In a previous post, I discussed the first two of four major trends that are changing how many people think about retirement, are planning for it, and that plan advisors need to know about. This post discusses the remaining two trends.
Women as a group are at a disadvantage when it comes to saving for retirement, and are almost twice as likely to live in poverty in retirement compared to men, according to an analysis of US Census data by the National Institute on Retirement Security. Because women typically earn less and spend more time out of the workforce, their accumulated savings are less, and their average Social Security benefit is smaller compared to men’s. In 2017 for example, women’s average monthly benefit was $1,231.50 compared to an average of $1,583.77 for men. In particular, women who are widowed, divorced, and over age 70 are more likely to rely on Social Security benefits for the majority of their income. Because women live an average of five years longer compared to men, their savings have to last longer. Their healthcare costs are likely to be higher as well, especially due to the expense of long term care.
While policy changes on a national level are needed to address gender income disparities, plan sponsors and advisors can help their plan participants save more for retirement now through features such as auto-enrollment and auto-escalation. Pairing these, especially combined with a higher default savings rate, has been shown to increase the amount of participants’ savings in defined contribution plans. A 2017 study by the Defined Contribution Institutional Investment Association (DCIIA) showed that when plan sponsors implemented neither auto-enrollment nor auto-escalation, only 44% of such plans had savings rates above 10% of compensation, including both employee deferrals and employer match. But when sponsors implemented auto enrollment, 67% of them had savings rates above 10%. The percentage rose even further, to 70% for plans where sponsors implemented both auto-enrollment and auto-escalation. In addition, plan sponsors’ fears of plan participant complaints about the use of default elections were shown to be unwarranted; opt-out rates by participants were negligible even at higher default rates.
Research has also shown that women as a group tend to be less financially literate and may benefit from more targeted, personalized financial education that can be provided through defined contribution plans. Developing better communication strategies to reach out to women can have benefits for advisors as well: women are potential clients for firms that offer wealth management in additional to retirement plan advising. More women are starting businesses, are interesting in investing, are equally likely to receive significant inheritances, and are the largest group of clients who leave advisory firms--widows frequently cite being ignored by their advisor while their husbands were alive as the primary reason for choosing another firm.
The role of technology
A growing number of people now expect a digital experience from all their financial services. In fact, 56% of clients between the ages of 30-40 say that a comprehensive digital experience is highly important, according to a 2018 survey from Wealth Management magazine. And consumers are backing up their words with behavior. According to a 2017 PwC study, 46% of customers are skipping bank branches altogether, relying instead on smartphones, tablets, and other online applications. And of course millennials are well-known for preferring digital experiences, as the first generation to have grown up with readily available digital consumer technology. Retirement planning has been slow to catch up with the trend of digital transformation.
Firms that are looking to grow their book of business are using technology to scale their ability to serve more clients without adding staff. Technology also allows for a more personalized experience, which is key to increasing plan participant engagement. For example, financial wellness technology can scale advisor efficiency and reach with configurable self-service portals, simple and multi-channel advisor-plan participant communication, calculators, and content. Client touch points can be increasingly proactive rather than reactive. For example, an advisor could easily see that a client has experienced a new life event and then quickly reach out with information or an invitation to schedule a phone meeting.
All of these features can be used by both existing wealth clients and participants in defined contribution plans. Including financial wellness technology can be a powerful differentiator for plan advisors looking to attract new business and retain existing plans. According to Prudential, 82% of employers believe they can benefit from a financially secure workforce, and a majority are interested in providing financial wellness tools for their employees because it’s the right thing to do.
Plan advisors have an important role to play in re-shaping the concept of retirement to help their participants confront a rapidly changing landscape. Advisors’ roles are shifting too, toward re-integrating the human element into the process. Perhaps it’s time to discard the idea of retirement altogether, and the stigma that accompanies aging, in favor of a movement toward personalized financial planning and financial independence. Focusing on what people need to do now in order to support their ideal lives later is an inherently more attractive idea, and offers the advantage of avoiding the cognitive bias of putting off saving until tomorrow comes.
Whatever we choose to call it, retirement, financial independence, or annual income replacement, financial wellness is the starting point. Plan participants need to understand their financial situation, make a plan to reach their goals, and follow through on it, so that they can handle unexpected expenses, make and celebrate progress towards those goals, and live the futures they dream about. Financial wellness helps make retirement dreams realities, allowing plan participants to focus on how they want to spend their time and on what’s important to them, their values and their lifestyle, knowing they will have the income they need to support these. By doing the right thing for plan participants, both plan sponsors and advisors can benefit.
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