Demand for 401(k) Advice Grows; Will FAs Benefit?

Demand for 401(k) Advice Grows; Will FAs Benefit?

Employees with 401(k) or other defined contribution plans are showing less interest in managing their investments, and more interest in having professionals do it for them, new data from Vanguard shows. But the trend isn’t likely to benefit financial advisors, at least in the short run.

In its recently released annual report, How America Saves 2012, Vanguard said that last year 33 percent of participants in its 3.4 million defined contribution plans were invested in professionally managed allocation programs, up from just 9 percent at the end of 2005.

Target date funds—baskets of securities whose asset allocation is built around the expected date of the owners’ retirement—are leading the growth; 24 percent of people in DC plans were in a single target date fund, while 6 percent were in a single balanced fund, and 3 percent were in a managed account advisory program.

Part of the reason for why managed solutions have grown so sharply over six years is the growing practice among employers to automatically enroll new workers into 401(k)s, allowing them to opt out if they prefer to do so. TDFs have largely become the investment option of choice for plan sponsors when they put workers into those plans. (The workers also are free to switch to other investing options available within the program if they don’t like the default.)

Some observers view the growth of TDFs as a positive response to a long-standing criticism of 401(k)s—they force investment decisions on people who may lack the expertise to do it well.  Indeed, Jean Young, chief author of the Vanguard report, says she expects the pace to pick up; she predicts 55 percent of all its plan participants and 80 percent of its new plan participants to be entirely invested in a professionally managed plan by 2016.

The trend toward TDFs isn’t entirely driven by the default systems being set up by sponsors, Young adds. Just three out of 10 participants who use TDFs for their 401(k)s were defaulted into that option, she says, while the rest unilaterally chose TDFs.

The hunger for advice is manifesting itself in other venues. Fidelity Investments said that last year it saw a 45 percent increase in the number of employees in 401(k)s who used online webinars on investing; the number of participants who attended workplace workshops was up 20 percent, it added.

Interest in TDFs also was up at Fidelity. At the end of the first quarter of this year, 56 percent of its 11.9 million plan participants were invested to some degree in target date funds, up from 26 percent five years earlier. Assets in its Freedom Fund target date brand had grown more than threefold in that time, from $60 billion to $189 billion.

Growth in TDFs is fine if you’re an asset manager, but advisors who want in on the advice market face hurdles.

The share of plans that offer managed account advice is low—just 14 percent at Vanguard. And that advice already is offered through Vanguard financial planners or through Financial Engines, the third-party advisor founded by Nobel laureate Bill Sharpe.

And plan sponsors sometimes are loathe to bring in outside advisors, since the sponsors are required to vet the people who provide such advice because they have a fiduciary responsibility for the retirement plan.

Cerulli Associates analyst Bing Waldert says a few opportunities are emerging for advisors around the margins of the industry. Customized target date funds are being created by large investment firms that allow an advisor to populate them with the investment products he chooses.

“The old adage in the retirement plan industry is trends start in large megaplans and they come down,” Waldert says.  “For the bread and butter advisor, opportunity in the 401(k) space is really shrinking. For the plans that populate Vanguard’s data, there really isn’t a ton of opportunity for advisors.”

But advisors who specialize in retirement plans of $10 million to $25 million are likely to fare better, he adds. Regulatory pressures on plan sponsors will lead them to look for more experienced advisors, instead of those for whom retirement plans are a sideline.

Charles Roame­, managing partner at ­Tiburon Strategic Advisors­ in ­Tiburon, Calif., says that the balances in most target date plans are typically too low to attract an advisor’s attention. One strategy advisors use is to persuade clients to let them manage both their 401(k) plans and their assets outside of those plans, with the advisor working with data aggregators to keep track of all the holdings.

Advice matters, Financial Engines says in a report last fall that it prepared with human resource consultant Aon Hewitt. Investors in 401(k) plans who obtained help—either by investing in TDFs, or using managed accounts or online advice—on average realized returns of nearly 3 percentage points greater than those who didn’t, net of fees, the report said. It reviewed workers at eight companies over a five-year period, through 2010.


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