DC pension plan members seen favouring outside advice

(May 18, 2004) Employees who are members of defined contribution (DC) pension plans feel they lack investing knowledge and are looking for financial advice, a survey released today suggests. But most firms remain reluctant to provide advice, forcing employees to look for alternative sources.

A study conducted by SEI Investments Canada reveals that 79% of employees want to receive some kind of financial advice, says SEI president Patrick Walsh: “There’s a very strong desire for advice, about their own plan and about their own retirement.”

Less than half of employees surveyed said they had used the pension education services provided by their employer. But even those who do take advantage of the education component apparently aren’t getting much out of it.

“Plan members don’t understand how their own plan works and they don’t understand investment,” Walsh says. “They’re going to these sessions, but they’re not learning anything.”

That’s a worry for DC plan sponsors, many of whom started to offer the plans because they wanted to avoid some of the liabilities associated with defined benefit plans, says Walsh. “In the institutional world, advice giving is akin to devil worship.”

“A lot of employers believed that after you put your money in, the employees take all the financial responsibility. But of course there are responsibilities and employers are starting to realize they are on the hook for more than they realize and some, the more progressive ones, have already started to address this with some form of advice giving.”

In a few cases, employers have gone to third-party advice providers, Walsh says, but that’s still the exception, though the trend is on the rise. Instead, plan members are taking on the responsibility themselves.

While 42% of employees indicated that they make investment decisions on their own, 54% of employees said they are currently receiving some form of outside investment advice, most often from a financial planner, independent investment advisor or banker, the survey found.

Although it’s not clear how much employees are relying on that outside advice, Walsh says there are inherent opportunities for independent advisors looking to build their practice.

Household wealth figures show that 16% of the 2,000 DC plan members surveyed by SEI had more than $100,000 in annual income and 40% had assets over $200,000, Walsh notes.

“These people have liquid net worth, they do have other savings and they need broader advice than just the company plan,” he adds. “So you can directly invest their other money for them and get paid for that or you could charge a planning fee. There are revenue streams that could address the needs of an independent planner.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com