The Importance of a Formal Advisory Relationship and a Written Plan on the Retirement-Income Outlook Among Defined Contribution Participants

DRAFT VOLUME 3, NUMBER 2

BY RON BUSH

For purposes of the study we define “participant” as someone currently contributing to a 401(k), RON BUSH 403(b) or 457 defined contribution plan. To be FOUNDER AND PRINCIPAL “advised” they must have currently or in the past BRIGHTWORK PARTNERS LLC. five years had a relationship with a professional financial adviser (someone paid either through fees or commissions to assist in financial decisions, financial product selection or in selecting providers of financial services).

Thirty-nine percent of surveyed participants are Our ongoing research with participants in defined working or previously worked with such an contribution (DC) plans indicates that those who adviser while 25% have a formal written plan for have a paid adviser and/or a formal written plan how they are going to achieve their retirement- are considerably more comfortable with knowing income goals. Most of those with a written plan how much income they will need in retirement. (74%) prepared the plan with the assistance of Additionally, they are more confident in achieving their adviser. their goals for a secure retirement.

F IGURE 1: S EGMENT C HARACTERISTICS Total Do Not Have Have a Paid Have a Formal DC a Paid Adviser Adviser Written Plan Male 58% 59% 55% 63% Female 42% 41% 45% 37% Average Age (in years): 42.4 41.4 43.9 42.3 Education: Four year college 45% 37% 55% 54% degree or higher Household Income: $90 $80 $114 $112 Median $ in thousands Market Value of DC Plan: $33 $22 $60 $66 Median $ in thousands Has considered delaying 33% 28% 41% 35% retirement Average age expect to retire 65.3 65.8 64.4 63.7

F IGURE 2: CONFIDENCEIN R ETIREMENT P LANNING Total Do Not Have Have a Paid Have a Formal DC a Paid Adviser Adviser Written Plan Comfortable with estimating 56% 45% 73% 80% Household Income needed in retirement (very or somewhat) Confident in achieving Target 64% 56% 74% 78% Retirement Income (very or somewhat) Confident in being ready for 50% 42% 62% 68% retirement financially (very or somewhat) Confident in not outliving your 47% 41% 57% 67% assets (very or somewhat) Confident in keeping up with 39% 33% 47% 64% inflation (very or somewhat)

This paper looks at key differences among of an adviser or presence of a written plan are participants who 1) are advised, 2) have a written among a cluster of factors that can contribute to plan or 3) have neither. Cited data was captured a more favorable retirement outlook. See Figure in our late 2012 survey of over 1,000 DC plan 1, on previous page, for a profile of participants participants, structured so that findings are along these dimensions. projectable to the universe of all such participants and can be segmented on various dimensions. In Note that those with a paid adviser are addition to the presence of an advisory proportionately more likely to be female while relationship or written plan, these dimensions those with a written plan are more likely male. include age, gender, household income, Note also that the advised participant is more educational achievement, balance in plan and likely to have considered delaying retirement type of DC plan. within the past 12 months even though perceiving himself or herself as better prepared It should be noted that the median household for retirement than the non-advised – perhaps income of DC plan participants of $90,000 is heeding the council of his or her adviser. nearly double that of all households ($50,054 in 2011 according to the U.S. Census Bureau). It Those who are advised and those with a plan also should be noted that the population of clearly are more comfortable estimating participants who are advised or have written retirement-income needs and more confident in plans have somewhat higher levels of achieving target levels of retirement income, in educational achievement, median household being ready for retirement financially, in not income and median plan account balances. These outliving one’s assets and being able to keep up are all factors that are associated with higher with inflation in retirement. (See Figure 2, above) levels of confidence in achieving retirement- income goals and more optimistic expectations Similarly, our advised participants and those with about retirement generally. Accordingly, the use a plan are more positive about their expectations

F IGURE 3: R ETIREMENT E XPECTATIONS Question: Given the retirement savings you have in place right now and the rate at which you are adding to those savings, which of the statements below do you expect will be true in retirement? Total Do Not Have Have a Paid Have a Formal DC a Paid Adviser Adviser Written Plan You will live as well or better as 33% 27% 42% 50% you did when working You will have enough money to 38% 32% 48% 55% pay for healthcare You will be in a position to 19% 16% 24% 32% travel extensively You will be able to help out 15% 10% 23% 26% younger family members with tuition or housing expenses You will be able to leave money to 22% 16% 31% 38% family members or charities of retirement, including their ability to travel age 16 and over work at organizations that extensively in retirement and to leave a legacy. sponsor a DC plan while 43% actually participate. (See Figure 3, above) Among individuals both fortunate and astute enough to participate, those who have an advisory Participation in a workplace DC plan affords relationship (39%) and especially those who have individuals a considerable advantage in preparing a written financial plan that addresses retirement for a secure retirement. Still, only a minority of income (25%) appear much better positioned than all workers do participate. According to recent their peers who have neither to achieve their EBRI analysis1 59% of all employed individuals financial and lifestyle goals in retirement. I

Footnote: 1 EBRI Notes, August 2013. Analysis of data from the US Census Bureau, 2012 Survey of Income and Program Participants (SIPP).