The Pension Protection Act (PPA) passed in September 2006 validates the growing conviction that advice is the critical success factor in helping workers achieve a financially secure retirement. As a result, advisors whose business is retirement should find themselves competing for — and winning –more and bigger slices of the defined contribution (DC) or 401(k) plan pie.
The quality of advice available to plan participants may prove to be the key factor in employers' future decisions on DC plan providers, now that the PPA makes it easier for employers to add an advice component to their plans with less fear of liability. Even before the new law passed, however, DC plan sponsors were already taking a close look at their programs and providers in search of a solution to the increasingly worrisome savings gap.
Nearly a quarter of American workers eligible to participate in a DC plan do not, according to research from the Profit Sharing Council of America. Those who do participate typically save too little and fail to invest strategically. In fact, the Employee Benefit Research Institute's annual survey for 2006 reveals that two-thirds of current workers say they have less than $50,000 in accumulated retirement savings.
These dismal statistics worry employers. A 2005 survey by CFO magazine of finance executives at companies offering DC plans showed that 56 percent are concerned that employees may not be able to retire comfortably and 49 percent are worried that employees do not invest wisely.
Will an advice component allay these concerns and help close the gap? No one knows for sure, but it should be worth a shot. Research conducted by Putnam has regularly shown a link between investment advice and retirement security. Our 2005 survey of retirees who had returned to the workforce, those who had used an advisor were 15 percent more likely to be satisfied with retirement and had 50 percent more investable assets than working retirees without an advisor.
The consideration of an advice component is likely to reshape roles and relationships in the DC services landscape, accelerating a trend that is already underway. Brightwork Partners, the research-based consultancy focusing on retirement issues, estimates that 61,000 401(k) plans, representing $206 billion in assets, have changed providers. When it became clear that DC plans were not serving employees as well as they might, employers' first instinct was typically to review their plans with an eye toward changing some aspect, and often that aspect was the provider.
Given their fiduciary responsibilities, employers are not inclined to decide unilaterally when it comes to their DC plan. Most depend on intermediaries to help them find the right provider and implement a plan that works for them and their workers. In fact, the Retirement Services Roundtable forecast that in 2006, based on data from the first part of the year, 97 percent of DC plan sales would depend on an intermediary.
