You may be surprised at how retirees are looking at investing their 401(k) rollovers and working with their advisors. I certainly was. There has been a great deal of survey research on what retirees are doing, or saying they will do. There has been little exploration, however, of why they are doing it.
My marketing consulting firm recently conducted four focus groups with 50 investors studying retirees who were planning to take a 401(k) rollover or already had. We were looking for the social and psychological factors that determine how they make the decision to hire an investment advisor for their 401(k) rollovers. Two of our groups were in New York City and two were in Chicago. Half of the people we talked to had retired within the last year. The other half planned to retire within the coming year.
Our study focused on the mass affluent. Our investors had at least $300,000 in assets, with most having less than $1 million. A few wealthier folks had from $1 million to more than $3 million. We concentrated just on retirement rollovers and not those taking rollovers because they had changed jobs: There is good evidence that retirement rollovers are very different and present much more opportunity for the advisor. We also discovered, however, that retirees–especially the mass-affluent ones–harbor numerous fears about their golden years and feel they lack the tools to produce a comfortable lifestyle. They are also amazingly ignorant about how to choose an advisor from the array of planners, brokers, and other professionals.
Our first finding is that retirees are eager to talk about retirement investing and their finances. This was the opposite reaction our focus group recruitment firm expected. They felt that this would be too personal a topic and didn’t think they would find enough volunteers. We had more than enough, as it turned out. Our study groups comprised predominantly middle-class and upper-middle-class folks, with a good mix of women and men. They came from the cities and suburbs, and formed a good cross-section of the new generation of retirees and pre-retirees.
We use the term “scared pioneers” to describe our respondents. They are beset by two kinds of pressures.
They are, with good reason, concerned that they do not have enough money saved to support their retirement. In fact, $1 million or less may not be adequate even for a modest lifestyle that could stretch for decades or longer. This is especially true for women. The second set of pressures comes from this being the very first generation of retirees in modern times to face the tough problem of generating their own retirement income from their savings. This is the first group to retire with primarily defined contribution retirement plans and assets. They sit at the bleeding edge of momentous changes.
Here again, their concerns are legitimate. The new defined-contribution-based retirement landscape has none of the formal and informal institutions, norms, and practices common to other retirement schemes. As a society and culture we have not yet built the processes and practices needed to support these people. As an industry, we are just at the beginning of experimenting with new products and services. Right now, there are no prior examples of what to do. There are no models. Everything has to be invented from scratch. Indeed, for this new generation of retirees, almost everything is new and in flux. Even the tax laws, Social Security system, and other traditional government programs for retirement security are under attack right now. They may all be reconfigured wholesale. So, overall, our respondents have good reason to be afraid.
Coping by Control
Our respondents said they are coping with what they see as their precarious situation by seeking maximum control of their investment activities. That desire for control is being expressed in a drive to diversify. Not putting all their eggs in one basket is the theme of this group’s interactions with investment advisors. There are two ways they are diversifying: They are working–or want to work–with multiple investment advisors; and they are dividing their investments among separate pools of assets.
In his December 2004 Investment Advisor article “Getting There,” Scott MacKillop, who is president of USF Services in Sugar Land, Texas, cited behavioral finance research that shows investors have different “mental accounts.” Our research finds that retiree investors have this same mindset. Indeed, our respondents talked about placing different pools of assets with different advisors.
One pool of assets that is especially important to the respondents was the contents of their 401(k)s. To our groups, the 401(k) assets are sacred. They are at the core of their retirement income and investment funds. Emotionally and symbolically, the investors’ 401(k) assets are seen as the last bastion of defense against a catastrophic event that would severely hurt their finances.
The main catastrophic events they are concerned about are health-related. Uniformly, our focus group members were deathly afraid of becoming disabled or infirm. But this deep fear came up in a backward way. When we asked the groups at the end of each session to project ahead and tell us about their hopes, dreams, ambitions, and wish lists for their future, they quickly shot back with fears about getting sick. So whatever hopeful ideas may exist about retirement are being buried under fears about being incapacitated. Pushing our respondents to a deeper level, what is underlying the fears about health issues in later life is a deathly fear of becoming dependent on relatives they don’t like or trust, or whom they don’t want to bother. They also fear burdening their children or becoming dependent and having no one on whom to depend. Having good long-term care insurance, not those idyllic images of golfing, sailing, or happy couples, is the real hope of our retirees.
