Historically ‘National 401(k) Day follows Labor Day and offers advisors an opportunity to reach out to plan sponsors and participants to remind them of the importance of saving for retirement. It is also a good time for advisors to reflect on the trends in the industry and their impact on their practice.

ERISA requires fiduciaries to act solely in the interest of the plan’s participants/beneficiaries for the exclusive purpose of providing benefits and paying only reasonable plan expenses. Fortunately, both plan sponsors and the industry itself are beginning to take on that charge more resolutely, resulting in the most significant trend: a keener focus on the participant.

The pace of change is more rapid than it has been in the past few decades, which is causing some disruption for advisors that impacts their work and compensation. Fortunately, the trends are helping participants better achieve retirement income security. Many of the changes are traceable to regulatory modifications resulting from the Pension Protection Act of 2006 (PPA), and the enforcement of the fee disclosure regulations of IRC Sections 408(b)(2) and 404(a)(5).

Education
Probably the biggest change and most positive trend in the 401(k) world is that more educators are now focused on outcome based education. How is the education changing the participants’ behaviors? Are the behaviors measured? To whom are they being reported? In my experience when you measure, you improve.

Another positive trend is to have the educator address personal financial management matters, such as debt, budgeting and spending. While these are not direct 401(k) matters, they strongly impact an individual’s ability to save for retirement and are therefore very constructive.

Many educators are also providing one-on-one meetings to discuss an individual’s circumstances. These meetings have a tremendous impact and give the participant greater confidence that the decisions they are making are the right ones.

Further, more plan providers are adding retirement income projections to their participant statements. While the influence of this is not yet clear, Acropolis thinks it is a big step in the right direction. The expectation is that many participants will see the need to increase their savings rate and maybe make adjustments to their asset allocation to meet their retirement income goal.

Administration
Administratively, companies are trying to help their employees achieve retirement income security by implementing an auto-enrollment feature to the plan. The auto-enrollment trend, which borrows some ideas from the defined benefit world, is a great way to get employees on the path of saving for retirement.

Financially, Americans are critically underprepared for retirement. Depending on the year and the source, it appears that most employees are saving somewhere between 4 percent and 6 percent of their salaries annually. However, to replace 75 percent of one’s income, most employees need to save 15 percent or more of their salary every year. This is a significant gap.

A recent study by Capital One ShareBuilder found that “while 93 percent think they should contribute some portion of their income toward retirement and half believe it should be more than 10 percent, only one-fifth are currently saving 10 percent or higher.” So what can plans do?

More and more companies are going a step further and enhancing auto-enrollment with an auto-escalation feature. Thanks to auto-escalation, after a handful of years, many employees will have potentially doubled their savings rate. In addition to auto-escalation, education plays a big role in helping participants save more. We have found that when participants are told the rate that they specifically need to save, they are compelled to increase their deferral rate.

Investment
The most dramatic change on the investing front is the uptake of model portfolios and target-date funds. According to Vanguard, “84 percent of plan sponsors offered target-date funds at year-end 2012, up 45 percent compared with year-end 2007.” The same report says that, “51 percent of all participants use target-date funds.”

Why the big surge? Participants seek a simple solution, and education about their ease of use, glidepath methodology and rebalance feature is having a robust impact. Additionally, since the PPA, plan sponsors are often utilizing them as the qualified default investment alternative (QDIA).

When it comes to investments, the industry is also moving toward open architecture (no proprietary funds required) and an overall reduction in fees. Many participants are seeing fees for the first time and are migrating toward funds with lower expense ratios. Another impact of fee transparency and open architecture (enveloped in academic research) is the uptake of index funds in the line-up by plan sponsors.

Summary
Today’s advisors are different from advisors of yesteryear. As we move forward, advisors must be more focused on the participant providing tailored and more relevant education, addressing investor behavior, and helping participants save more.

Michael Lissner is a partner with Acropolis Investment Management LLC, a St. Louis-based, fee-only wealth management firm, serving individual investors and 401(k) plan sponsors. Acropolis specializes in retirement planning and currently has over $1 billion in AUM. For more information, visit www.acrinv.com.