Advisors who work with 401(k) plans understand that plan sponsors consider a rising average deferral rate a sign of a successful plan. As the deferral rate increases, so do plan assets, creating a mutual benefit for both the advisor and sponsor. Participants also benefit as their savings increases and their retirement outcomes improve.

For advisors, the critical question is how to improve those deferral rates. The answer is by making simple structural changes to the plan, such as adding auto-enrollment provisions with an auto-escalation of the deferral rate over time. These provisions have proven to move the needle on this metric. But another, more impactful way to improve deferral rates, and provide valuable service to participants, is through simple planning.

Advisors often encounter participants overwhelmed by the prospect of managing their financial future. They are struggling to understand the fundamentals of their plan, whether they can afford their goals, and how they can save more for retirement.

These questions are not easy to answer. Advisors need to be able to present an overview of the client’s financial health, and efficiently address a broad range of common concerns for their clients. Finding the right program to help assess client goals and provide meaningful retirement planning will lead not only to more financially secure clients, but also to higher deferral rates.

In order to serve a large number of participants, the planning approach must be extremely efficient, with the ability to assess the affordability of a participant’s retirement goals in minutes. The household balance sheet is one approach that can provide the kind of retirement goal plan affordability analysis needed so the advisor can efficiently serve the entire participant base.

Advisors can begin by introducing the concept of the household balance sheet in group participant enrollment and education meetings, followed up with one-on-one meetings to run a personalized retirement goal plan analysis.

In those one-on-one meetings, they should launch a quick analysis of the retirement goal plan to show how close—or how far—they are from meeting their goals. Contributions to the 401(k) plan can then be easily adjusted based on the level of savings needed to reach the desired income stream in retirement.

Advisors need to determine what existing accounts are dedicated to retirement, capturing the amounts in rollover IRAs, for example. Then, they can calculate any anticipated savings earmarked for retirement, such as the percentage they’re already contributing to a 401(k), along with any employer match. A tool can also help the advisor determine anticipated benefits, such as those income streams that start at retirement and run the duration of retirement, taking into account Social Security benefits.

Once the resources have been calculated, the advisor can determine the participant’s monthly living expenses during retirement. That usually involves the income replacement ratio, which is retirement income expressed as a percentage of pre-retirement income. That number is typically set at 80 percent. Participants can break living expenses down into categories such as healthcare, travel or groceries, using software to go as granular or as basic as they’d like. The software can inflate the estimated living expenses using the Consumer Price Index, or any desired inflation assumption.

With this information, advisors can then help structure specific retirement goals based on all those inputs, automatically calculating if a participant is falling short of desired goals, and whether a larger contribution is needed each payroll cycle. Software can illustrate what level of savings the participant needs to fully fund necessary goals—or, in some cases, determine whether participants are setting aside more than they need. The household balance sheet approach allows the advisor to conduct this analysis in minutes.

The right program can transform the kind of interaction the advisor has with the participant in a one-on-one setting, allowing discussions to go well beyond a basic orientation on investments to critical and valuable retirement planning for the participant. Participants do not have to resort to a website or a support line for assistance, which typically do not have planning tools. But more importantly, these tools help focus employees on their goals and on the choices they can make to attain them, and ultimately help many to understand the importance of plan deferrals. Advisors can give the participant peace of mind by coaching them to manage what they can control—their savings rate. Successfully doing so will improve the participants’ retirement outcome, boost the sponsor’s key success metric, and grow the advisor’s retirement plan business.

 

 

Neal Ringquist is President of Advisor Software, Inc., a provider of web-based wealth management solutions for financial advisors.