Savers snub taxable brokerage accounts, lack of advice is culprit: Report

Savers invest too little of their assets in taxable brokerage accounts and other “middle liquidity” account types, and the financial services industry is much to blame, according to a report Wednesday on consumer behavior.

The majority of U.S. households, even those that save and invest diligently, place the bulk of their investible assets in tax-deferred retirement accounts and bank accounts, which are vastly different in terms of their liquidity, the report published by Hearts & Wallets notes.
“People are sending the vast majority of their savings to one of two extremes … They’re on two ends of the spectrum,” said Laura Varas, CEO of the research and benchmarking firm. “There isn’t a lot of great advice out there about how to optimize your saving.”
Retirement plan participants who consult the advice service provided by their plan might be told to save a bigger chunk of their income in the 401(k) or perhaps start an emergency savings account. But the advice available to most consumers is lacking when it comes to taxable brokerage, health savings accounts and 529 plans, Varas noted.
“It’s crazy how few people, especially young people, realize that taxable brokerage is a great way to save money,” she said. “We found and believe that even if you only have $1,000 or $2,000 to save, it’s almost more important to optimize what types of accounts it goes into.”
That is particularly important now, as the pandemic has prompted more people to start saving or save more than they were previously, she said.

The most common change people made last year related to their household finances was to save more in bank accounts or taxable brokerage accounts, with 29% of people reporting that change. Another 20% said they increased contributions to retirement savings accounts, and 19% said they started their first emergency savings funds, according to Hearts & Wallets.
The report is based on data collected from about 6,000 U.S. households.

On average, people directed 41% of their savings last year to bank accounts or certificates of deposit and 29% to employer-sponsored retirement plans, according to Hearts & Wallets. Meanwhile, 10% of savings went to IRAs, 9% to taxable brokerage accounts, 4% to HSAs and 3% to 529 college savings accounts. The remining 4% went to other, unspecified account types, according to the report.
That allocation varied considerably by income level. Households with $48,000 or less in annual income directed an average of 59% of their savings to bank accounts or CDs, just 10% to workplace retirement plans and 21% to other vehicles such as brokerage accounts.
Those earning between $48,000 and $96,000 were much more likely to save in employer-sponsored plans, directing on average 30% of savings to such accounts and saving 44% in bank accounts, according to Hearts & Wallets. Those with income above $160,000 per year saved 25% in bank accounts, 38% in employer plans, 16% in taxable brokerage accounts, 4% in HSAs, 11% in IRAs and 4% in 529s.
Of course, people with higher incomes are able to save a higher portion of their income in general — 59% of those whose income exceeds $160,000 save 10% or more, while that was the case for just 23% of people with household income between $48,000 and $96,000, according to the report.

Further, there was a correlation between working with a paid investment professional and investing in those “middle liquidity” accounts, the report found. People who paid for financial advice invested an average of 17% of savings in taxable brokerage accounts, compared with 12% among those who used no financial advice.
“Advisers have a really exciting role” in shaping investment behavior, Varas said.
“We hope that more savings will go across the spectrum, because it’s something that is actually associated with successful outcomes,” she said. “You don’t want to have all your money in one type of account.”
[Video: Shundrawn Thomas on how silence prevents needed inclusion conversations]

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The future of 401(k) plans, as industry leaders see it

The 401(k) industry is complicated. Multiple vendors must cooperate, with each one adding its own levels of complexity and competition. There are multiple clients, each with different needs and interests. Technology is clunky. Much of the data are either unavailable or inaccessible.

Regardless, the entire participant-directed payroll-deducted industry is hot and evolving rapidly, with outside investment, government oversight and media attention reaching all-time highs. Maybe $10 trillion in assets and 90 million participants are hard to ignore. It’s as big as $20 trillion if IRAs are included.
Due to COVID-19 restrictions, the InvestmentNews RPA Roundtable and Think Tank events were held virtually, over six weeks. Those events included:1. Chief investment officers (Oct. 29-30)2. Broker-dealers (Nov. 30-Dec. 1)3. Aggregators (Dec. 8-9)4. Record keepers (Dec. 14-15)
Because senior executives in charge of strategy attended, the programs provided valuable insight into the future of the 401(k) industry. Recaps of each of the four events were published, and some themes reverberated throughout.
As fragmented industries mature, consolidation is inevitable, and most groups see that as both an opportunity and challenge. Those firms with capital, focused acquisition strategies and culture felt well positioned to take advantage of increased scale. Others not able to compete, mostly because prices are so high, were concerned.
All groups recognized the opportunity and challenge to help participants saving for retirement at work. The ability to provide integrated wealth management, retirement income and benefits to plan sponsors and their participants is what’s driving capital to the industry. But the challenges are daunting, ranging from data access, technology and how to serve the constrained investor who cannot afford traditional financial planning.

