Trendspotting

Art by Henrik Drescher

Attentive to Advisers
Asset managers and insurers foresee strong growth in the advisory industry

A new report from kasina finds institutional asset managers, fund providers and insurers view the financial advisory industry as an area with strong growth potential.

This is a positive development for advisers, both retirement and retail specialists, according to kasina. The report, “Growing Sales and Loyalty With the Advisor Customer Journey,” is targeted at the asset management industry, but it contains some important insights for plan advisers.

Notably, the report predicts asset managers will increasingly compete for adviser-mediated business in the coming years. This in turn will create a solutions-rich environment that could make it easier for advisers to effectively service their clients by leveraging advanced support from asset managers and fund providers.

kasina says asset managers that want to generate more sustainable and profitable growth in the coming years are focusing on the personalized support experience financial advisers want—and increasingly expect. Researchers suggest that asset managers already offer and develop investing solutions tied to advisory service models, and that advisers should anticipate more options when choosing platforms, investments and support tools. However, while generally a positive development for advisers and their clients, the rush of new products and services could challenge adviser due diligence and decisionmaking, kasina warns.

Asset managers, exchange-traded fund (ETF) providers and insurers are reacting to this pressure by delivering a personalized customer experience for advisers across all touch points, kasina says. Researchers call this “defining the customer journey.” Unlike many types of business-to-business customers, financial advisers are almost always in “buying mode,” kasina explains. Therefore, the bulk of the adviser’s customer journey is spent in the decisionmaking and investment evaluation process. Top-performing asset managers are folding this outlook into their efforts to gain adviser-intermediated business, kasina says.

Given all this, the report suggests, advisers will likely see ongoing evolution in tools designed to support portfolio monitoring, investment universe exploration and efficient asset control/trade execution. – John Manganaro

Insurance Critical for Retirees
Individuals typically lose employer-provided insurance benefits when they retire

When planning for retirement, it is essential for individuals to evaluate their insurance needs. They should plan for how they will supplement savings and generate income for expenses such as health care, loss of life and disability, as they often lose access to insurance for these situations when they stop working.

Some advisers and providers in the retirement industry recommend that individuals consider investing in health insurance, life insurance and annuities. A Nationwide Financial survey found many Baby Boomers are “terrified” of what health care costs will do to their retirement plans. More than one-quarter (26%) now believe they will never retire. While many plan to work while in retirement, few people actually continue to work as health problems often arrive years sooner than expected and derail those plans.

Nationwide estimates that by 2030, an individual can expect one year of nursing home care to cost $265,000, making it important for individuals to start planning for these expenses early and consider supplementing employer benefits with individual policies that offer flexibility and portability, explains Kevin McGarry, director of the Nationwide Retirement Institute. He adds that insurance needs are personal and vary from one person to the next.

A second investment, life insurance, may also be appropriate for an individual’s financial situation. Ellen Blumstein, assistant vice president for PlanSmart at MetLife describes life insurance as a means to help individuals protect the people who depend on them financially. It can provide a legacy for future generations and accumulate wealth.

According to Blumstein, depending on the kind of life insurance policy that an individual has purchased, they may also have several options for using it as a source of cash if funds run low in retirement. If the policy has a savings account feature—typically found in whole life, universal life, and variable universal life policies—the individual can make partial withdrawals from it, which can be tax-free depending on the amount of the withdrawal. Additionally, the individual may be able to take out a loan against the policy.

All of the options may have certain tax ramifications and impacts on the policy’s death benefit, so they should be weighed carefully. A qualified financial professional can help with the decision to use life insurance as a source of cash.

Blumstein adds that a third option—annuities—can help provide a stream of guaranteed pension-like income and allow individuals to grow their investments on a tax-deferred basis.

How does a financial adviser assess what insurance a person or would will need? Blumstein lists four key factors advisers should consider when assessing what insurance products may best meet an individual’s needs:

• Income and cost of living both before and after retirement;
• Financial goals;
• Risk tolerance; and
• Health.

Plan sponsors often offer a range of benefits that help employees save for retirement, cover health care costs, and provide income replacement should an employee die or become unable to work. The opportunity to help employees be more retirement ready “lies in educating employees on how those benefits work, what they provide, how much they cover, and how to transition from working to living in retirement,” according to McCarry.

He adds, “With more than 60 million Baby Boomers reaching retirement by 2030, there’s a lot of planning and education that is needed. Advisers and providers play a major role in education and guiding individuals to create a holistic retirement income plan that helps them achieve their financial goals, and live the retirement they’ve earned.” – Noel Couch

Holistic Advice Gains Traction
Sponsors are broadening financial education for participants

Employers are expanding their focus on the overall financial well-being of their workers, a survey from Aon Hewitt finds.

