Many Plan Participants Seek Investment Advice

Growth of account balance/bear market influence decision to select investment advisor

Defined contribution plans are not the participant-directed investments that some professionals in the retirement plan market might think. While much of the informational and educational materials given to plan participants are written with the assumption that individual participants are making their own investment decisions, reality is far different from this perception. Today, more than one-half of plan participants seek the advice and assistance of a professional financial advisor when making investment decisions affecting their retirement plan money, compared with just one-fifth in 1996. 

Reasons for Increase in Investment Advice
This increase in advisor use in the past 10 years reflects two factors: the growth in the proportion of participants who have account balances of at least $100,000 (27 percent in 2006 compared with 9 percent in 1996) and the experience of the 2000-2002 bear market, when many participants saw their account balances decline. 

Retirement plan participants approach investment decision-making much like any other type of investor. In a Spectrem Group survey of 400 plan participants in November and December 2005, 41 percent described themselves as self-directed, handling all decisions on their own; 15 percent said they are advisor-dependent, delegating investment decisions to a financial advisor; and the remaining 44 percent indicated they make their own decisions but involve a financial advisor to some extent. In a separate survey, this one of individuals who have at least $100,000 but less than $1 million of investable assets, Spectrem found 35 percent of investors are self-directed, 9 percent are advisor-dependent, and 56 percent use an advisor to some extent. 

These preferred approaches track closely with the behavior of the plan participants surveyed. Given a choice of four categories, participants were asked to select the one that best describes their approach to retirement plan investment decision-making. Overall, 59 percent of participants use a financial advisor, and 41 percent make all investment decisions on their own. Among those who use an advisor, 6 percent involve the advisor only in decisions about investments held outside the plan. This leaves 53 percent of plan participants who seek the help of an advisor with plan investment decisions (See Exhibit A).

Plan participants have always relied on financial advisors for help in making plan investment decisions. However, the degree to which they use advisors has increased dramatically since the height of the bull market in 2000 (See Exhibit B). As the stock market collapsed (2000-2002), rallied sharply (2003), then essentially moved sideways on heightened volatility (2004-2006), participants’ use of financial advisors doubled to 53 percent.

How Participants Use Financial Advisors
The use of financial advisors varies somewhat among plan participants. For example, advisor use is greatest among participants who are 50 or older (66 percent) and decreases steadily with age. Even among those who are younger than 35, however, almost half say they use an advisor. 

This pattern is reversed when participants are asked whether their financial advisors are affiliated with the providers of their retirement plans. Overall, 44 percent of those who are younger than 35 say their advisors are affiliated with their plan providers, compared with just 31 percent of those who are 50 or older. 

A similar pattern emerged when Spectrem examined data based on participants’ household income. Plan participants who have an annual household income of at least $100,000 are the most likely to use financial advisors and the least likely to work with advisors who are affiliated with their plan providers. 

What This Advice Means for Participants and the Future
These findings suggest that plan providers that want to establish a lasting advisory relationship with plan participants should focus on those who are young and, presumably, have modest plan balances. While these relationships may not be profitable at first, the plan balances of the young will grow over time and likely be rolled over when job changes occur. 

Overall, plan participants who use financial advisors say they are most likely to select independent certified financial planners (36 percent), followed by mutual fund company representatives (20 percent) and stockbrokers (18 percent). All other types of advisors are used by less than 10 percent of participants. There is no significant variation among demographic segments in the types of advisors used. 

Most plan participants indicate they met their financial advisor through a referral from a friend or business associate. Participants were next most likely to have met their advisor at a presentation in the workplace, through social contacts or through a telephone call or visit to the company for which the advisor works. 

With two exceptions, plan participants’ attitudes toward financial advisors did not change noticeably between 2000 and 2005. 

In both 2000 and 2005, about 40 percent of plan participants said their advisors had helped them become more knowledgeable investors, and that same percentage said they had earned a higher rate of return on their investments by having used an advisor. 

On the other hand, the percentage of plan participants who said their advisors had made them more comfortable with higher-risk investments declined to 24 percent in 2005 from 37 percent in 2000. It appears the bear market has had a lasting effect on participants’ interest in investments they perceive as risky. 

In addition, the percentage of plan participants who expressed confidence that their advisors fully understood their objectives increased to 64 percent in 2005 from 54 percent in 2000. Again, it appears the experience of the bear market has made those participants who use advisors more conscious of the need to fully explain their objectives and circumstances to the advisors they select. 

Conclusion
Financial advisors have made a place for themselves in the retirement plan market. A majority of plan participants want the expertise and assistance that advisors provide. The only question is whether plan providers or outside advisors eventually will control the relationships with participants’ households. At stake in the long run is the management of retirement plan assets for all household members and the potential to manage other household savings and investments.