Bank of America Merrill Lynch issued best practices related to employee benefits for financial advisors to follow who are concerned with the retirement savings of their clients.
Employee contributions are on the upswing in plans managed by the company, officials said, which means advisors need to be better prepared to assist clients with retirement planning decisions.
Last year, total contributions increased by 14 percent, and the number of employees with balances grew 16 percent. A trend, the number of employees who took a positive savings action, either enrolling or increasing contributions to a plan, grew by 82 percent from 2012 to 2015.
Advisors weigh in on three key ideas from the Bank of America report:
1. Combine automatic enrollment with automatic increases in contribution rates and increase default contribution rates. The default employee contribution rate should be no less than 3%, and at the level that maximizes the employer's matching contribution.
Although Scott Smith, CFP, agrees that automatic enrollment with auto increases will help employees save more, the advisor questions what is motivating employers.
“Are employers doing this in the best interest of the employee or is automatic enrollment serving those in upper management who are constrained by the rank and file's contribution rate due to low wages,” said Smith with Olympia Ridge Personal Financial Advisers in Rochester Hills, Mich.
“By helping employees to save money with automatic enrolment, upper management, advisors and custodians now have more assets to manage.”
2. Encourage clients to use their mobile devices for account changes and updates because mobile access is the wave of the future. Unique visitors grew by 57 percent, and sessions by 27 percent, from 2014 to 2015.
While most Americans use their mobile device for emailing or commenting on Facebook and Twitter, these activities are not potentially financially devastating.
“If you’re only using a mobile device to check account balance and it provides a sense of confidence, that’s harmless but using your mobile device for account changes can be dangerous if it develops into a habit of frequent transactions in your retirement account,” said James Brewer, a Chicago based financial advisor with Envision Wealth Planning.
Typically the mobile device experience is a more targeted and limited one whereas a laptop or PC allows for a more enriched online retirement planning experience.
“With a PC, you have to sit down and be more thoughtful, finding the time either at work or at home to execute a trade or transactions,” Brewer told Advisor News. “The larger screen size also facilitates the ability to show more information like the negative impact of a decreasing savings rate.”
3. Employ a managed account or model portfolio as the default investment option of your 401k plan.
Because 401(k)s are often the largest part of an investor's nest egg, Tim Brennan advises his clients to be vigilant about investing wisely.
“Don't settle for what the plan defaults to,” said Brennan, a financial advisor with Ariadne Wealth Advisors in Pembroke, Mass. “The default investment options or managed accounts offered by 401(k) plans are often expensive and unnecessary.”
As far as a managed account option, most employee sponsored retirement plans offer automatic investment services that pick investments for you and since so many workers aren’t comfortable picking their own investments, opting into this type of service is quite common.
But there’s a catch, according to Brennan.
“These services are similar to popular robo-advisors only are typically much more expensive and use much higher cost investments,” Brennan told Advisor News. ‘It’s a double whammy for the 401(k) investor and an easy money maker for the 401(k) plan administrator.”
Among other data released by Bank of America, enrollment in health savings accounts (HSAs) also continues to grow year over year. In 2015, the number of HSAs increased 47 percent, with total assets under management increasing 47 percent and average cash balances increasing 42 percent.
“Growth across almost all employee participation metrics is very promising. Partnering with employers, we see the impact that strategic plan design and employee engagement can have on improving retirement outcomes,” said Gary DeMaio, head of Defined Contribution Products, Bank of America Merrill Lynch.
Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected]
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