Empowering employees with Advice Access

Transcription

1 RETIREMENT & BENEFIT PLAN SERVICES Workplace Insights Empowering employees with Advice Access According to a report, employees who enroll in 401(k) managed accounts are more likely to have greater success with their retirement investments. 1 Summary When left to invest on their own, many do-it-yourself investors may have less successful retirement outcomes. 2 Offering customized planning tools and professionally managed account options is an important way to give employees an opportunity to better manage their retirement investments. This paper shares the findings of research conducted by Morningstar Investment Management 1 that showed participants enrolled in PersonalManager (the managed accounts feature of the Advice Access service provided by Bank of America Merrill Lynch) may obtain better retirement outcomes, on average, than those who invest on their own. These benefits could potentially be significant over time. Table of contents An in-depth study reveals potential for more retirement income... 2 How Advice Access works... 3 How participants may improve their outlook for retirement.. 4 Improve your plan offering.. 6 PersonalManager feature of Advice Access... 7 Getting started is easy... 8 This paper cannot be distributed without the full Morningstar Investment Management report. Important: This publication provides general information about fiduciary ideas and strategies for retirement plans. Always consult with your legal, tax, insurance and investment advisors before implementing any changes. For institutional use only. Distribution to any other audience is prohibited. Bank of America Merrill Lynch is a marketing name for the Retirement Services business of Bank of America Corporation ( BofA Corp. ). Banking activities may be performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., member FDIC. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp., including Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value

2 ADVICE ACCESS FOR YOUR 401(k) 2 An in-depth study reveals potential for more retirement income Accumulating sufficient assets for retirement is becoming increasingly important for all employees. For participants who don t have the same investment knowledge and discipline as professional financial experts, a managed account may be a cost-effective way to help them prepare for retirement. For Bank of America Merrill Lynch clients on our 401(k) platform, PersonalManager is an option you may want to offer your plan participants. In an in-depth study and assessment, Morningstar reviewed 20,758 participants in eight retirement plans that offer Advice Access, and specifically PersonalManager. Advice Access is our investment advisory service that recommends a contribution rate, asset allocation and specific investment options to plan participants. PersonalManager is a managed accounts feature in Advice Access that dynamically manages, rebalances and/or reallocates an individual s portfolio every 90 days, based on updates to personal financial information, account balances and other data. A total of 2,635 participants had previously selected and enrolled in PersonalManager. The other 18,123 were do-it-yourself investors and were managing their own 401(k) investments. No plan sponsors in the study had auto-enrolled or defaulted their participants into PersonalManager. PersonalManager can lift balances Retirement balances could be significantly higher when using PersonalManager, the managed accounts feature of Advice Access. 2 According to the study: The biggest finding was that managed account participants may see more retirement income. In some cases, this could be a significant amount. For example, a 25-year-old enrolling in PersonalManager could potentially see up to 35% more income at retirement than a participant not enrolled in the service (a do-it-yourself, or DIY, participant). 3, 4 These better outcomes can be attributed to a combination of other key findings presented in this paper.

3 ADVICE ACCESS FOR YOUR 401(k) 3 How Advice Access works: The power of strong financial management working for your participants Advice Access is a powerful goal-based tool that participants can choose to use on our website at BenefitsOnLine, at our Call Center through a registered representative, or with a Merrill Lynch financial advisor. Plan sponsor-provided information is automatically input from the record-keeping system (contribution rate, salary, date of birth, account balance, etc.). Specific plan-level investment options and plan features are incorporated. The participant can enter additional information, including spouse or partner data, to further personalize the plan. Internal methodology designed by Ibbotson takes into account these financial assumptions, which become the foundation to calculate estimated retirement income, and identify whether there is a gap between projected future accumulated value and future need. Ibbotson s human capital and financial capital models are used to assess how much risk a participant could take on. 90% Investment portfolio recommendations are based on extensive Ibbotson analysis and expertise. The target goal is to deliver solutions to reach 90% of net take-home pay. 5 The participant can choose how to implement Advice Access from three types of account management options: PersonalManager A managed account feature that automatically rebalances the 401(k) portfolio every 90 days and gradually adjusts risk level based on changing age and time-to-retirement horizon, as well as other changes to the plan or the individual s financial situation. Portfolio Rebalancing Rebalances 401(k) portfolio every 90 days back to the selected target allocation but does not make any adjustments for risk level. One-time implementation Allows the individual to execute the investment recommendations at the point of his review. No further rebalancing or reallocation occurs.

