Retirement Plan Participants Want Advisors and Income
At a recent TPSU program in Seattle, a plan sponsor shared how she is able to get younger workers interested in their retirement plan. The issue is that retirement seems so far away and unreal while they struggle to save for their future selves, sacrificing today. This plan sponsor asked her younger workforce, “Who wants to be a millionaire?”
The defined contribution industry is evolving partly because the economics require advisors and providers to move from plan to participant fees, but it must start with client demand, not just plan sponsors. What participants want is also changing, according to the recently released “U.S. Retirement End-Investor 2026: Evolving Advice Offerings to Help Pre-Retirees Achieve their Vision for Retirement” by Cerulli.
The subtle but dramatic shift from defined benefit to defined contribution plans has put most participants in a difficult and uncomfortable position, especially the vast majority without a personal advisor. For many, the only advisor they will ever meet is at work. Cerulli reports a low level of confidence among participants in their ability to determine how much to save and where to invest, with the vast majority not using the tools available from their record keepers or knowing how to implement them, none of which is a real surprise.
Most participants want and need an advisor, and those with a written plan (only 30%) are more confident and successful.
According to the report, pre-retirees also want retirement income in their plan, along with flexibility and a guarantee, which the DC industry has struggled to provide. The greatest fear is outliving their savings, which means many do not spend enough in retirement to maintain their current lifestyle, address health issues or determine whether they will need to continue working. Chris Baily, director, retirement at Cerulli, notes, “It’s all about knowing how much they need to retire.”
So as DC plans evolve from savings to retirement plans, trying to replace DB plans without the organization being on the hook for shortfalls, so must the DC industry. The stakes are huge. Cerulli is estimating that almost $1 trillion will roll out of DC plans into an IRA in 2026, jumping to $1.34 trillion in 2031. IRAs are expected to be double what will be held in DC plans by 2031.
This evolution can create conflict between the advisor that sells and services the plan and the record keeper who does the heavy lifting and maintains the data. The question of who owns the participant is absurd and antiquated. No one “owns” anyone. The question is who is in the best position to help participants, which will vary greatly depending on their needs, means and situation and who has the resources.
Cerulli wisely recommends that advisors and record keepers should collaborate, not compete, while reducing institutional friction. According to the Cerulli report, participants value human advice because it is personalized, questions are answered immediately, and they feel more confident, certainly more than with artificial intelligence, according to a FINRA study. Advisors are willing to act as fiduciaries, putting their clients’ interests first, with compensation structured so it does not favor one product or service over another.
Record keepers have significant technology, massive call centers, access to data and the means to protect it from cyber-attacks, as well as to manage and deliver it in a timely and useful fashion. Though a few have the capabilities to offer participant services with some eager and able to go it alone, most providers do not, and to survive, they must partner with advisors, each leveraging their own core competencies.
The Cerulli end-user study is a trove of valuable information about participants, drawn from 1,704 surveys conducted in the first quarter of this year. Before advisors, plan sponsors, record keepers and asset managers create and evolve their products and services, perhaps they should try to understand what participants, who are now managing their own personal DB plan, may want.