Boomer Demand Triggers 40l(k) Advice

The huge baby boom generation has had an impact on society at every stage of its evolution. Do you think it's coincidence that contact lenses and Lasik surgery became affordable just as boomers started to need help with their eyesight?
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The huge baby boom generation has had an impact on society at every stage of its evolution. Do you think it's coincidence that contact lenses and Lasik surgery became affordable just as boomers started to need help with their eyesight? Or that hip and knee replacements came about just as boomers started needing those medical services? Think about it.

Now the boomers are facing retirement. And the financial advice business is evolving quickly to provide needed services. The Investment Company Institute says total U.S. retirement assets now total more than $24.7 trillion at year-end 2014. The greatest amount is in baby boomer's accounts.

They're searching for personalized, sophisticated advice on how to invest their retirement money -- and how to make it last their lifetime. And, just in time for the boomers (and younger savers), technology is making it easier to provide personalized investment and financial planning advice.

Targeting Your Retirement

The 40l(k) industry has come a long way from its inception in 1978. One of the most enticing changes was the "safe harbor" offering of Retirement Target Date funds, which took the responsibility for diversification and investment choice off the shoulders of the employee. These funds promised to adjust the asset allocation appropriately to become more conservative as retirement age approached.

Today, according to Morningstar, there is $706 billion in Target Date funds, and they accounted for more than 30 percent of mutual fund inflows in 2014.

But an employee with a low income and a relatively small amount of savings may not have the same investment goals as a more highly paid corporate executive of the same age, who also has stock options and savings outside the plan. Why, then, should they find themselves in the same target date fund?

Answering that question has motivated two new trends in the investment advice industry. Both trends use technology to create individualized investment advice based on a wider assessment than just retirement plan assets.

Personalized Advice from Mutual Fund Companies

For many years, well-known mutual fund companies like Fidelity, Vanguard, and T. Rowe Price have offered individual investment advice and retirement withdrawal planning for those with significant assets in their funds. They pioneered the use of Monte Carlo modeling formulas that use a range of historical returns to create an individualized, sophisticated investment and withdrawal strategy for those approaching, and during, retirement.

Now Vanguard has stepped up that competition, recently announcing it would offer Vanguard Personal Advisor Services to clients with investable assets of just $50,000. The cost will be only 0.30% of assets under management ($150 on a $50,000 portfolio) annually. Plus, the recommended investments will be in low-cost Vanguard funds.

Clients will work with an individual Vanguard advisor, rebalancing and altering strategies as conditions change. The technology powering this advice is Vanguard's proprietary Capital Markets Model, using Monte Carlo modeling simulations. The combination of personal advisoes, sophisticated yet individualized technology, and low costs gives a value proposition that was previously unavailable to "small investors."

Individualized 40l(k) Participant Advice

Technology is impacting investment advice both inside and outside retirement plans. I've written before about retail-focused "robo-advisors" - firms that give online, personalized investment advice using sophisticated algorithms. Betterment, Wealthfront, and PersonalCapital are among the better known names.

But, there are also a growing number of low-cost advisory services ready to give individualized investment advice to 40l(k) retirement plan participants. No longer must employees choose between target date retirement funds and guesswork. Many plan sponsors are offering "managed accounts" within 40l(k) plans - individualized advice in choosing among plan options.

Financial Engines led the way in this process a decade ago . Morningstar offers managed account advice to 40l(k) plan participants, as well. And Schwab offers both Morningstar and GuidedChoice managed accounts for plan participants.

Now there is a new offering by NextCapital -- a leading personalized planning and portfolio management service. NextCapital seeks to disrupt the retirement Target Date Fund industry by providing automated, personalized retirement advisory services to 40l(k) participants -- at a cost not much more than Target Date Funds. They are expected to partner with several major advice providers in 2015. If you see their service arrive inside your 40l(k) plan, take advantage of it.

Competition is increasing the breadth of the advice offered to employees, and cutting the costs. So, if you're one of the millions of Americans who have seen their savings grow over the years in retirement plans, don't despair over finding sophisticated, personalized advice on how to invest. Advice is on its way, and just in time. That's the Savage Truth.