PALM BEACH, Fla. - Most 401(k) and other defined contribution plan administrators and sponsors like the automatic enrollment feature in the retirement savings plans they manage because it gets more people saving earlier, but the involuntary nature of these plans does not diminish the burdens they place on administrators to run them.
While many of these reluctant participants may not be of the saving and investing mindset when they join the plan, the hope is that auto enrollment can help steer them on the right path at an early age. Participants' interest in retirement generally increases the closer they get to their retirement date, and auto enrollment can give investors a critical head start.
"If you can get someone to start building money at an early age, a natural interest will occur over time as they watch their balance begin to grow," said Tami Wihlen, a principal at Excel Securities and Associates, at the Society of Professional Asset Managers and Record Keepers 2009 Forum held last week at The Breakers.
"The auto enrollment feature can be a launching pad to help educate more people about their money, whether it's teaching them about how to manage their income and expenses, what it means to invest, how investments work and, most importantly, that saving and investing for your retirement is a long process," Wihlen said.
Investment advisors need to make taking care of their clients their primary focus, said Rick Shoff, managing director at Captrust Financial Advisors. "Providers who are incredibly client-centric are winning business. A lot of our new business comes from referrals."
"As a society, we tend to go for the instant gratification first," Wihlen said. "People aren't saving to the degree that they could."
This instant gratification mindset does not mix well with turbulent markets, she said.
"People have lost their focus on financial affairs," she said. "Anything that says 'guarantee' is better in the minds of investors than what they saw last year," but in reality, it's more important for investors to have a diversified portfolio with a balanced fund or fund-of-funds, she said.
With so much data out there, it's easy for participants and advisers to get overwhelmed. Advisors need technology that helps them integrate and analyze client information and investment data from various sources, Wihlen said, with the ultimate goal of making it easy to deliver solutions to the client in a straightforward manner.
"I believe clients need advisers who can deliver this kind of service, because people are seeking simple, consolidated and meaningful reports about their finances," she said.
The advisor's job should be to create simplicity and efficiency so participants don't have to try to make sense of 17 different financial statements, she said.
When novice investors ask about complicated areas, it's important for their advisor to guide them in the right direction.
"We've got to put guardrails on the road so participants don't drive off," Wihlen said.
Options like self-directed brokerage accounts are the equivalent of a "loaded gun" in the hands of unsophisticated investors, she said.
"Our society has a gigantic looming retirement liability out there," she said. "If we as a society are going to hedge it, then part of an adviser's job is to help more people understand the price. If they want to retire someday, the individual has to be willing to feel some pain now, i.e., work hard, take responsibility and control their spending. Advisers need to provide unbiased and objective support so that these goals can be achieved."
Money for Nothing
Advisers are still trying to figure out what fees they should charge automatically enrolled participants. Scale plays a factor, as accounts with low balances are generally more expensive to manage than larger accounts because the service costs may outweigh the fees collected.
Some of the more sophisticated plans are more expensive because they are designed to run on auto pilot from Day 1 all the way to retirement, automatically rebalancing a participant's asset allocation as they get older.
While these products may appear to run themselves, the truth is much more complicated.
These plans don't take certain things like a participant's personal risk tolerance into consideration and are not intended to replace personalized advice, but are designed help start participants saving until the time they decide to take an active interest in their own finances. All participants have the option to opt-out of these plans at any time.
A recent study by Charles Schwab found that 84% of workers who were automatically enrolled in a 401(k) plan stayed in the plan, up from 77% in 2007.
It remains unclear whether these investors are comfortable paying a little extra for the convenience of having someone else manage their money, or whether they are simply oblivious to what's going on.
"Many participants are of the opinion that these things are free, but the reality is that their employers are paying for this," Wihlen said. "You don't have to pay top prices for high-quality service," but these plans do have expenses.
The Department of Labor and the Internal Revenue Service have provided guidance on how to display fees for retirement accounts, but there are still a lot of gray areas.
Until fees are made more transparent, it is difficult to tell what auto-enrolled investors are paying. Some service providers charge higher fees for stable-value products in order to subsidize fees for other investors, and it would certainly be easy to charge higher fees to investors who either don't bother checking their statements or who check but don't complain.
While plan administrators have seen a big increase in the number of participants due to auto enrollment, Shoff said this surge of participants didn't include a cost-reduction plan.
"Sometimes we have to charge big premiums to make it worth the expense," he said.
"It seems like the best providers and third-party administrators are the ones who make everything easier," he said. "The market naturally gravitates to TPAs who are doing it the right way," even if the superior services they offer are a little more expensive.
Wihlen said auto enrollment is also creating a potential hornet's nest in regards to legal compliance.
"Not only do we have to enroll people, we have to remind them they're enrolled," she said. "If you don't do compliance, the IRS is going to have a field day on you. There is a lot of opportunity for a tool that could help advisors like me track that."
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