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On the Long Road to Retirement, Checkpoints are Key

Short-term actions yield short-term effect. This is especially true in financial education, where a recent report from the Pension Research Council at The Wharton School found that programs that follow up with participants or that operate continuously are most effective.

Our financial lives aren’t static; they change throughout the retirement saving process.

It may be time to evolve past a one-and-done education strategy in favor of planning that’s both consistent and dynamic.

According to the study, financial education programs that included follow-ups delivered to employees around the age of 40 optimally enhance savings by close to 10 percent at the time of retirement. Assuming a retirement age of 67, employees who have been followed up with since age 40 will have logged nearly 30 years of personalized education by the time they retire. That adds up to a lot of opportunities for plan sponsors to continue to support employees by engaging through tactics that work best for the particularities of the demographic involved—whether through videos, print materials, live sessions or even podcasts.

To paraphrase an old political phrase about voting, “educate early, educate often.” An employee who planned to retire at 65 but didn’t save enough may be hard to reach, especially late in his career. Our previously mentioned well-served mid-career employee is bound to be more willing to listen and learn. The key takeaway you can impart to your clients is to establish enthusiasm and confidence in retirees at the outset of the planning process, then build a strategy based on this solid foundation.

Bridging the Retirement Conversation Gap

More education is good, but a consistent schedule of relevant follow-ups is even better. For example, companies might improve their enrollment protocol by offering a week of employee presentations and meetings instead of one afternoon. That’s an important step, but it still overlooks the fact that planning can take decades. Typically, conversations about retirement take place during two periods. The first discussion happens when the worker is first hired and probably covers plan details and enrollment policies. The second may not occur until the worker is near retirement, at which point it’s a little late to make adjustments.

To keep the lines of communication open and flowing, advisers can add value to their plan sponsor clients by helping them maintain an ongoing and varied dialogue with their plan participants. Consider staggering the delivery of materials so the recipient doesn’t feel overwhelmed, and craft a follow-up game plan to suit personality types, schedules and status (newly enrolled, on track, running behind, nearing retirement).

Following up with participants may also mean checking in on general financial concerns such as daily living costs and paying down debt. Perhaps they’d like to receive advice about overall financial wellness as well as retirement. Even if they’re not quite on track after receiving guidance, in many cases they’ll still feel better after a chat.

Another opportunity to add value may arise when participants who initially don’t qualify for a contribution matching program become eligible later on. Whether or not the matching policy is clearly articulated by the employer—and in a perfect world, it always would be—your clients can enhance their service model by staying on top of eligibility along with other details.

Retirement planning is a long road for everyone involved—advisers, plan sponsors and, of course, the retirees themselves. You might think about emphasizing the importance of follow-ups by comparing them to friendly inns along the way: they provide the perfect opportunity for all parties to reflect on how far they’ve come and prepare for the next stage of the journey.

Learn more about retirement strategies and solutions through Janus Henderson Investors’ Defined Contribution program.

Editor’s note: This blog post originally appeared on the Janus Henderson Blog here.

Ben Rizzuto

Ben Rizzuto, CRPS®, is a retirement director for Janus Henderson Investors. In his position Rizzuto works with financial advisers, platform partners, Janus Henderson colleagues and clients to find solutions for today’s increasingly difficult retirement issues, whether they be within retirement plans or for those clients that are trying to figure out how to retire on their own terms. He also contributes to the dialogue surrounding these issues as the host of the “Plan Talk” podcast and through periodic posts to the Janus Henderson Blog.


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Pay Attention to the Details: Don’t Overlook the Obvious in Portfolio Construction

We all want to build great portfolios for our clients. But in our effort to gain a performance advantage for our clients sometimes we overlook the obvious.

In 2010, Morningstar studied the relationship between low fees and mutual fund performance. They found: “In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”

Vanguard did a study in 2015 that measured the effectiveness of different factors in predicting mutual fund performance. They found: “The ex-ante expense ratio separated poorly performing funds from better performing funds more successfully than all other metrics…”

In another Vanguard study, they compared the returns of mutual funds in the lowest cost quartile with funds in the highest cost quartile in different asset classes over the 10 years ending in 2013. Again, the low-cost funds beat the high cost funds in every asset class.

Clearly you don’t get more by paying more. Here’s how to incorporate this reality into your investment process.

Keep a watchful eye on:

  • The internal expenses of the funds and ETFs in your portfolios
  • Ongoing trading and rebalancing costs incurred in managing the portfolios

Almost everyone understands the theoretical importance of keeping an eye on fees and expenses, but far fewer do it in practice. Yet it can make a huge difference to your clients over their investment time horizon. Here are some examples. (All transaction costs are estimates that include allowance for the bid/ask spread on ETFs.)

