they do not need to do anything, like hiring a fitness coach, because our “Ozempic” will solve the decumulation issues like they have done for accumulation?
There are big debates about retirement income including:
- Should it be within a DC plan?
- Auto enrolled?
- Guaranteed?
Maslow wrote, ““If the only tool you have is a hammer, you tend to see every problem as a nail.” So of course, the DC industry would answer it should be within a plan. Because auto features have worked so well, why not embed annuities within target date funds or managed accounts? And though everyone wants guarantees, most do not want to pay for them or lose control of their money. In other words, everyone wants to go to heaven, but no one wants to die.
At an RPA record keeper roundtable discussion about the issues around helping people with retirement income planning, Nathan Vorhis, then at Schwab, noted wealth advisors have been doing it for half a century, just not within a DC plan. Working outside a plan eliminates transferability issues, the biggest impediment today for in-plan retirement income, and does not require the approval or cooperation of the plan sponsor.
The solution clearly lies at the convergence of wealth and retirement. A growing number of retirement plan advisors have been developing or buying wealth capabilities while wealth advisors are just beginning to see the opportunities in DC plans. New services like Pontera help advisors manage their client’s DC plans with less cyber risk.
While it might be fun to debate who is better positioned to help DC participants with retirement income and whether it should be within the plan or not, the opportunity created by 401(k) and 403(b) plans with the help of auto features are so huge that there will be plenty for everyone and lots of options depending on the situation and needs of the plan sponsor, record keeper, advisor and individual.
But how do we get our diabetic or unhealthy participants off the coach to eat better or exercise more while weaning them off auto features getting them engaged with financial planning so critical as they get closer to retirement.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.