How Behavior Shapes Retirement Planning

By eliminating the "little frictions" and smoothing the path to saving, advisors may help their clients accumulate the assets they need for a secure retirement.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).
 

Advisors who are skilled at guiding the behavior of their mass affluent clients can have outsized impacts on their ultimate success or failure in preparing for their retirements, agreed three panel experts at a recent Morningstar conference in Chicago. The topic was focused on delivering better retirement outcomes.

“The question is, how do we get them to save enough?” asked Michael Finke, a professor of financial planning at Texas Tech University.

Wealthy and low-income savers, for different reasons, may be better off in retirement, but the real worry for planners is the average investor who knows he or she should be putting money away, but isn’t doing so.

“The conundrum for these investors is that their values don’t mesh with their behavior; they know they should save and want to save, but don’t,” says Steve Wendel, principal scientist at the Morningstar’s HelloWallet.

One study found that 68% of respondents in a survey acknowledged they were saving too little; 24% said they would save in the next six months, but only 2% did, Wendel said.

“It’s not about people being lazy,” he said. “It’s the little frictions.”

Which is why broad-based programs, such as employers’ opt-out 401(k) programs, the increasing use of target-date funds and, increasingly, annuities designed to minimize longevity risk, can help mitigate those frictions, the speakers said.

Some of the experts’ advice and observations include:

▪ Small is big. Tiny changes can be huge, Wendel says. When employees at one firm received a Morningstar newsletter about their plan options, most threw it out, he says. But adding the logo of their own company to the header of the newsletter “increased uptake of these plans by 300%,” he says.

▪ Automate saving. Make investing as simple as possible for your clients, even if it means filling out forms for them to sign, says David Blanchett, head of retirement research for Morningstar. But not so much that they become disengaged with their own savings process, Wendel cautions.

▪ Automate decumulation. Automating retirement savings is a proven strategy in the accumulation phase, Finke says. And more automation is needed for decumulation in the form of target-date funds balanced with variable annuities designed to mitigate longevity risk. The biggest risk in buying variable annuities to cover expenditures later in life is that insurance companies could fail, he adds. To address that risk, it should become standard practice to put clients into “participating” variable annuities in which clients share in the risk of market performance, giving them a range of income options depending on how their investments do. This spreads the risk of investments between both the insurers and the clients, he says. Annuitization is all the more important given that Morningstar forecasts bearish performance for equities over the next decade, while bond yields remain low, Finke says.

▪ Remember Social Security. Factor Social Security benefits into your client’s plans. “If you look at Social Security wealth among retirees and compare it to 401(k) wealth, Social Security wealth dominates 401(k) wealth, so Social Security is an incredibly important asset class,” Finke says. And as long as the government is still printing its own money, Social Security “is going to be solvent for the near term,” he says.

—Ann Marsh