With more state and federal initiatives to make retirement saving at work accessible, the question is whether current providers can meet the challenge to serve all participants, not just the wealthy ones. Because if they cannot, the concern is that a tech giant like Amazon might give away plan-level services to their business partners to access their workers.
As each group fights for more revenue from existing clients, competition is inevitable, especially with outside investors fueling industry consolidation. Though record keepers depend on advisers to bring them clients and drive engagement, who owns the relationships with participants in those plans?

All sectors had to scramble to serve clients and manage staffs remotely when the crisis hit. Those with scale did better. All groups agreed that many practices that had to be deployed during the pandemic are working well, with the hope they can continue. But few firms expect to have all employees working 100% remotely, and those with significant relationships, books of business and resources will benefit more than those still trying to establish themselves.
New state and federal laws and regulations were expected and mostly welcomed, as retirement seems to be one of the few bipartisan issues. However, broker-dealers struggle just to keep up with all the new notices and requirements. Pooled employer plans represent a major opportunity for all sectors, especially for record keeper and aggregators. Retirement plan litigation is expected to continue, and record keepers appeared to be the most concerned.
Advisers face two important lines of questions about their future in the DC business:1. Do I want to participate? If not, do I sell, partner or do nothing?2. If I do want to engage, with whom should I partner? Which record keeper, broker-dealer, aggregator or money manager will thrive?
The focus on retirement is growing worldwide. Employers and employees are expecting more financial solutions at work. The U.S. DC industry is at a crossroads, driven by the pandemic, new laws and convergence, all of which will result in massive consolidation. Advisers have tough decisions to make, but doing nothing is no longer an option. Choose wisely.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.

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What elite RPAs think about PEPs

Pooled employer plans under the SECURE Act could completely change the defined-contribution industry, or they could have very little impact. They present an incredible opportunity to pool plans to mitigate work and fiduciary liability as well as to lower costs — but the question is whether the market will adopt them

Though record keepers and third-party administrators are most aggressive and will most likely act as the pooled plan providers, retirement plan advisers will still likely drive sales.
What are DC aggregators and elite RPAs planning?
At the 2020 InvestmentNews RPA Convergence Aggregator Roundtable and Think Tank, there were mixed opinions. As John Jurik, Gallagher’s national practice leader for retirement plan consulting, said, “PEPs are opportunities, challenges and threats, all in one.”
According to forthcoming research by the Defined Contribution Institutional Investment Association’s Retirement Research Council, 55% of elite RPAs were undecided about whether they would offer PEPs to clients and prospects, while 26% indicated that they would. Most said they would use a third party, mostly likely a record keeper, to be the pooled plan provider. Eighty-four percent said they thought PEPs would make sense for plans with less than $5 million in assets, but a significant percentage said that even plans with up to $100 million would be good candidates. (Respondents in the survey could select more than one market.)
By using PEPs, DC plans of such size could limit litigation risk, offload administrative work and be innovative, DCIIA president and CEO Lew Minsky said. Institutional investment consultants like Aon and Mercer have been among the first to offer PEPs as a way to serve smaller plans, which in their world might be those with $100 million or more in assets.

Most attendees at the 2020 Aggregator Think Tank said PEPs would be focused on smaller plans. Fidelity’s offering will target plans with 30 or fewer participants, but others thought PEPs would attract larger plans.
PEPs will also replace multiple employer plans, said John Cunningham, executive vice president at Alliant Insurance Services. PEPs are more of a marketing tool than a way to improve coverage, as smaller employers can already use Simple 401(k) or similar plans, he said. However, about 90% of PEPs will fail, Cunningham said.

Jeff Cullen, managing partner at Strategic Retirement Partners, said, “Most record keepers don’t understand PEPs and are trying to retrofit their current models. Most likely to succeed are those that are innovative.”
PEPs will allow advisers to manage more plan assets, which is especially needed as experienced RPAs are aging.
[Video: Shundrawn Thomas on how silence prevents needed inclusion conversations]
At the 2020 Record Keeper Roundtable and Think Tank, Darren Zino, vice president and head of retirement sales at Transamerica, noted that the company’s pooled programs were one segment that beat expectations in 2020. But he warned that clients, especially larger plans, want to have their cake and eat it too. They want to lock down features that minimize work and fiduciary liability, but they still want customization.

Like broker-dealers, most aggregators and RPAs are waiting to see how the PEP market develops. But many have FOMO, or fear of missing out, and are closely watching the space. If there is ever a federal mandate requiring companies of a certain size to offer payroll-deducted, participant-directed retirement plans, PEPs could explode.
But that could be a double-edged sword. DCIIA’s Minsky warned that companies like Amazon and Square that have strong relationships with smaller employers could leverage low-cost PEPs as a way to access participants. Who could better offer a rich digital experience with the ability to know what the participants are most likely to buy?
Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.

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vestwell pep

Vestwell files as PEPs provider

Fintech and digital record keeper Vestwell is among about three dozen firms that have registered as pooled plan providers with the DOL, but the firm does not yet have information on pricing and plan design for a potential PEP product.

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