What Retirement Investors Need Right Now: Cerulli

During the COVID-19 pandemic, it is proving to be useful for advisors to balance communications, technology and behavioral finance when it comes to dealing with clients about their retirement plans, according to its latest report, Cerulli Edge — U.S. Retirement Edition, released Wednesday.

“Now may be an opportune time for retirement plan providers to revisit lessons from behavioral finance, which can offer insights into the thinking and decision-making of individual investors and help inform participant communications,” according to Cerulli.

And “incorporating the expertise of a financial professional — whether through a prepackaged or customized solution — can be a key first step for participants to combat the impact of potentially harmful human biases and improve financial outcomes for defined contribution (DC) plan participants,” according to the firm.

During periods of market volatility and economic uncertainty, DC recordkeepers relate that most participants on their platforms are “staying the course,” Cerulli said. Although that may be the case, findings from participant transaction data revealed increases in trading activity during the first quarter of 2020, with many of the redemptions resulting in reduction of equity exposure at seemingly inopportune times, it said.

In July 2019, Cerulli was retained by Charles Schwab, in partnership with the Investments and Wealth Institute, to study how advisors used and viewed behavioral finance when working with clients, Cerulli noted. Via a survey of more than 300 financial advisors, Cerulli found the most pronounced emotional biases affecting the decision-making of advisors’ clients were loss aversion (26%) and inertia/status quo (23%), it said.

“Status quo bias, or inertia, is particularly acute in the DC space, in which many participants may be disengaged from their retirement accounts for long periods of time,” according to Cerulli senior analyst Shawn O’Brien. “As a result, participants may remain in portfolios with risk profiles that are not suitable to their current circumstances.”

While the expansion of auto-enrollment features, target date funds and plan reenrollments have likely mitigated some of the effects of inertia, a significant portion of 401(k) participants remained self-directed investors, according to Cerulli.

Self-directed investors could be more prone to certain behavioral biases, including inertia, than participants in professionally managed solutions, the company pointed out. Merely choosing to self-direct 401(k) investments could, in some cases, be a symptom of overconfidence bias, it said.

Cerulli found that more than 50% of active 401(k) participants preferred to conduct their own investment research, either making the final investment decisions on their own (28%) or with assurance from a financial professional (24%), it said. In comparison, 24% preferred to have someone else selecting their investments, while only 11% desired a single investment they didn’t have to think about, such as a target date fund, it said.

The report was divided into two sections: Retirement Providers’ Response to a Health and Economic Crisis and Participant Behavior During the COVID-19 Pandemic.

Cerulli recommended that DC providers demonstrate to participants the benefits of investing in professionally managed solutions.

Plan participants, meanwhile, were generally comfortable divulging their gender, ethnicity, family structure and expected retirement age, but were more guarded about their non-401(k) assets, chronic health conditions and student loan debt, Cerulli noted.

Many participants, especially men, said they preferred to conduct their own investment research and make their own investment decisions, according to Cerulli. Another one of its findings: The most common factor active (56%) and retired (49%) participants consider when choosing investments in their 401(k) plan is long-term performance.

Although retirement providers (including advisors/consultants, asset managers and recordkeepers) were “unable to meet with clients face-to-face in the wake of the COVID-19 pandemic, these firms are communicating more than ever via their call centers, webinars, and virtual planning meetings,” Cerulli said in the report.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has helped by allowing “more flexible treatment of withdrawals and required minimum distributions from defined contribution retirement plans and individual retirement accounts,” Cerulli said, noting: “Recordkeepers have been quick to implement these provisions, and advisors/consultants are helping to navigate plan sponsors and participants through key decision points resulting from this legislation.”

Industrywide, retirement plan providers have “experienced relatively little disruption to daily operations,” Cerulli also said. “With the exception of temporary website outages and occasionally clogged conferencing platforms, research participants relate that existing technology has successfully facilitated a massive shift to remote work.”

— Check out Mutual Fund Assets Bounced Back in April, but Outflows Continued: Cerulli on ThinkAdvisor.