More Experienced/Affluent Share Investing Advice

May 12, 2014 (PLANSPONSOR.com) – Affluent investors surveyed by Legg Mason identified the decisions they made that have had a positive impact on their investment success.

The top five decisions were:

  • Changed their spending habits so they could save/invest more;
  • Developed a financial plan;
  • Began working with or increased the role of my financial adviser;
  • Invested in products other than just stocks and bonds; and
  • Took a more global approach to investing.

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A significant majority (70%) of the investors surveyed believe the investment environment that future generations face will be more difficult than the environment investors face now. Those between the ages of 55 to 64 are most likely to make this prediction—82% believe it will be more difficult for future generations. Only 6% expect the future environment to be “easier” while less than one-quarter (24%) believe it will be about the same.

Asked what counsel they might offer the next generation facing this challenging future, respondents said:

  • Start investing early in life;
  • Make sure you understand what you invest in;
  • Avoid short-term decisions based on emotions;
  • Make a plan and stand by it over time; and
  • Employ a professional adviser.

Only 30% suggested the next generation should be cautious about taking risk.

Even though Legg Mason’s Global Income Survey finds the majority of affluent investors are confident they will have enough money to live the lifestyle they in retirement (88%) and are confident in their ability to retire at the age they want to (86%), these same investors are also aware of how certain factors could potentially derail their retirement plans. Issues they fear include having an event that consumes their retirement funds, outliving their retirement funds, the government not following up on obligations (e.g., Social Security), not saving enough, and a low interest rate environment.

According to Matthew Schiffman managing director and head of global marketing at Legg Mason Global Asset Management, recent events such as the financial crisis have made current investors more aware of how retirement savings can be unpredictably and negatively impacted, adding, “We encourage financial advisers and investors to take a realistic approach when planning for retirement, which we call ‘realtirement.’ It includes trying to anticipate the unpredictable. For instance, have you planned for your long-term living situation? What if you suddenly need assisted living or even greater care? Are you prepared for that event? We all need to be.”

Among the U.S. investors surveyed, the primary goal of investing is to “provide for my own retirement.” Other goals included:

  • Maintain my current lifestyle later in life;
  • Protect my wealth;
  • Grow my wealth; and
  • Generate income for living expenses.

Asked about their progress toward these goals, 41% of those ages 40 to 54 said they were not making progress toward “providing for my own retirement;” 46% of those ages 55 to 64 said they are not making progress toward “maintaining my current lifestyle later in life;” more than 4 in 10 (42%) said they are not doing very well in the progress they are making to “protect my wealth;” and 53% of those ages 55 to 64 said they were not doing very well toward the goal “grow my wealth.”

The Legg Mason survey was conducted among 4,320 affluent investors (minimum $200,000 in asset as measured in U.S. dollars) from 20 countries, including the United States. The U.S. survey findings are from among 500 affluent investors. Respondents were surveyed online by Northstar Research Partners, on behalf of Legg Mason, from December 2013 to January 2014.

Retirement Advisor Council Sees Flaw in 408(b)(2) Review

May 12, 2014 (PLANSPONSOR.com) – In an open letter to the Department of Labor, the Retirement Advisor Council contends the regulator’s proposed methodology for assessing the impact of 408(b)(2) fee regulations is flawed.

The Retirement Advisor Council (RAC) issued its commentary following the federal agency’s announcement that it may soon amend 408(b)(2) fee disclosure regulations approved in 2012. That announcement included a request for comment on a proposed rule change to Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) that would require covered service providers issuing overly complex fee documentation to develop a “guide” or “road map” that could help less experienced clients find relevant fee data (see “DOL Proposes Service Provider Fee Guides”).

In addition to seeking public comment on these fees guides, the DOL said it would soon conduct a series of focus groups among small plan sponsors—those serving fewer than 100 participants—to determine if these fee guides are necessary. The DOL said it is also interested in assessing the impact of existing fee disclosure regulations more generally to identify any unanticipated difficulties.

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While the RAC says it supports the DOL’s intelligence-gathering effort, it warns that only sampling small plan sponsors for focus group research will lead to flawed results that may under-represent the concerns of large plan sponsors—who are, the RAC says, far more influential than small plan sponsors when it comes to retirement readiness in the United States. That’s because, while plans with fewer than 100 participants represent a substantial percentage of the total number of retirement plans, participants of plans in this segment make up only a fraction of the total number of participants in all U.S. plans. In other words, while there are fewer large plans, their expansive size means they represent far more participants than the small plan segment.

To address this, the RAC recommends DOL investigators take the opposite approach and focus review efforts on the so-called mega plan segment, stratifying the focus group sample to over-represent plans with more 1000 employees. This approach will better reflect the structure of the U.S. retirement planning system, the RAC argues, and so will provide the DOL with more accurate and insightful data on 408(b)(2)’s successes and failures (see “Fee Guide Proposal Misses the Point, Some Say”).

The RAC argues that the DOL’s proposed methodology for conducting fee disclosure focus groups is flawed in other ways. For example, the RAC points out that the DOL hopes to conduct eight to 10 in-person focus groups in select locations—with seven to 10 sponsors in each group. As an alternative, the RAC argues it would be more effective for the DOL to conduct fewer, online focus groups while utilizing a nationwide sample.

“Our rationale is that focus groups are qualitative in nature, meant to discern a range of attitudes and behaviors, not their frequency,” the RAC writes. “Quality of the research is less a factor of the number of focus group attendees than of the variety of recruits. Redundancy in observations past the initial four or five sessions makes additional groups wasteful.”

The RAC argues the digital format is preferable to in-person reviews, as it will allow the DOL to gather input from sponsors outside large metropolitan statistical areas. The digital methodology will also save travel dollars, the RAC says, and significantly compress the data collection schedule.

“Internet access among employers in all sectors has become so ubiquitous as to make bias irrelevant,” the RAC observes.

RAC members say they also take issue with the DOL’s intention to focus solely on plan sponsors in the effort to asses 408(b)(2), arguing that sponsors will not be able to give a complete picture of the regulation’s performance thus far. Many sponsors rely almost entirely on the services of a specialist retirement plan adviser to comply with the requirement to regularly and prudently review service provider fees, the RAC says, suggesting it will be necessary to solicit additional input from professional retirement plan advisers whom sponsors have retained in a fiduciary capacity.

“Our experience suggests the feedback you will receive from plan advisers will be more insightful than the opinions of individuals who hired a professional adviser specifically because they personally lack the knowledge and confidence that an expert can impart,” the RAC explains.

To collect information from plan advisers, the RAC recommends the DOL conduct a series of in-depth, one-on-one interviews with advisers serving in various fiduciary capacities—including 3(16), 3(21) and 3(38) fiduciary arrangements, named for the sections under which they are described in ERISA. A series of 20 to 30 interviews using a structured discussion guide will provide the range of consistency and input needed to make informed decisions on changing 408(b)(2), the RAC says.

“Of all the professionals with whom plan sponsors interact, we believe the adviser is the best placed to deliver 408(b)(2) disclosure education,” the RAC says.

The full text of the RAC’s comment letter is available here. A coalition of advocacy groups representing U.S. retirement plan service providers filed its own comment letter last month, available here, which suggests there may be other flaws in the DOL’s fee guide proposal.

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