According to the survey of nearly 250 U.S. employers representing approximately six million employees, 93% are focused on the overall financial well-being of their employees, beyond retirement readiness. Nearly half (47%) are either very likely or somewhat likely to add new financial apps or online tools to assist individuals with financial planning.

Sixty-nine percent currently offer online investment guidance, up from 56% in 2014, and 18% of the remaining employers are very likely to add this feature in 2015. More than half (53%) offer phone access to financial advisers in 2015, up from 35% in 2014. Nearly half (49%) offer third-party investment advice, up slightly from 44% in 2014, and 47% offer managed accounts, up eight percentage points from 2014.

“Employers’ focus on financial wellness has been steadily picking up steam in recent years. This year, even more organizations will address this topic head-on and help workers think beyond just saving enough for retirement and consider all aspects of their financial health,” says Rob Austin, director of Retirement Research at Aon Hewitt. “Depending on the individual needs of their employee populations, companies are offering features like basic budgeting help, while others are providing assistance on how to save for life events like a home purchase or college.”

The survey also found companies are more carefully reviewing the costs associated with their defined contribution retirement plans and are using their scale and purchasing power to make changes that may improve returns for workers. More than one-third (34%) of employers recently made changes to their fund line-ups to reduce plan costs, compared to 27% in 2014. Of those employers that have not yet made this change, 34% are very likely to do so before the end of the 2015.

Additionally, the percentage of employers that have recently moved from mutual funds to institutional funds or separately managed accounts has almost doubled, from 16% a year ago to 30% today.

“Employers understand that small plan fees can add up and ultimately make a big impact on workers’ retirement savings,” explains Austin. “To help workers’ maximize their retirement dollars, employers are scrutinizing each fund in the plan to determine if the associated fees are reasonable.”

DC Assets Highly Concentrated
The largest 1% of 401(k) retirement plans holds 71% of all 401(k) assets 

Analysis by Judy Diamond Associates finds there were approximately 540,000 active 401(k) plans at the end of 2014, with a collective $4.3 trillion in total assets. Much of this money, 72%, is held by about 5,400 defined contribution (DC) retirement plans that make up the top 1% of plans by assets, the analysis shows. In contrast, the other 534,600 companies offering 401(k) plans in the U.S. control just 29% of the total assets.

“These findings actually mirror our research from last year,” says Eric Ryles, managing director of the company. “Then, as now, 71% of the country’s 401(k) assets were in the hands of 1% of its employers. If you dial down even further, to just the top 500 companies [by assets], the figure is still an enormous $1.9 trillion dollars.”

Ryles says this figure implies some 500 investment committees have as much collective influence, in dollar terms, as the next 500,000 committees combined.

“What’s so very interesting about this is that you’ve got 500 investment committees who are, essentially, dictating trends in retirement savings that can’t help but influence the rest of the market,” he notes. “That’s an enormous amount of influence concentrated in a very small number of hands.”

Although larger firms employ a greater population of the American work force than small firms, the asset ratio is still significantly out of balance in favor of the large firms, Judy Diamond finds. For example, the top 1% of plans provides retirement coverage to only 56% of workers eligible for a 401(k) plan in the U.S.—yet they control 71% of the assets. The other 99% of plans serve 44% of the remaining eligible participant population, who hold just 29% of the total industry assets.

Judy Diamond based its research on the most recently available 401(k) plan disclosure documents released by the U.S. Department of Labor (DOL). For the study, only active 401(k) plans with more than $3,000 in total plan assets were considered. – John Manganaro

Americans Want Tax Incentives
Nearly nine in 10 oppose removing DC plan tax benefits

A strong majority of U.S. households—including those with and those without retirement plan accounts—disagree with proposals to remove or reduce tax incentives for retirement savers using defined contribution (DC) accounts, according to new survey findings by the Investment Company Institute (ICI).

Eighty-eight percent of households disagreed with the notion that the government should take away the tax advantages of DC accounts, and 90% disagreed with reducing the amount that individuals can contribute to DC accounts. These percentages are up from 86% and 83%, respectively, one year ago.

Even among households not owning DC accounts or individual retirement accounts (IRAs), more than eight in 10 rejected the idea of taking away or reducing the current tax treatment of DC accounts.

Eight in 10 households with DC accounts said the tax treatment of their retirement plans is a big incentive to contribute.

“Past budget and tax reform initiatives have proposed to limit the benefits of tax deferral on retirement plan contributions or cap the amount Americans can save in their 401(k)s, individual retirement accounts, and pensions,” says ICI President and CEO Paul Schott Stevens. “This ICI survey reaffirms our consistent finding that Americans strongly support current tax incentives for retirement saving and want those benefits to be preserved. All workers, regardless of income, benefit from the current tax treatment for retirement plan saving, and we urge policymakers, as they consider legislation in this area, not to curtail these important incentives to save for retirement.” – Rebecca Moore