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.  

But…

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
  • Salary
  • Savings/deferrral rate
  • Estimated Social Security benefit
  • Employer contributin rate
  • Other outsde investments
  • Any potential pension benefits
  • State of residence
  • Marital status
  • Gender

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.

 

1https://www.cnbc.com/2019/06/21/when-is-it-a-bad-idea-to-invest-in-target-date-funds.html

Neither principal nor the underlying assets of target date investments are guaranteed at any time, including the target date, and investment risk remains at all time.  There is no assurance that the recommended asset allocation will either maximize returns or minimize risk or be the appropriate allocation in all circumstances for every investor with a particular time horizon.
Information herein has been obtained from sources which Mesirow Financial believes to be reliable, we do not guarantee its accuracy and such information may be incomplete and/or condensed. All opinions and estimates included herein are subject to change without notice. This communication may contain privileged and/or confidential information. It is intended solely for the use of the addressee. If you are not the intended recipient, you are strictly prohibited from disclosing, copying, distributing or using any of the information. If you receive this communication in error, please contact the sender immediately and destroy the material in its entirety, whether electronic or hard copy. This material is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.