Just how confident are Americans about their ability to afford retirement? According to one leading survey, plenty of us are still anxious about our retirement readiness.
In April, the Employee Benefits Research Institute (EBRI) published its 2015 Retirement Confidence Survey detailing how Americans feel about their retirement prospects. That survey found some good news-along with some lingering anxiety.
After reporting record low levels of confidence about retirement among U.S. workers from 2009-2013, this year’s survey finds an uptick in optimism. According to EBRI, just 22% of Americans say they’re “very confident” about having enough money to fund their retirement and 36% say they’re “somewhat confident.” While that is an improvement over recent years, it still means that too many Americans are not adequately prepared for retirement.
Almost a quarter of respondents (24%) say they’re “not at all confident” about their retirement preparedness. And even the more confident respondents confess to some anxiety-overall, 64% say they “feel they are behind schedule when it comes to planning and saving for retirement.”
It’s clear that too many Americans have a retirement savings shortfall, and we all need to be taking greater responsibility for our own savings if we hope to enjoy a comfortable retirement.
The solution is saving more and starting earlier. Many people find it useful to seek professional investing guidance when determining how best to achieve their retirement goals.
Unfortunately, saving for retirement could get a lot harder for investors if Washington moves forward with new regulations that could restrict investors’ access to guidance and education from financial professionals, limit retirement choices, and make saving for retirement harder.
The Changing Face of Retirement
Saving for retirement in the 21st century is a very different proposition than it was even a generation ago. One key difference: longer life expectancies mean that we’re not only working longer, but can also expect to live longer in retirement.
Additionally, the way we save has been transformed. These days, far fewer Americans have access to defined-benefit pension plans and while traditional pensions offer significant benefits for workers, there are also drawbacks, including lengthy vesting schedules and lack of portability. That meant workers were more likely to find themselves tied to one employer for years, for fear of losing their retirement coverage.
With the rise of the Individual Retirement Accounts (IRA) and 401(k)-style savings vehicles, more Americans are free to pursue new jobs, entrepreneurial activities and alternative work arrangements, because their retirement benefits travel with them.
That greater portability, freedom and independence can be a little more complicated though-workers can’t necessarily expect someone else to worry about their retirement for them. We have to take responsibility for our own savings and investments.
The good news is that doing so is easier today than it was in the past. Affordable, quality financial guidance is more accessible for middle-income investors who may not have large portfolios, but still want to achieve solid returns for the future.
A study, “New Evidence on the Value of Investment Advice,” by the Investment Funds Institute of Canada compared identical savers in terms of income and age, and found that those working with a financial professional have 58% more in assets in four to six years, 99% more in assets in seven to 14 years and 173% more in assets in 15 years and beyond. By working with a financial professional, investors typically have more diversified and balanced portfolios and use more packaged products for equity exposure as compared to those investors who do not work with a financial planner.
A similar study by Oliver Wyman found that individuals who worked with a financial professional “have more wealth than non-advised individuals across all age and income levels studied. For example, we found that advised individuals aged 35-54 years making less than $100K per year had 51% more assets than similar non-advised investors. Those are typical middle-class households in the middle of their accumulation years. Moreover, advised individuals are better investors across many key dimensions commonly associated with long term investing success.”
And while investors, particularly those just getting started investing for their retirement with an IRA or 401(k) plan, may think they can’t afford professional investment guidance, they should think again. Different advisors offer different payment arrangements-some work on a commission basis, some on a fee basis-which allows investors to choose the relationship that works best for them and is most affordable for their needs.
Would New Regulation Strangle the Advisor-Client Relationship?
A new regulatory proposal from the Department of Labor (DOL) could jeopardize the alternatives available to small investors-which could restrict access to advisors and the opportunity for investment education.
The DOL proposal will likely make it more difficult for small investors to work with financial advisors. By tightening requirements on financial advisors and introducing new liabilities and unprecedented conditions, the proposed regulation may force those advisors to stop servicing smaller retirement account holders.
A recent report conducted by Deloitte outlined the anticipated operational impacts of the proposed DOL regulation and identified areas that will be impractical or impossible to implement as currently drafted. Other areas of the proposed regulation are so broad in scope, subjective and ambiguous that it will likely be impossible to build operational systems and processes to ensure compliance. In addition, the proposed regulation conflicts with existing regulatory obligations and legal requirements. The proposed rule reflects the opinion that the best intentions don’t make the best regulations.
This isn’t just idle speculation. We’ve seen the effects of this type of policy in the United Kingdom, where similar rules were put in place in early 2013. Within months, investors and advisors alike were complaining about higher costs that priced middle-income investors out of the market, as the number of advisors declined by an estimated 11%. Those most affected by the constriction in the market were lower- and middle-income savers, who were unable to afford the higher priced financial guidance, and the UK is now suffering from what some are referring to as an “advice gap.”
The DOL regulation is presented as a form of “consumer protection.” However, the proposed rule could harm the very same investors the Administration is seeking to protect. Contrary to the regulatory proponents’ suggestions, financial advisors are dedicated professionals committed to working in the best interests of their clients to help them achieve their retirement goals. Targeting these professionals is bound to have unintended consequences.
In a recent commentary for the Boston Globe, former Senator John Sununu of New Hampshire makes that same point, arguing that a blanket regulation that targets a few “bad actors” is inefficient and potentially destructive.
“It’s the regulatory equivalent of using a sledgehammer to drive a finish nail: You might succeed, but there will be plenty of shattered cabinetry in the process,” Sununu writes.
The financial industry has long supported common-sense regulations that protect investors, but it has to be done in a manner that is balanced to ensure that investors can get access to the highest quality services at the lowest cost. It’s not at all clear that the new DOL rule will meet that standard.
As SIFMA’s President and CEO Ken Bentsen recently wrote in the Hill, “The DOL proposal’s prescriptions and conditions – separate and apart from the best interest standard – create a myriad of new requirements and systems that will make the process of helping American savers prepare for retirement far too complex to implement without causing undue harm.”
This isn’t the first time we’ve made the case for financial guidance and education as a key component in the path to a secure retirement, and it won’t be the last. Given the fact that too many Americans have inadequate retirement savings and don’t have a plan to catch up, any new regulations that would make it more difficult to get the guidance they need or raise the cost of retirement savings should be greeted with skepticism.
To learn more about the DOL issue, please visit KeepRetirementOpen.com.