Most Americans need help when it comes to understanding how to get the most out of their Social Security benefits. But a new study shows that financial advisors aren't very knowledgeable about the ins and outs of the program, either.

The Pension Research Council (PRC) at the Wharton School examined efforts to educate pre-retirement Americans about Social Security by advisors and workplace retirement plan sponsors – two of the most important “touch point” opportunities to help with retirement planning. The researchers conclude that advisors often don't provide the best advice to their clients – especially on the optimal age for claiming benefits. And defined benefit retirement plan sponsors aren't providing much direct advice at all.

Benefit claiming decisions are one of the most critical factors affecting retirement security – and in most cases, a delayed filing is highly beneficial.

Social Security benefits are calculated using a formula called the primary insurance amount, or PIA. Seniors who wait to start receiving Social Security until their full retirement age (currently 66) receive 100 percent of PIA; taking benefits at 62, the first year of eligibility, gets them 75 percent of PIA. By waiting until age 70, they'll receive 132 percent of the PIA – nearly double the monthly income for the rest of their lives. Those benefits are enhanced by an annual cost-of-living adjustment, which is added back in for any years of delayed filing.

Spousal filing strategies also can be important. One example is file-and-suspend, which allows a spouse to claim a spousal benefit while the individual defers claiming. Another is “claim now, claim more later,” where the high earner in a married couple claims a spousal benefit based on the lower earning spouse’s record, while delaying his or her own retired worker benefit. The idea is to generate higher benefits both for the individual as well as higher survivor benefits for widows.

The need to educate the public about Social Security's plan design is clear. A 2010 PRC survey of 2,000 Americans found that most think they understand the program—but don't. For example, only 25 percent could correctly answer a question about how Social Security benefits are calculated. Forty-three percent didn't understand that Social Security benefits can be taxed in certain situations, and the same proportion did not know that benefits are adjusted for inflation. Moreover, few people know the relationship between their retirement age, claiming age and the level of benefit they can receive.

But financial advisors aren't doing much better than the public. For the new report, PRC researchers surveyed more than 400 experienced advisors of all types (wirehouses, regional broker/dealers, banks, insurance companies and independent advisors) about a range of Social Security decision-making issues.

Almost 90 percent agreed that it was important to address Social Security with their clients – and most said they considered themselves knowledgeable. But the study found that most of the conversations advisors have with clients are focused on the political questions swirling around Social Security’s solvency. I see that as a red herring issue – but no matter what you think about the political debate on deficits and entitlement policies, it's irrelevant to anyone nearing retirement.

“For people on the verge of retirement and thinking about when to claim, solvency isn't a big deal,” says Andrew G. Biggs, a co-author of the study and a resident scholar at the American Enterprise Institute, a conservative think tank. “Almost no Social Security reform plan that I'm aware of would cut benefits for current retirees. Telling people that they should claim Social Security now because the program is in trouble is a false assumption.”

The study also found that many advisors frame claiming decisions in terms that incorrectly encourage early filing decisions. And a relatively small number are inclined toward strategies that encourage delayed filing.

The PRC findings don't surprise Andy Landis, a retirement consultant, educator and author who conducts seminars for financial advisors and plan sponsors on Social Security benefits. “I use almost the same set of slides for a presentation to financial professionals that I use for the public, because they have exactly the same questions. The typical adviser that I work with needs basic information about Social Security – spousal benefits, disability, survivor benefits – they just don't know.”

The knowledge gap is a glaring problem, since Social Security will be the only source of guaranteed income for many retirees. “If you're doing comprehensive planning for clients, you certainly need need to address Social Security,” says Susan John, immediate past chair of the National Association of Personal Financial Advisors. “But planners shouldn't give advice on something they don't understand,” she adds. “You should either get knowledgable about it, or defer to someone who understands it.”

GETTING SMARTER

Financial advisors told the PRC researchers that they regard the Social Security Administration (SSA) as a major source of information, and many point their clients to the SSA site for further information. But advisors also think the SSA could do a better job in providing financial advice, and only one-third of advisors were aware of the agency's website for financial professionals.

Some advisory firms have brought in educators like Landis to help get up to speed. Useful books on Social Security filing basics include Landis' “Social Security, The Inside Story,” and “ “A Social Security Owner’s Manual: Your Guide to Social Security Retirement, Dependent’s, and Survivor’s Benefits,” written by financial planner Jim Blankenship. The National Academy of Social Insurance – a non-partisan research consortium – publishes a free guide to claiming, as does the Center for Retirement Research at Boston College.

Several useful software tools have sprung up in recent years to help people maximize Social Security benefits. The options vary from basic free online tools to more robust fee-based services – and some are marketed specifically to financial professionals as well as the general public. You'll find a list of resources here.

HESITANT PLAN SPONSORS

About one-third of workplace plan sponsors are providing employees with broad education about retirement planning as they prepare to take distributions, according to a survey by the Plan Sponsor Council of America (PSCA).

The PRC researchers interviewed 18 executives at some of the largest plan sponsors (ranked by assets under management) to understand their attitudes about educating employees on  Social Security. Most reported that they have educational materials and online tools available to participants that include some degree of Social Security information and resources; some offer webinars and seminars on the program. But most thought their participants lacked a good understanding of Social Security benefits.

Plan sponsors have hesitated to wade deeper into Social Security due to concerns about legal liability, according to David L. Wray, PSCA's president. “Plan sponsors want to help, but if they are the source of a decision by a participant that doesn't work out, the potential for a lawsuit is significant. So the question is, how can we help but not be liable? The likely scenario is that sponsors will direct participants to the Social Security website and other third party sites until the Department of Labor addresses this specifically.”

Financial Engines, which provides that fiduciary advice service to about 450 corporate retirement plans, perceives growing interest among plan sponsors in helping their employees with all aspects of planning their retirement income, according to Jason Scott, managing director of the company's Retiree Research Center. That's due to decisions by many employers to freeze defined benefit plans and replace them with defined contribution plans.

“We've had several decades of shifting away from defined benefit pension plans, and we're just starting to get to the point where defined contribution plans are taking over as a more primary way of supporting retirees,” says Scott. “So the employers we work with are getting much more interested in understanding how the 401k plan and Social Security can work together.”

Another driver of the growing employer interest, Scott says, is the rising value of Social Security benefits in the wake of the financial crisis and the ensuing low-interest rate environment.

“With interest rates so low, the value of deferring your filing for benefits by even one year is dramatically better than what you can get from a fixed income investment,” he says. “So, from an employer perspective, something that was just on a white board now looks like something that they've got to do.”

Financial Engines has a team of advisors who can help its clients' employees understand the tradeoffs between taking Social Security early and deferring, and how to use withdrawals early in retirement from their 401(k) plans to facilitate deferring their Social Security.

Better education that encourages pre-retirees to consider the big picture is key – how much income the retiree can expect from all sources, and consideration of the long haul of retirement. “One thing that moves the needle a bit when you talk with plan participants is not just the start of retirement, but the end,” Scott says. “How will my filing affect survival benefits for my surviving spouse?

The company doesn't yet offer specific claiming recommendations, although it's under consideration. A key concern, Scott says, if finding a way to execute well on helping retirees with filing strategies that can be complex at times.

“The real problem with education and guidance is implementation—that's where it breaks down,” he says. “If you do a file-and-suspend with the spouse starting benefits later, you might have an odd pattern of of payouts from Social Security that ideally you want to smooth out using 401k withdrawals. That can be complicated for people to implement on their own.”

Mark Miller is a journalist and author who writes about trends in retirement and aging. Mark edits and publishes RetirementRevised.com, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living(John Wiley & Sons, 2010).