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A comparison of the expected risk and return for the 60% and 100% equity portfolios shows that the risk increases by 65% (11.34% vs. 18.86% standard deviation) while the expected return only increases by a little over 20% (9.63 vs.11.69%).⁴ 

Summary

For anyone providing education or advice to participants, this example holds a few lessons:

• Even after the losses of 2008, the reality may not be as bad as the perception.  In the above example, a 45 year old who lost 50% of his money can get back to where he was by working only one extra year.  There is no need to panic.
• For younger participants who have not accumulated a large balance, now is the time to save as much as possible. Not only will they benefit from the leverage of a company match, they will buy into a market at the lowest prices in decades.  Whether the market improves in 2009, 2010, or later doesn’t really matter.
• Don’t assume that a participant should be invested in a portfolio based on the risk tolerance from a questionnaire. Use typical planning tools with caution. Most calculators only analyze and recommend the most aggressive portfolio within the risk tolerance of the investor. But, as in the example above, there are many instances where a lower risk portfolio, even with a lower return, will provide a better chance of retirement success.
• Studies show that people have a better chance of meeting goals when those goals are specific, personalized, have a rational process behind them, and are supported by a regular measure of whether or not the individual is on track to meet the goal.⁵ When working with participants, it is important to develop a process that can meet those criteria rather than simply rely on a general education meeting or sending the participants out on their own to execute and keep track of the results.  One-time advice may be better than no advice, but without ongoing reporting to measure a participant’s progress, no plan is truly complete.

Conclusions

Most retirement plan participants in the U.S. have been very hard-hit by the recent market turmoil, and now they are looking for answers. The typical participant does not have the knowledge or experience to make rational decisions about investment and savings strategies for retirement success. They can definitely benefit from your considered guidance, now more than ever.

Your challenge as an advisor is to offer personalized advice to all participants in the plans you service, and to do so in a cost-effective way.  Even if you offer private consultations to each participant, many won’t take advantage of the opportunity.  The best, and most efficient, alternative is to deliver a personalized savings and investment strategy to each participant that doesn’t require their input.  A new generation of software tools now brings this ability within reach.⁶  Advisors servicing retirement plans should seriously consider using such software. It is not sufficient to rely on traditional planning tools given retirement planning’s unique objectives.  One thing is certain:  Participants are looking to you to set the right strategy and to keep them on course.

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