“Advisors can truly differentiate themselves by addressing replacement income levels.”
SmithElaine, Shlomo, thank you both for your time. Behavioral Finance has a good track record in helping people save more for retirement when it comes to corporate, 401(k)-type plans and even government pension systems. However, one criticism is that it hasn’t had quite the same impact on the relationship of financial advisors with clients. Is this valid?
SarsynskiMassMutual would disagree. We have been using techniques inspired by behavioral finance for almost 10 years, with great success. For example, we know that most individuals want to participate in a retirement plan, but, even with the best of intentions, many fail to follow through or fail to save enough. So, we’ve worked with advisors, plan sponsors and participants to apply approaches that direct employee behavior to desired outcomes. We’ve seen something as simple as an “opt-out” as opposed to an “opt-in” strategy help raise enrollment rates from 75% up to mid-90%. Behavioral finance is absolutely working for us and for our clients.
BenartziIf you talk about advisors who are concerned with 401(k)s, I think some of the better ones have been using behavioral finance techniques and finding it extremely valuable. But, I think it is probably true that advisors who do more wealth management and work one-on-one with individuals have been less focused on systematically applying behavioral finance to date
SarsynskiI would suggest the results we are all after are ensuring employees are able to save appropriately and retire with sufficient replacement income. From our perspective, that would be an incredible missed opportunity. Advisors who go into a meeting with a plan sponsor and talk about the three Fs – funds, fees and fiduciary responsibility – are not differentiating themselves from the sea of sameness in the marketplace. More importantly, they are not getting to the crux of the issue, which is how we can help sponsors ensure that the investment they are making by offering a retirement benefit to their employees is actually producing positive results.
BenartziWhat is interesting is that when I talk to advisors doing wealth management, I ask them if they are reasonably confident about the likelihood of success of the retirement income plans they have set up for their clients. When I ask for a show of hands, I normally get less than 1% raising their hands.
SarsynskiThat is a worry.
BenartziIt’s actually scary – scary! However, they are asking about behavioral finance – and that’s exciting. Although it shows that, while we have addressed some of the big issues on the accumulation side, which is saving for retirement, the decumulation phase has been neglected or the issues not identified. This phase begins around the time of retirement as people transition from 401(k)-type solutions to wealth management solutions. There are still huge opportunities there. So, for me the bad news about low confidence is actually good news that we have something exciting to work on.
SmithA few months ago, we ran a dial-in seminar for advisors on assisting clients from a behavioral finance perspective. The response was over-whelming! We had over 860 people dial in, although we had been told that 40 or so participants would be a good number. Obviously there is a strong desire among advisors for education on the topic, but feedback shows that they also need actionable insights and tools. Advisors are seeking something to help engage with clients in discussing retirement, or rather re-engage with them after the uncertainty caused by the financial crisis.
SarsynskiFour years ago, education may have been enough, but today it is about having tools and analysis to support the ultimate goal of creating a healthy plan. Sitting with participants and discussing 401(k)s or defining large caps doesn’t really address participants’ needs. Advisors need to show participants the likelihood of achieving a certain replacement income rate in retirement. Once participants see that number, whether it’s 20%, 50%, 75% or even a 90% replacement level of their final wage, it completely changes the dialogue for advisors. Participants are driven to take action the minute they see that figure, and are seeking answers on how they can make adjustments to meet their income needs later.
SmithI know MassMutual has a tool that helps participants in this.
SarsynskiMassMutual offers the RetireSmart Ready Tool for participants and our PlanSmart Analysis Report which allows advisors and consultants to show sponsors, for example, the percentage of employees on track to retire at the age of 67. This is a powerful macro tool, and the response has been phenomenal. Advisors can truly differentiate themselves by addressing replacement income levels.