CHICAGO, -- Advisors who are skilled at guiding their mass affluent clients’ behaviors can have outsize impacts on their ultimate success or failure in preparing for their retirement, three experts agreed on a panel focused on delivering better retirement outcomes at the Morningstar conference.

“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 like 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 the own saving process, Wendel cautions.
  • Use target-date funds. Target-date funds are going to be an increasingly critical component of effectively automating clients’ retirement savings.

People will buy more products when the price drops, Finke says, but the opposite psychology drives investors’ interest in buying stocks. This established tendency delivers “guaranteed underperformance” for most U.S. investors, he says.
Although target-date funds help bridge this performance gap, they aren’t panaceas, Finke says, and need to be balanced with other investments.

Investors also need more target-date funds from which to choose, especially from the big firms like Vanguard, T. Rowe Price and Fidelity, Blanchett says. “There’s nothing wrong with a target-date fund that is 20% more aggressive” in a given category, he says.

  • 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.
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