4 ADVICE ACCESS FOR YOUR 401(k) 4 How participants may improve their outlook for retirement In the Morningstar study of PersonalManager users, professionally managed accounts yielded significantly better results in two specific areas compared with accounts using a do-it-yourself approach: Managed account participants saved significantly more (page 5). Managed account participant accounts were significantly more diversified than DIY participants portfolios, where diversification is defined as holding more than three funds (page 7). 6 The results of Morningstar s study support the theory that participants enrolled in PersonalManager potentially could obtain better retirement outcomes, on average, than those who do their own investing, and those benefits may be significant over time. For example, a 25-year-old enrolling in PersonalManager could potentially see up to 35% more income at retirement than a participant not enrolled in the service (a do-it-yourself, or DIY, participant). The study s other positive highlights include: Potentially higher savings rates. PersonalManager participants deferred 1.9% more than DIY participants, or $2,070 more per year, on average. This goes along with better plan match utilization: 69.4% of managed account participants contribute at least to the level of the maximum employer contribution versus 62.4% of DIY participants. Potentially higher returns. PersonalManager participants are projected to have returns almost 1.2% (119 basis points) higher than DIY participants. The difference is 41 basis points on a risk-adjusted basis. Better allocated, more diversified portfolios. All PersonalManager users studied were believed to be appropriately allocated. Nearly half of DIYers were improperly diversified, holding three funds or fewer in their portfolios. Better expected outcomes. PersonalManager participants are projected to have an 85% probability of success, with younger workers projected to have success rates over 90%, on average. Plus, the 35% increase in annual retirement income that a long-term PersonalManager participant is projected to see compared with DIY participants could mean $6,700 more annual income, on average, for a retiree. 7 The bottom-line results from this study clearly show that those participants who choose PersonalManager could expect better retirement outcomes. 8, 9

5 ADVICE ACCESS FOR YOUR 401(k) 5 1.6M 1.4M 1.2M 1M 800K 600K 400K 200K 0 Projected retirement plan balances at retirement (age 65) PERSONAL MANAGER USERS Current age Source: Morningstar Investment Management, Better Expected Retirement Outcomes with Managed Accounts, January DIY INVESTORS The simplest way to gauge the expected benefit of a managed account service is to compare the expected plan account balances at retirement between DIY participants and managed account participants. While the current balances for managed account participants were 14.3% higher on average than those of DIY participants, after adjusting for the different income levels, the projected balances at retirement are 66.0% higher. Those differences are driven by the higher deferral rates and the higher projected returns, which are a function of the portfolio allocation and more efficient portfolios. (For a more complete discussion, please view the Morningstar paper.) 50 Increase in expected retirement income of PersonalManager participants by income groups Percent increase Average 34.9% % 35% 27% 35% 44% Low Low/Mid Mid Mid/High High Income groups Source: Morningstar Investment Management, Better Expected Retirement Outcomes with Managed Accounts, January To get a broader perspective of the potential increase in income during retirement, we performed some calculations across each of five income groups. The benefit analysis assumes a 25-year-old worker with an annual income at the median of the given income group. Based on risk-adjusted returns, we note a retirement balance that is 34.9% higher on average for managed account participants, which should result in proportionally greater retirement income. (For a complete set of assumptions, refer to the Morningstar paper.)

