As I am sure you have heard by now, Bob Dylan was recently awarded the 2016 Nobel Prize in Literature and that the award has stirred much debate. In fact, to add to the controversy, the Swedish Academy that awards the prize, after many failed attempts, gave up trying to reach Dylan to notify him of the prestigious honor. No doubt, Dylan’s lyrics, which were poetic and never shied away from controversy, will long be remembered for the impact they had on our world. Perhaps, at least for me, his most meaningful verse was in the song, “The Times They Are A-Changin’.” “If your time to you / Is worth savin’ / Then you better start swimmin’ / Or you’ll sink like a stone / For the times they are a-changin’.”
This lyric stands out to me because of the simple fact that we do live in an ever-changing world. Our ability to adapt to change is the key to not sinking like a stone. As an investment advisor assisting retirement plan sponsors and participants, I look for ways to help clients deal with the imminent changes on the horizon. Currently, the retirement plan industry faces significant change driven by the Department of Labor (DOL). In April of 2017, the DOL will begin to phase in new rules requiring investment advice to be held to a best-interests standard. I will write more on this in blogs to come. Today, I want to stress that while the times will continue to change, those changes often impact how we do things. But changes do not necessarily impact what we are attempting to do and why we are doing them.
The purpose of a retirement plan is simply to help participants save for retirement. There are many reasons for the complex rules that govern the administration of a plan, but when you boil it all down, the end goal is to help participants build wealth that can be used in retirement. With that goal in mind, my logical next question, as an advisor, is how can I help clients best reach that goal? What can be done to help drive the best possible outcome for plan participants? Two things immediately jump to mind.
First, helping participants invest their savings appropriately for their situation is critical for long-term success. A participant’s ability to do so begins with the plan sponsor selecting an appropriate list of investment options to be available on the plan’s fund lineup. As an investment advisor, I recommend that a plan offer three pathways for a participant to invest – individual portfolio construction, target date funds and risk based portfolio allocations. First, I recommend an appropriate list of investment options that allows the do-it-yourselfer to construct a portfolio having access to broad geographical and asset-class diversification. In addition, a plan should offer a suite of target retirement date funds. Finally, I recommend risk based portfolio options that allow a participant to peg the risk level of the portfolio to a desired level – the most known being a balanced portfolio of 60% stock and 40% bond. The likelihood of long-term investment success can be significantly improved when an investor adopts a reasonable long-term strategy and sticks with it.
Second, in this day, a plan should offer participants a tool to help assess retirement readiness. In general, retirement readiness is measured by a participant’s ability to generate a desired level of income from his or her assets needed at retirement to replace income previously generated from working. Participants should periodically review their progress towards retirement readiness because doing so enables them to assess the critical elements of achieving success – savings rates, investment risk levels and how long will work be necessary. Working towards retirement can be a scary, exciting prospect defined by a life of hard work and saving. Measuring progress along the way can help a participant make sure he or she is still “swimmin’.”
As an investment advisor, I have played a role assisting in both of the steps above. In certain cases, I have been able to add my services to the plan while effectively reducing the all-in costs of the plan. All too often, when evaluating a plan, I find the investment advisor service to be non-existent or relegated to an 800 number with no personal consistency. There is no doubt that technology and automation have played critical roles in controlling plan costs. However, automating the investment advice component removes a human element that I believe significantly contributes to a participant’s ability to succeed in retiring. Who would have ever predicted that one day the winner of a Nobel Prize would not make himself available to receive it? Who would have ever thought that I would be writing to you to tell you that you might just find it possible to increase service and decrease all-in costs? But, then again, Bob Dylan sang it himself, “…the times they are a-changin’.”