Vanguard Study Shows Seismic Shift in Retirement Investing

With automatic enrollment tripling, advisors need to position themselves for rollover business, advisors say.

By Ed Prince

America’s retirement investment landscape is undergoing a seismic shift, and financial advisors need to adapt to new challenges — and new opportunities.

That’s the consensus of investment professionals responding to a new Vanguard report that found a continuing surge in 401(k) plan participation as more companies switch to automatic enrollment.

The use of automatic enrollment has more than tripled since 2007, when the Pension Protection Act (PPA) of 2006 took effect, according to the annual How America Saves report, which looks at saving behaviors of nearly 5 million Vanguard defined contribution plan participants. At the end of 2022, 58% of Vanguard plans had adopted automatic enrollment, including 76% of plans with at least 1,000 participants.

Target-date retirement funds make up 98% of automatic enrollment plans, and more companies are offering plans with managed account advice services that help employees with investing and planning decisions.

In 2022, 41% of all plans offered managed-account advice; amongst larger plans with more than 5,000 employees, 81% offered this service. Altogether, nearly three in four plan participants now have access to advice, such as a robo-advisor or guidance from a CFP. (Vanguard has its own investment professionals.)

Meanwhile, investors seem to be less actively involved in investing activity.

Vanguard reported that in 2022, participant trading declined to its lowest level in nearly 20 years. During 2004, 20% engaged in participant-directed trades. In 2022, the total was 6%. Further, 83% of all participants used target-date funds, and 71% of them had their entire account invested in a single target-date fund in 2022 – which don’t necessarily protect investors although they may not realize that.

Positive reactions

Financial advisors contacted for this article cheered the continuing shift toward sound retirement strategies by companies and their employees.

And one advisor revealed his secret for capitalizing on the changes — become a financial literacy instructor (more on that later).

“The automatic enrollment and target date funds and these managed portfolios are really just kind of standard best practices that we typically recommend across the board,” said another advisor, Zack Hubbard, a member of the Advisors Bureau of the National Association of Professional Financial Advisors.

“And a lot of companies are starting to implement these things,” said Hubbard, who is director of Financial Planning and Participant Engagement at Greenspring Advisors in Towson, Md.

Vanguard reported that automatic enrollment defaults have also increased over the past decade, and 59% of plans now default employees at a deferral rate of 4% or higher, compared with 35% of plans in 2013. Additionally, two-thirds of automatic enrollment plans have implemented automatic annual deferral rate increases.

The report notes that 99% of all plans with automatic enrollment defaulted participants into a balanced investment strategy in 2022, with 98% selecting a target-date fund as the default.

“My reaction to it is, it’s very positive news,” said Jonathan Bird, founder and principal of Farnam Financial, Phoenix, and a NAPFA advisor. “It reminded me a little bit about some countries doing automatic enrollment for organ donation. … It seemed like a lot more people were on board, but it was really just a matter of the default choice. So, more people saving for retirement to their 401(k) is just objectively a great thing for society.”

Bypassing ‘inertia’

The biggest increases in 401(k) participation were seen in groups that traditionally have low voluntary participation rates — low-income employees and young adults.

For employees with incomes under $15,000, participation was 28% for plans with voluntary enrollment, and 80% for plans with automatic enrollment. (This could include some seniors working part-time jobs).

Similarly, automatic enrollment markedly increased participation by young adults. Among employees under 25, the participation rate was 33% for those in voluntary enrollment plans and 88% for those in automatic enrollment (Keep this in mind when speaking with clients about their young-adult children).

Automatic enrollment also boosted participation among new employees. Among those with a year or less of job tenure, 48% were enrolled in voluntary plans, and 89% were enrolled in automatic plans.

The advisors agreed that bypassing “inertia” is a big advantage of automatic enrollment.

“So many people have good intentions about saving for retirement. They just can’t overcome their inertia to get started,” said Andrea Clark, a NAPFA Advisor Bureau member and owner/founder of The Table Financial Planning in Fountain Hills, Ariz. “Auto enrollment helps people overcome that. … Most people really do need that help over the line that eliminates that one small piece of friction that stops them from getting started on something most people really want — retirement.”

Tomorrows’ clients?

In today’s 401(k)-rich environment, Hubbard said, the key for financial advisors is timing — going after 401(k) “money in motion” when an individual retires.

“If I’m an advisor working out 10, 15, 20 years from now, the pool of people that have enough assets to qualify for my minimum is probably growing, because more people are saving for retirement, and they’re saving sooner because of these automatic features.

“It presents a really interesting opportunity because the pool of potential clients is expanding. But it’s also a really interesting challenge, because essentially all of this investing is happening in 401(k) plans … not the easiest place to get money out of.

“Companies like Vanguard, Fidelity, they’re going to be really working to towards keeping that money at Vanguard or Fidelity … The challenge is going to be, how do I get to these people before, or pull them away from Vanguard and Fidelity?” Hubbard said.

“There’s money in motion, so when they retire, when they change jobs, all that is opportunities where that account can be rolled over,” he said. “So, if I’m an advisor … how do we bring new clients in —your brand-new assets — to manage?”

Making connections

“We have to figure out a way to work with folks, essentially, before that money becomes available, right? How do we get to people and start developing that relationship before that money motion?” said Hubbard.

The answer is that financial advisors need to take on a new role — educator, says Paul J. Brahim, managing director, senior vice president with the Wealth Enhancement Group in Pittsburgh. In addition to offering traditional advisory services, Brahim teaches financial literacy classes for corporate employees.

The training benefits employers as well as employees, said Brahim, a member of the Board of Directors of the Financial Planning Association. When an employee feels financially secure, they are less likely to want to leave. Increasing their knowledge about retirement investment increases that feeling of security, he said. “They’re not wandering through the wilderness alone, trying to figure out what to do.”

“So, what’s the opportunity for a financial advisor? A financial advisor needs to learn how to teach a class on different financial planning subject matter areas. They need to connect with corporations that have retirement plans and offer these financial wellness tools,” said Brahim. “Now, sometimes those are offered through the 401(k) plan itself. Other times it’s an add-on that an advisor can bring.”

‘Become the go-to’

“Financial advisors have a tremendous opportunity to go into these plans and provide financial wellness training services. I began doing that in the late ’90s, and the impact on my practice was extraordinary,” said Brahim.

“There’s all kinds of opportunity for an advisor inside of a corporation if they occupy a place of trust, and integrity,” he said. “In that company, with those people, they’ll become the go-to.”

“And so rather than lurking and waiting for a rollover to occur, you’re providing a very valuable service to lots of people over time, where there’s lots of opportunity, and you become the natural for those kinds of situations when that person retires and rolls that money over,” Brahim.

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

 

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