6 ADVICE ACCESS FOR YOUR 401(k) 6 Improve your plan offering with Advice Access at no additional charge If encouraging employees to save for retirement is the first step, getting them to contribute enough is the second. Automatic enrollment and automatic increase have been successful approaches for many employees. The next step is helping participants become disciplined, logical investors. They need to choose plan-level investments and asset allocations that are most appropriate for them at a particular age and time to retirement and that carry an appropriate amount of risk. Participants may need help managing investments and market volatility so they have the potential to achieve greater financial wellness. This may be too challenging for some participants. Some participants who may sell at inappropriate times never rebalance, have too much (or too little) investment risk, or may just be disengaged. Advice Access provides deferral rate recommendations, asset allocation and specific investment direction based on the investment options offered in your plan. Adding Advice Access as an option to your plan may be helpful for participants who: Auto enrollment increases participation 47% As of year-end 2014, 47.5% of eligible employees were automatically enrolled in 401(k) plans. Source: Bank of America Merrill Lynch, December 31, Prefer a hands-off alternative; also those who are not actively managing their accounts might appreciate the professional management delivered with PersonalManager. Prefer more involvement with their investments, but can utilize Portfolio Rebalancing to help keep them disciplined. Prefer to manage their portfolios independently, but need a one-time rebalance using One-Time Implementation. We hope you will consider joining other employers who are helping their employees toward achieving better financial wellness. In 2014, we saw a 46% increase in plans offering automatic increase, and a 6% increase in plans offering Advice Access. One of our goals at Bank of America Merrill Lynch is to help more employees attain their retirement lifestyle goals. That can best be achieved by contributing more during the working years and making those assets work as hard as possible. To help more participants have more success, we offer our Advice Access and PersonalManager services at no additional cost to the plan or to its participants.

7 ADVICE ACCESS FOR YOUR 401(k) 7 PersonalManager feature of Advice Access: Making a difference Higher contribution rate More efficient return rates Better asset allocation, more diversified portfolios Overall goal for financial wellness: Contributing adequately and taking full advantage of any company match are two of the critical steps toward achieving financial wellness. Investing in an efficient portfolio that has been optimized for risk and returns and has an enhanced asset allocation may yield higher balances for retirement. Determining optimal diversification 10 among the investments offered in-plan and choosing investments that cross the style box to spread risk are key components for driving better results. Potentially better results with the PersonalManager feature of Advice Access*: Participants using the PersonalManager feature of Advice Access deferred more each year: 1.9% higher contribution rate yielded $2,070 more in annual savings. Long-term PersonalManager users are projected to have more money available at retirement: 13% higher final account value due to better projected investment returns (over 30 years, risk-adjusted). Well-diversified portfolios include three or more diverse funds to help manage risk. Less than 1% of Advice Access participants held three or fewer funds versus 47% of do-it-yourselfers. Participant benefits*: 69.4% of Advice Access participants contributed up to their employer matches, taking full advantage of extra dollars. Their enhanced portfolio returns may be 1.2% higher. A key consideration is the percentage of equities in the portfolio for a given age. Those using PersonalManager received optimal equity allocation and gained the value of professional management. Do-it-yourselfers were about 57/43 for proper allocation. *According to the Morningstar study.