Let’s say you have a client who needs a standard 60/40 balanced portfolio. The average expense ratio for a balanced fund in the Morningstar database is about 87 basis points. You could buy the “average balanced fund,” or you could build a perfectly good balanced portfolio with internal expenses of under 10 basis points using ETFs. The difference is 77 basis points.

If you build your client an eight-position portfolio using ETFs, the transaction costs might be around $80. Or you could build a 16-position portfolio using actively managed funds. That might cost around $320. The difference is about 24 basis points for a $100,000 account.

If you rebalance your eight-position portfolio annually and trade one-quarter of your positions, your annual rebalancing costs could be about $20. If you rebalance your 16-position portfolio quarterly and trade one-quarter of your positions each quarter, your annual rebalancing costs would be $320. That’s an annual difference of about 30 basis points for a $100,000 account.

You can see how fees, expenses and transaction costs can add up and detract from your clients’ long-term investment returns. In the Morningstar study referred to earlier they found: “Each 1 percent in additional fees eats up 28 percent of the ending value of an account over a 35-year span.” You can see that saving even 1 percent annually could fund years of additional retirement for your clients.

My point is not to advocate for the use of ETFs or for any particular approach to portfolio management. But I do want to underscore the significant impact that paying attention to the details can have on a client’s long-term financial well-being.

It’s easy to build portfolios with many high-cost positions and trade them frequently. Some people might even equate the complexity, all the moving parts and the frequent activity with more sophistication. But, as Leonardo da Vinci said, “Simplicity is the ultimate sophistication.”

scott-mackillop
Scott MacKillop is CEO of First Ascent Asset Management, a Denver, Colo.-based firm that provides investment management services to financial advisers and their clients. He is a 40-year veteran of the financial services industry. He can be reached at scott@firstascentam.com.

 

 


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Portfolio Management Beliefs and Practices That May Harm Clients

A number of beliefs and practices have grown up in the area of portfolio management that may be detrimental to the financial well-being of clients. Here are a few of them.

The MPT problem. Modern portfolio theory is an elegantly wonderful confluence of insight and mathematics. Efforts to implement MPT have not been as beautiful as the theory itself.

To build an “optimal” portfolio you must know three things—the future expected returns, volatilities and correlations of the asset classes in your portfolio. Unfortunately, no one knows what those numbers are.

Optimal portfolios are like unicorns—they don’t exist in real life. Nevertheless, we act as though our capital market assumptions have a magical predictive quality. If they tell us to trade, we trade, thus incurring transaction and tax costs.

Let’s recognize that our capital market assumptions are guesses about the future, but the fees and expenses we incur trying to stay locked onto our optimal allocation are real.

The rebalancing problem. Even if our expectations about the future have not changed, we feel compelled to tweak our portfolios to bring them back to our “optimal” mix. This is called rebalancing.

Research suggests that its utility is dependent on factors such as time period, the direction of the market and the relative future expected returns of the asset classes being rebalanced. Yet we employ simple, mechanical rebalancing strategies that generate plenty of transactions, but add little or no value. A more thoughtful approach could improve results and reduce costs.

The style-drift problem. Just to make sure everyone knows how much we love our optimal mix, we punish active managers who commit the sin of “style drift.” Forget the fact that the manager was led astray by a perceived opportunity to make money. We want them to strictly adhere to their mandate. Even though we hired them for their skill, we want them to be closet indexers.

The asset class selection problem. Another problem is that most of us do not have a scientific process for selecting the asset classes we use in our portfolios. We just keep adding asset classes until it feels about right. Remember, every additional asset class brings with it additional transaction and tax costs.

Fear of volatility. Ah, volatility reduction. Is that a good thing, or a bad thing, or does it depend? Certainly all things being equal we’d like less volatility rather than more. But we rarely have the choice of getting the same return with less risk if Mr. Market is being efficient.

We get paid to take risk and to generate the returns our clients need; we must experience some volatility. Let’s not become overly fixated on eliminating it.

The data-mining problem. It has become popular to use our massive computing power to mine data in search of winning patterns in the historical tea leaves. Some of these patterns take the form of “factors” that, we are told, will allow us to tilt our portfolios in one direction or another to give us an edge.

In investing, there is no strategy that always wins. The future rarely replicates that past. Let’s set our expectations and those of our clients accordingly.

Conclusion. Every portfolio we manage has a client attached to it. We should examine our beliefs and practices to make sure they are consistent with the best interests of those clients.

scott-mackillop

 

Scott MacKillop
CEO
First Ascent Asset Management
Denver, CO