Perspectives | Employee Retirement Savings is More Than a Single Number
Advisor Managed Accounts Make Retirement Planning Personal
We’ve Come a Long Way
Investing through a company-sponsored retirement plan has many potential features to increase the probability an employee can retire with dignity. Auto-enrollment, auto-escalation, and in many cases utilizing a target date retirement series as the default investment option all nudge an employee to make small changes to their saving and asset allocation profile over time. Among investment options, target date funds dominate retirement plan investing. Fidelity estimates 68% of millennials have 100% of their investment assets in a target date fund (TDF)¹. Determine the age you want to retire (typically around 65) and pick the fund with the year that corresponds to that age. Simple and sweet, set it and forget it.
The TDF concept initially filled the void of advice for employee retirement plan savings. Employees had few options for high-quality, fiduciary-based advice as they saved for retirement, as many advisors are reticent to take on small-dollar accounts, especially when they cannot exercise discretion.
But, the TDF concept is built on a single data point: age. Different TDF series have slightly different glide paths, or paths of asset allocation change, but rely just on an assumption of age as the sole driving variable.
So here’s the question: Can you boil down an employee’s entire personal financial situation into a single number?
Enter a Cost-Efficient, Personalized Alternative
Advisor Managed Accounts (AMAs) offer an alternative to a TDF. With AMAs, an employee gets a professionally managed retirement plan that is customized based on their unique financial situation. This avenue requires input from the employee and engages them in the planning process. Engagement allows the participant to feel valued and the interaction to draw out specific goals, risks, and concerns an employee may have. A TDF uses the following data points:
- Age (and by implication retirement date)
Whereas AMAs consider age but also these known data points:
- Account balance
- Savings/deferrral rate
- Estimated Social Security benefit
- Employer contributin rate
- Other outsde investments
- Any potential pension benefits
- State of residence
- Marital status
These additional data points allow the program to better calibrate the retirement destination for an employee. In addition, AMAs allow an employee to input datapoints that are personal to them (spending and saving goals in retirement and key risk concerns). From there, the program develops suggested savings or deferral rates for their retirement plan in addition to a customized asset allocation using the investment options in the retirement plan.
Perhaps more important, the employee’s retirement planning process updates as these datapoints change over time. Not just age, but changes in salary, bonus, other financial accounts and market fluctuations are all factored in. The program then makes changes to their investment portfolio when appropriate.
AMA programs also may give the option for employees to engage with a financial planner in a one-on-one format. Utilizing technology or onsite meetings, employees can sit down and become active participants in planning for their retirement. Here, participant engagement and outcomes become a top priority. Participant needs change over time and AMAs help better address these common questions with a scalable yet personalized approach:
- How will I be able to retire?
- What investments should I choose?
- How much money should I be saving now?
- How much money do I need in retirement?
- How much risk should I take on?
These benefits bring a scope to the financial planning process previously reserved for the high net worth clients of financial planners. But now, employees can access these services while they are accumulating assets during their working years…at a substantially reduced cost compared with typical financial planning services. Other topics are also available for discussion including student debt, 529 college saving planning, and Social Security and Medicaid planning.
Advisor managed accounts provide a professional, guided path to retirement for employees. By utilizing technology and access to financial professionals, the program can help increase the probability that employees can retire with dignity and on terms specific to their situation.