Depending upon on how a practice is structured, offered services and the needs of clients, advisors may or may not much involvement in clients’ 401(k) plans.
Even if the involvement isn’t direct, advisors should still engage clients in 401(k) conversations. After all, solid advice today can set the stage for better outcomes tomorrow. Plus, those plans with eventually need to be rolled into individual retirement accounts (IRAs), meaning elevated need for guidance and planning courtesy of advisors.
Put it all together and now is an optimal for advisors to consider avenues for boosting their 401(k) business in direct or indirect fashion. Data confirm as much because, not surprisingly, 401(k) balances ballooned from 2016 through 2020 and are now declining due in part to inflation and rising interest rates, among other factors.
The silver lining is that employer-sponsored retirement plans remain fertile territory for advisor/client engagement. Below are some starting points.
401(k) Optimism Abounds
Advisors shouldn’t be overly gloomy in their market assumptions, but they should help clients realize that great expectations don’t always equate to great returns. As noted by the Employment Benefit Research Institute (EBRI), this an issue for younger clients and those with smaller 401(k) balances.
“Three primary factors affect account balances: contributions, investment returns, and withdrawal and loan activity. The percentage change in average 401(k) plan account balance of participants in their twenties was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 57.4 percent per year between year-end 2016 and year-end 2020,” according to a recent EBRI study.
Another point to consider is that this is prime avenue for advisors to enhance relationships with younger clients because it appears some need help navigating the laws of small and large numbers.
“Younger 401(k) participants or those with smaller year-end 2016 balances experienced higher percent growth in account balances compared with older participants or those with larger year-end 2016 balances. Because younger participants’ account balances tended to be smaller, their contributions produced significant percentage growth in their account balances,” adds EBRI.
The Concentration Conversation
Another area where advisors can make in impact on the 401(k) front is allocations. As in many clients are likely too heavily tilted to domestic large-cap equity funds and lack adequate exposure to alternative asset classes, which can generate income and provide inflation protection.
Obviously, substantial equity exposure is fine for younger clients, but older 401(k) participants may need help fine-tuning asset class breakdowns in their employer-sponsored plans.
“On average at year-end 2020, more than two-thirds of consistent 401(k) participants’ assets were invested in equities—through equity funds, the equity portion of target date funds, the equity portion of non–target date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants,” concludes EBRI.
The point: Advisors don’t have to be 401(k) sponsors to help clients in this space. There other are other opportunities with built-in demand where they can make a difference for clients.