This should come as a surprise to no one: Investing can be confounding. Stocks, bonds, returns, allocations . . . it can be a lot for plan participants to deal with.
In fact, 73%1 of participants say they’d like some kind of personalized guidance to help them manage their money—or have someone manage it for them.
A new Vanguard commentary, Participant Advice and the Prudent Fiduciary: A Road Map to Compliance, makes the case for why advice matters to participants and what plan sponsors should watch for when selecting and monitoring advice providers.
A need for advice
More than half of employees indicate that finances are a leading cause of stress,2 and 69% simply aren’t saving enough for retirement.3 Financial decisions are hard. People want help.
Vanguard believes that offering personalized investment advice helps give participants the best chance for investment success. It also helps lead to better financial decisions, can increase financial security, helps reduce the likelihood of errors within participant accounts, and can improve overall financial wellness.
So, for participants feeling bogged down by financial burdens, advice can be a game changer. And while it can enhance financial success, advice can also help reduce fiduciary risks for plan sponsors. It’s a win-win—if the advice program operates with the best interests of participants in mind.
Fiduciary considerations
The Department of Labor encourages fiduciaries to offer advice programs to participants to help improve outcomes. There are various programs available, and it’s up to the plan sponsor to understand the types of services offered and determine how they meet the needs of their participants, as well as the legal and regulatory requirements.
And when selecting an advisor, sponsors should objectively ensure that the advisor is a good fit for the plan and does not introduce conflicts of interest. To assist with this, Vanguard developed the READ model: research, evaluate, ask, and determine. This model also helps with the ongoing monitoring of the sponsor’s chosen advisor.
Here’s how it works:
Research: Gather comprehensive information about potential advice providers, including their methodology, philosophy, regulatory compliance, and fees.
Evaluate: Assess whether the provider meets the sponsor’s standards, focusing on their investment principles, philosophical alignment, and fee reasonableness.
Ask: Seek additional information or clarification from experts to address any uncertainties.
Determine: Make informed decisions based on thorough evaluation and continue to monitor the provider’s compliance and fee reasonableness.
A word about fees
Advice or target-date funds? There’s room for both
Target-date funds (TDFs), a staple of many retirement plans, can be seen by some as an alternative to personalized investment advice. TDFs select funds and change allocations much as an advice program would. But a TDF generally caters to a broader range of investors, lacking the customization and engagement that an advice program can offer. Of the two, a personalized advice program offers a more holistic solution, offering a final equity landing point that can differ from a TDF by many percentage points.
Still, for participants who may lack investment knowledge or may not be able to engage in a more personalized, customizable solution, a TDF may be suitable. And including both options in a retirement plan is certainly something sponsors should consider.
Fiduciary work is never done
The door’s open for advice
The Pension Protection Act of 2006 laid the initial groundwork for offering advice, and Congress and the DOL have supported the including of advice programs in retirement plans. By understanding and complying with the regulatory standards, sponsors can comfortably introduce advice into their plans and help their participants get closer to their financial goals.
For more about the history and regulatory landscape of advice, don’t miss Vanguard’s commentary, Participant Advice and the Prudent Fiduciary: A Road Map to Compliance.
Notes:
1 2023 401(k) Participant Study. Charles Schwab, August 1, 2023.
2 PwC’s 2023 Employee Financial Wellness Survey: Guiding Your Employees Through Uncertain Economical Times. PwC, May 9, 2023.
3 7 in 10 U.S. Employees Not Saving Enough for Retirement, WTW Survey Finds. WTW, July 19, 2022.
All investing is subject to risk, including the possible loss of the money you invest.
Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.