8 ADVICE ACCESS FOR YOUR 401(k) 8 Getting started is easy For those of us at Bank of America Merrill Lynch, we are thrilled to see greater visibility of our efforts at supporting better savings behaviors, investment diversification and retirement readiness for your participants. And when you consider the fact that there is no charge for this service that could end up reducing a participant s returns, these findings become even more meaningful. Our service is available to your participants in multiple ways over the phone through our FINRA Series 7 and 66 registered representatives, online via BenefitsOnLine or in person through our Merrill Lynch financial advisors. Contact your Bank of America Merrill Lynch representative or call He or she will help you assess whether this service is right for your plan, and if you determine it is appropriate, can guide you through the implementation and setup processes. We will review plan attributes, develop a communications strategy and help you successfully roll out this service. Ibbotson Associates, an affiliate of Morningstar, provides retirement projections and specific investment advice through our proprietary Advice Access service. Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ) accepts the fiduciary responsibility of the delivery of the service, the prudence of the advice process, and the selection of Ibbotson Associates as our independent financial expert. The agreement for Advice Access is between the Plan Sponsor and MLPF&S. The Advice Access service uses a probabilistic approach to determine the likelihood that participants in the service may be able to achieve their stated goal and/or to identify a potential wealth outcome that could be realized. Additionally, the recommendations provided by Advice Access may include a higher level of investment risk than a participant may be personally comfortable with. Participants are strongly advised to consider their personal goals, overall risk tolerance, and retirement horizon before accepting any recommendations made by Advice Access. Participants should carefully review the explanation of the methodology used, including key assumptions and limitations, which is provided in the Advice Access disclosure statement. It can be obtained through Benefits OnLine or through your Bank of America Merrill Lynch representative. IMPORTANT: The projections or other information shown in the Advice Access service regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time. Investing through retirement plans, such as 401(k)s, involves risk, including the possible loss of the principal value invested. Past performance does not guarantee future results. 1 Morningstar Investment Management, Better Expected Retirement Outcomes with Managed Accounts, January Unless otherwise specified, Morningstar refers to the Morningstar Investment Management division, a division of Morningstar that includes Morningstar Associates, Ibbotson Associates and Morningstar Investment Services, which are registered investment advisors and wholly owned subsidiaries of Morningstar, Inc. All investment advisory services described herein are provided by Ibbotson Associates. The Morningstar name and logo are registered marks of Morningstar, Inc. Neither Morningstar nor its affiliates are affiliated with Bank of America Corporation or its affiliates. 2 Morningstar did not estimate the probability of success for DIY participants because they did not have information about outside assets for DIY participants and therefore this would be an incomplete calculation. On average, PersonalManager participants are projected to have 1.9% of compensation or $2,070 more per year than do-it-yourself (DIY) participants. According to the report, many DIY participants had much more conservative investments than they would have with the PersonalManager platform. 3 Younger investors have a higher probability of success in meeting their retirement goals, in large part because of the amount of time they have to defer income and compound those contributions. 4 Based on projections for 25-year-old participants who continue to contribute to the 401(k) plan until age 65 and withdraw 4% of balances annually starting at age 65. PersonalManager participants are assumed to continue deferring 1.9% of compensation more than a do-it-yourself investor and projected to have 0.41% risk-adjusted higher annual investment returns. 5 PersonalManager s default measure of success is 90% of post-tax, post-contribution income. Individuals studied may have altered this measure. 6 DIY participants were much less likely to have diversified portfolios. 43% held three or fewer funds in their portfolios. By contrast, 0.14% of managed account users held three or fewer funds. 7 Assuming a 4% initial withdrawal rate at retirement (age 65), based on the underlying average balance difference ($98,958), Morningstar estimated the average additional annual income for managed account participants would be approximately $6,700 per year. 8 Projections regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Projections do not take into account administrative, record-keeping, or investment advisory fees; if such fees were considered, performance results would be reduced accordingly. 9 Merrill Lynch does not impose any investment advisory fees on participant-managed accounts; therefore, such fees were not considered in this analysis. Other service providers may impose investment advisory fees on participant-managed accounts, and as a result, participant returns would be reduced accordingly. Administrative and record-keeping fees were not considered in projections for either set of participants; had such fees been considered, participant returns would be reduced accordingly. All previously described fees are over and above the fees and expenses imposed by the investment options. Investors should consider their own facts and circumstances before investing. Individual experiences may be substantially different from these results. The investment options available to plan participants may not be available to all investors. 10 Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss. This article is designed to provide general information for plan fiduciaries to assist with planning strategies for their retirement plans and is for discussion purposes only. Always consult with your independent actuary, attorney and/or tax advisor before making any change to your plan. Bank of America is prohibited by law from giving legal or tax advice outside the company. Investment advice is provided to plan participants in Bank of America Merrill Lynch-serviced plans solely through the Advice Access service, which is powered by Ibbotson Associates. Unless otherwise noted, all trademarks and registered trademarks are the property of Bank of America Corporation Bank of America Corporation. All rights reserved. ARFV98YH WP /2015