Market insights and analysis

By David Wismer

There is little doubt that many Americans are underprepared to fund their retirement needs. A recent Newsweek article summed it up clearly:

“More than half of all Americans do not have a plan in place for their retirement, a new study has revealed.

“Allianz Life’s 2024 Annual Retirement Study has found that 56 percent of Americans have no solid financial plan for their post-working years. … Nearly half (48 percent) worry about living too frugally and not enjoying retirement as much as they should.”

These statistics align with the National Institute on Retirement Security's findings from 2024:

“When asked if the nation faces a retirement crisis, 79 percent of Americans agree there indeed is a retirement crisis, up from 67 percent in 2020. More than half of Americans (55 percent) are concerned that they cannot achieve financial security in retirement.”

How are Americans managing their workplace retirement plans?

Research from Fidelity, the Center for Retirement Research at Boston College, and others reveals several concerns with how working Americans are contributing to and managing their workplace retirement savings plans, including 401(k)s and other voluntary savings plans such as 403(b)s:

•  According to a Fidelity study, age-appropriate equity allocations have declined, particularly among millennials. Only about 59% of those studied have what Fidelity considers to be age-appropriate investment allocations. The study found, “The decline in [retirement] preparedness is being driven by two primary factors: people are saving less and investing more conservatively. … Among those taking a conservative approach, nearly six in ten (57%) respondents expressed concern about losing their savings by investing too aggressively.”

•  Factors impacting retirement plan contribution rates include lower household savings rates, inflation, and declining real income.

•  In 2023, Alice Munnell, former director of the Center for Retirement Research, noted that 401(k) participants were hit hard by the weak 2022 stock market, and that “more importantly, long-run trends show little gains for median balances.”

In an updated look at 401(k) balances last year, Munnell wrote,

“Average balances rose from $112,600 in 2022—a terrible year for the stock market—to $134,100 in 2023, and median balances from $27,400 in 2022 to $35,300 in 2023. The big difference between the median and the average is due to a small number of accounts that have really big balances. Average balances are more typical of long-tenured, more affluent participants, while the median represents the typical participant.”

It’s also worth noting, as Munnell pointed out in 2023, that “households with a 401(k) plan are the lucky ones. Only about half of households in the middle third of the income distribution have such a plan.”

The shift over the past 45 years from defined benefit plans (pensions) to defined contribution plans (401(k)s) has raised important questions:

•  Are most American workers too focused on wealth accumulation and not enough on risk management of their investment assets and planning for decumulation—that is, how they will fund a retirement income stream?

•  Are they making avoidable mistakes with their 401(k)s? Bankrate cites several of the most common:

○  Not contributing enough or consistently

○  Failing to increase contributions with income growth

○  Being unaware of or not understanding investment choices, fees, or the performance of different investment funds

○  Accepting the default investment option

○  Failing to take full advantage of employer matches

○  Taking early withdrawals and incurring penalties and/or fees

•  Do most workers have the financial literacy to manage such an important asset on their own? Behavioral tendencies associated with self-directed investing—such as loss aversion, anchoring, or herding—can all impact 401(k) decisions. As one industry observer put it, “You give the burden of planning retirement and place it upon the shoulders of the person who knows the least.”

•  Are workers aware of and preparing for sequence-of-returns risk—the potential damage caused by poor market returns just before or after retirement?

Why it matters to have guidance—not just options

One of the key themes presented here is that participants in 401(k) and other voluntary retirement plans are being asked to effectively manage their own investment portfolios with limited personal investment knowledge and a tendency to make decisions influenced by behavioral biases. While plan sponsors provide information on administrative details and available investment options, that support falls short of professional guidance in making important investment decisions year after year.

Research from DALBAR and other sources shows how self-directed investors often underperform major benchmarks. A wealth management firm notes,

“For several years, DALBAR has analyzed when investors get in and out of the market to see how their decisions compare to the wise investing adage to buy low and sell high. They found that it is easy to be right when the market is steadily rising, but during turbulent times, investors need guidance.”

How FPI can help investors save for retirement with more confidence

For the past two decades, Flexible Plan Investments (FPI) has offered professionally managed investment strategies designed to help retirement savers navigate market ups and downs. These strategies are available through financial advisers working with participants in 403(b), 401(k), 401(a), and 457 retirement plans.

As noted earlier, many investors have responded to the market volatility of the past 20-plus years by investing their 401(k) accounts far too conservatively—missing out on opportunities for growth. FPI offers actively managed strategies that aim to strike a better balance: seeking growth when conditions are favorable while using risk-management tools to help reduce the impact of major market downturns.

With the help of their financial adviser, plan participants may be able to access these professionally managed strategies inside their retirement plan through a self-directed brokerage account (SDBA)—an option available at many employers and public-sector retirement plans. This provides access to dynamic, risk-managed portfolios similar to those used by high-net-worth investors and institutions, offering investors additional tools, an enhanced risk-management approach, and professional guidance to help them achieve their retirement funding goals.

FlexPlan Strategic is FPI’s most recent SDBA offering. It uses advisor class shares with no direct advisory or management fees for clients. A few of the strategy’s highlights include the following:

•  Actively managed allocation: Reallocates quarterly to respond to market conditions.

•  Dynamic risk management: Funds are tactically adjusted within the strategy.

•  Enhanced diversification: Includes equity, income-focused, and managed futures exposure designed to increase portfolio resilience.

•  Low minimum investment: $25,000 minimum at Fidelity and Schwab.

Investment professionals can learn more of the details about FlexPlan Strategic, including its actively managed fund allocations, here.

The bottom line

Working with their financial adviser, plan participants can construct a workplace retirement portfolio that reflects their objectives, risk tolerance, time horizon, and personal or family financial situation—in addition to being analyzed and optimized in the context of their overall financial plan.

Having a knowledgeable and professional advocate for retirement investment planning takes away the burden for plan participants of making difficult investment decisions each year on their own. In addition, employing risk-managed strategies that have an active, responsive defense mechanism can help keep a severe bear market from derailing a plan participant’s portfolio and progress toward their goals.

One financial adviser spoke to Proactive Advisor Magazine about the benefits of a managed workplace retirement solution for his clients, saying,

“Through our relationships with third-party investment managers, we now provide sophisticated, risk-managed investment strategies to eligible 401(k) plan participants at various companies and professional firms. …

“We help eligible participants take full advantage of their retirement accounts through the benefits of investment strategies using dynamic risk management. We are excited by this opportunity to serve current and future clients by helping them mitigate market volatility in their retirement accounts while seeking growth opportunities through full market cycles.”

If you are a financial adviser, please reach out to your FPI business consultant to learn more about the benefits and convenient implementation of FPI’s SBDA offerings. If you are an investor client, contact your financial adviser to learn how this investment option could help you stay on track toward your long-term financial goals through institutional-grade investing, active risk management, and broad diversification.

Dynamic Performance Publishing Inc., publisher of Proactive Advisor Magazine, is owned by Jerry Wagner, president of Flexible Plan Investments, Ltd.