Personalization is the key to retirement readiness: 3 solutions for 401(k) plan sponsors

A white paper from Cerulli Associates explores the increasing emphasis on personalization in retirement solutions, highlighting both the potential benefits of the trend and the challenges associated with it.

The paper, “The Benefits of Personalization in Defined Contribution Plans,” which was produced with support from Edelman Financial Engines, notes that companies that hope to serve the needs of a diverse collection of plan participants need to turn to programs and features that fill in gaps that are left by target-date funds or other less personalized offerings. According to Cerulli, 52% of consultant-intermediated DC plans use managed account programs to give participants access to personalized investment advice. The value of these programs can go beyond investment performance, the white paper said.

“When evaluating whether or not to offer a managed account program, plan sponsors should look beyond the investment returns to uncover the full value that these programs deliver to participants,” says Shawn O’Brien, director at Cerulli. “Financial planning and wellness features, and the ability to speak with an advisor, may have a meaningful impact on participants’ financial outcomes. Nevertheless, plan sponsors may need to employ different performance evaluation approaches to quantify their impact.”

Here’s a look at three of the white paper’s key conclusions.

#1: Selecting the right personalized service for participants

The white paper highlights that it can prove highly challenging to develop personalized financial services offerings that align with the interests and needs of a plan’s unique base of participants. This can be especially difficult as many plans aim to serve an increasingly diverse participant population. If personalized services are not a good fit for the plan’s participants, then it will lead to a misallocation of resources and a potential gap in personalization for the people it is intended to serve, according to Cerulli.

The importance of personalized advice and financial wellness solutions that match with participants is clear.

“Most DC participants have limited access to high-quality, cost-effective advice solutions outside of their DC plan and instead rely on in-plan financial planning, financial wellness or managed accounts for retirement planning and advice,” according to the paper. “Data from Cerulli’s 401(k) Participant Survey finds participants who do not work with an advisor most often turn to their

workplace retirement plan vendors for retirement planning and advice servic

#2: The appeal of one-on-one engagements

According to the white paper, many plan sponsors say they prefer personalized financial solutions that give participants individual access to a financial advisor, especially for participants who face complex financial situations and planning needs. When compared with digital advice programs, Cerulli asserted that human advisors “are arguably more effective at helping participants address psychological and emotional aspects of saving and investing, particularly during periods of market volatility, such as those experienced at the onset of the COVID-19 pandemic and the first quarter of 2022.”

Plan sponsors cite the importance of the level of trust that financial professionals establish with participants to help them contend with financial dilemmas “in a holistic, nuanced manner.” Personalized interactions can help ensure participants contribute adequately to their retirement plan and maintain a disciplined approach to saving and investing for retirement with one pension executive telling Cerulli that human interaction was both a primary driver for investor engagement and a critical factor to building engagement to other retirement products, such as annuities.

Still, Cerulli noted that quantifying the impact of speaking with a financial professional can be difficult when evaluating managed account providers. “Plan sponsors should investigate the quantitative and qualitative impact of these one-on-one engagements on the financial well-being of their participants,” the white paper said.

#3: Awareness of conflicts of interest

Cerulli said retirement providers cross-selling investment products or using their workplace businesses to expand into other relationships with end investors are among the common concerns of plan sponsors. For that reason, one of the highlighted takeaways of the white paper is that plan sponsors should be aware of potential conflicts of interest and “actively address them with managed account providers.”

“Conflicts of interest are top-of-mind for nearly all plan sponsors who spoke with Cerulli,” according to the paper. “Many plan sponsors also limit the services or types of topics their recordkeepers can have with their participants or create scripts for their recordkeepers’ call center representatives to mitigate the risk of inappropriate cross-selling.”

However, Cerulli said that taking these mitigation steps will not eliminate these cross-selling efforts, and the need for benefits and HR executives to monitor vendors to such an extent is time-consuming for them.

Related: The future of 401(k) plans: Personalized target date funds, advisor managed accounts

“Managed account programs that present less significant conflicts of interest are arguably more likely to act in participants’ best interests, resulting in more significant financial outcomes for these participants,” the paper said.

Ultimately, Cerulli said plan sponsors should ensure that they consider and evaluate the full impact of the programs that they offer – including how well they serve all their team members.

“DC plan sponsors must evaluate the specific features and services offered across the spectrum of personalized financial solutions — including financial wellness, financial planning and managed account programs,” according to the paper. “From a fiduciary perspective,

plan sponsors should conduct holistic, comprehensive due diligence on managed account programs, [assessing] the value these programs might deliver above and beyond their investment methodology.”