Lacking Confidence
Many members are not fluent in the language of investing. They may feel overwhelmed by investment information such as fund reviews and investment performance numbers. Because members do not feel confident, they might not make a contribution to their group retirement plan, or they may opt for the default fund instead of reviewing other alternatives.
That is why investment advice is extremely important for plan sponsors and members. If members do not take appropriate action, they will not get the most out of their retirement plans.
Many believe that making personal investment advice available to plan members should not be regarded as an “optional extra” but rather, that it is becoming essential for plan sponsors who want their plans to deliver maximum value to their members. Advice is the next wave of service for our industry in the coming years.
Advice Versus Education
Why is advice so important for members? Isn’t education enough?
While education and information will always be useful and helpful, research shows that most members want someone to talk to about their own financial situations. They want personal investment advice.
In the 2007 Benefits Canada Survey of CAP Members, a majority of members—74%—agreed that their plan sponsors should provide access to a financial advisor who can help them make the best investment choices. Demand for this service increased by nine percentage points compared to 2006.
Potentially Higher Average Returns
A U.S. study by Charles Schwab Corporation found that members using advice in 2005 and 2006 earned average returns that were higher than the average return for those who did not use the service. The differences in average returns were most pronounced for younger members, who tended to invest too conservatively for their age bracket.
Larger May Mean Less
According to the Canadian Pension Fund Directory, larger plan sponsors are less likely to offer advice services. Just 21% of sponsors with more than 3,000 employees offer advice, compared to 50% of sponsors with 500 to 999 employees and 62% of sponsors with less than 50 people.
Sponsors do not offer investment advice for a variety of reasons. Many say the potential liability risk is too high for advice services. The CAP Guidelines put the onus on them to choose an advice provider prudently by setting criteria for selecting and reviewing the provider’s performance. Any advice service in Canada must address sponsor responsibilities and potential liability.
Perceived Value Motivates
There is another objection often voiced by sponsors—that advice is too expensive, relative to the perceived value in the eyes of members. However, the 2007 Benefits Canada Survey of CAP Members found that members do see the value—58% said personalized investment advice would make their company’s retirement plan more valuable to them.
Members who see compelling value in their plans are more likely to be motivated to actively participate and make sufficient contributions towards retirement.
Investment advice is an option that can help bridge the gap.
William E. (Bill) Kyle is the senior vice-president of Great-West Life Group Retirement Services.
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