Contradictions and Skepticism
As advisors, the emotional landscape into which you must tread in working with our new generation of retirees is a nerve-wracking place. A further complication is the retirees’ lack of knowledge of investments and professional services, and their underlying suspicion of investment advisors–especially stockbrokers. The women generally felt that the male brokers are patronizing and do not give them credit for their expertise and knowledge. Men frequently complained about stockbrokers as well.
These groups were vocal in pointing out the inherent conflicts of interest in the financial advisors they are using or evaluating. They are on the lookout for self-dealing. Surprisingly, they were not concerned about the recent brokerage and mutual fund scandals and investigations. Rather, they expected such behavior all along; the discovery of shady dealings is not news and is hardly unexpected.
Overall, our retirees are woefully ignorant of the basics in finding, evaluating, and working with an investment advisor. Few understood the differences between a broker, an insurance agent, a financial planner, an investment advisor, and an independent advisor. They didn’t speak at all about credentials of advisors they used or evaluated. But they did hold two strong points of view. They want an independent, fee-based, comprehensive portfolio recommendation, but they do not want to aggregate all their assets with one advisor, though our research found that wealthier respondents did not share this desire at all (see “The Wealthy Are Different” sidebar).
A common complaint was that their advisors are too aggressive in trying to get at and manage all their assets. Our respondents are wary of the advisor who aggressively and persistently pushes for all the client’s assets. They say they will not put all their assets at risk with one advisor or one investment portfolio.
Friends and Family
We were surprised to find that independent investment advisors were not prominent in our group’s sights. Wirehouse brokers dominated the professionals that our groups used. However, this is a very uneasy relationship. Clearly, independent advisors need to do a much better job of differentiating themselves because right now, the prestige of a well-known big brand name is important in giving a firm credibility. The feeling was expressed that a “big, national firm” wouldn’t be as rife with conflicts. This feeling was especially prominent among men. Women, in contrast, focused much more on their relationship with an individual advisor.
We were also surprised to find how little outside support exists for these investors. We expected them to be snugly embedded in a network of assistance. Instead we found them primarily on their own, often alone. Typically, one person in a couple handled all the investments. There was no mention of help, assistance, or tools supplied by the former employer or the former 401(k) provider firm. So is it any wonder that contrary to expectations, neither Fidelity nor Vanguard is sweeping up many rollovers out of defined contribution plans they had provided to our respondents? Nor are other mutual fund companies.
We also expected investors’ attorneys and accountants to play a role in choosing an advisor. But that wasn’t the case in our groups. These professionals were not mentioned once. Furthermore, no professional criteria were used in selecting advisors, nor did our groups seem to have an idea there could be any. Using these groups as an indicator, the advisor industry is in for a long haul educating retirees.
The investors’ main source of referrals and investment advice is friends and family. So the decision-making in selecting an investment advisor to shepherd your life savings for the rest of your days comes down to getting homespun advice similar to that given, say, to find a good dry cleaner or a dentist.
Neither did we find much evidence of preplanning for retirement. It should be noted that this finding is in direct contrast to some of the survey research where people reported planning years ahead of retirement. Our pre-retiree groups appeared to think about it as little as possible.
Do Seminars Work?
For our respondents, seminars work–and don’t. These investors like to go to seminars and reported learning a great deal at them, even if we couldn’t find hard evidence of that. They liked most of the advisors sponsoring the seminars. But when asked what they had done since the seminar, the answer was, “nothing.” Uniformly, our investors went to seminars but ended up taking no action. So if you hold a seminar, try to get attendees to take some action before they leave.
We found retirement to be a period of major challenges for our groups. They are facing their issues largely alone, scared, and with little support. In fact, we should, as an industry, admit that many of the so-called “retirement” products and services are merely repackaged standard retail offerings.
These people cannot find the kinds of retirement income advice or services they want. So there is a great opportunity, not just for product development, but for whole new brands and franchises. However, the educational, knowledge, and communication gaps are very large. In fact, these retirees may not have enough time to be educated in what they need to know.
Elmer Rich III is president of Rich & Company, a consulting firm in Chicago that works with advisors and national firms to build marketing campaigns for the retirement and IRA rollover markets. Rich has a master’s degree from the University of Chicago in social psychology, and can be reached at email@example.com.