How 401(k) Providers Are Filling the Gaps in Financial Advice

Put that in the record books. 

Not everyone has an advisor, but most Americans have some type of retirement account, meaning the majority of folks are planning for retirement without the help of an advisor. That gap creates an opportunity for recordkeepers to step in and play a larger role as  planners, according to a new Cerulli report. It’s a strategy that may create more competition for traditional financial advisors.

“There is a lack of financial education in America, and it is critical for employers to let their employees know recordkeepers have financial advisors who are ready to meet with them,” said Evan Potash, executive advisor at TIAA.

Need a Little Help

The problem is that 401(k) participants often find retirement planning confusing and challenging, and less than a third are confident in their ability to make future financial decisions, per the Cerulli report. In fact, some 63% of 401(k) investors — many of whom fall into the mass-affluent category — do not work with an advisor. The research also found:

• More than half of mass-affluent 401(k) participants end up relying on their recordkeeper as their primary source of financial advice. 
• In many instances, these are point-in-time services, meaning the participant gets advice for a specific situation, rather than ongoing financial planning. 

“Recordkeepers can share the burden by taking on younger and less wealthy participants who may have less complicated planning needs,” said Elizabeth Chiffer, Cerulli analyst. Meanwhile, advisors can focus on providing a wider array of services to wealthier clients, she added.

Roll Over. Now Stay. However, recordkeepers that build solid relationships with 401(k) participants during the wealth accumulation phase are better positioned to secure IRA rollovers when participants leave their jobs and move money out of their retirement accounts, Chiffer told Advisor Upside. More than 60% of active 401(k) participants who move money out of their account do so within a year of leaving their job, the report found.

Many 401(k) participants are simply unaware of recordkeepers’ advice options, she  said, adding that they often require participants to seek them out or enter into a managed account. “We are encouraging recordkeepers to lower any barriers to accessing in-plan advice.”

Close to Home. While that might sound like competition for traditional financial advisors, some advisors don’t view recordkeepers as the biggest threat.  “Most 401(k) plan sponsors want an advisor that is local to their community,” said Paul Penke, a CFP with Ironvine Capital Partners. “The hands-on presence that a local advisor provides is difficult to replicate.”