Approaching Retirement: The Categories, Timing, and Correlates of Advice-seeking

GORDON CLARK, OXFORD UNIVERSITY, MAURIZIO FIASCHETTI, OXFORD UNIVERSITY, PETER TUFANO, OXFORD UNIVERSITY

01 April 2016

This paper identifies the categories, drivers and timing of advice-seeking by defined contribution (DC) plan participants as they approach retirement. Empirical analysis of a large Australian database indicates that the relative significance of three categories of advice-seeking changes with age, with administrative matters dominating investment matters and retirement planning prior to the age of 40 years. Retirement planning becomes the most important advice-seeking category from the age of 55–59 years. Other key findings include: changes in economic conditions are not a significant driver of changes in advice-seeking on retirement planning: and men, rather than women, are more likely to seek investment advice, especially as their account balance increases in value. We also examine the implications of these findings for the design of pension plans in their engagement with older participants.*

While DC plan participants are often encouraged to take advice in order to develop saving strategies that take into account their goals and objectives, expected income and risk tolerance, over the short- and long-term, little is known about the nature and scope of their demand for advice.

In this paper, we focus on four key issues:

  • the timing of advice-seeking by DC plan participants as they approach the median age of retirement
  • we distinguish between advice-seeking in general and advice-seeking relevant to retirement planning, assessing whether participants’ advice-seeking on this issue is a distinctive class of advice-seeking
  • we test whether advice-seeking is responsive to events and macroeconomic trends
  • we assess the patterns of advice-seeking as participants approach the median retirement age by reference to participants’ age, gender, account balance, and salary.

We utilise Mercer Australia’s large database of Australian DC pension plan participants involving approximately 560,000 participants over 10 years. Mercer provides advice via a call centre and internet facility where those employed to advise participants have no incentive other than to ‘help’ the participant in a timely manner.

Results

A brief summary of our results is as follows:

  • changes in the volume of calls related to administrative matters and investment matters are weakly but significantly related to changes in macroeconomic conditions, notably changes in full-time employment
  • changes in quarterly macroeconomic variables are not significant in driving changes in the volume of the advice-seeking related to retirement planning. It would appear that investment strategy is the most likely lever used by participants to respond to short-term macroeconomic events, whereas retirement planning is a longer term commitment more related to their anticipated retirement age than the ups and downs of the Australian economy.
  • the relative significance of the three categories of advice-seeking (administrative matters, investment matters and retirement planning) changes with age, such that prior to the age of 40 years, administrative matters dominate investment matters and retirement planning. Thereafter, retirement planning becomes the most important advice-seeking category from the age of 55–59 years. Advice-seeking on retirement planning peaks at the age when Australians become eligible to take a portion of their superannuation saving, as much as 10 years prior to their eligibility for the age pension.
  • women retire earlier and often indicate that when they retire they will rely, in part, upon their partners’ income to supplement their retirement income
  • men, rather than women, are more likely to call on investment matters, especially as their account balance increases in value. However, on retirement matters, the evidence suggests that both men and women are planning agents taking into account balances and salaries.

Implications and conclusions

Once enrolled in an industry fund or related commercial organisation, participants rarely switch between providers; to the extent that switching takes place, it is usually the result of switching employers (who may be in a different industry with a different service provider) rather than making a choice in favour of a preferred provider.

Of those participants that do contact their funds, a large majority of younger participants call about administrative matters (e.g. due to changes in employment, household status, residence and income) rather than investment matters or retirement planning. Advice-seeking with respect to retirement planning comes late in participants’ working careers ─ perhaps too late to make an appreciable difference to their account balances and pension benefits. One way forward could be to channel participants’ advice-seeking on administrative matters to briefings on retirement planning.

Those seeking advice on investment matters are younger on average than those seeking advice on retirement matters and would also benefit from advice on retirement planning.

Making the link between advice on investment matters and advice on retirement planning could require service providers to integrate the provision of advice across the three categories of advice-seeking. This could also mean upgrading the skills of call handlers and, perhaps, hiring different kinds of call handlers from those that handle routine administrative matters.

Call centers, web access, and mail are crude mechanisms for engaging participants in retirement planning. In response, some employers have brought to the workplace independent financial advisers to counsel those interested in investment matters and retirement planning. While there is little in the way of published research on the value of this type of facility, experience suggests that the take-up of this type of service depends upon the fee charged for the service, the degree to which an independent financial adviser is actually ‘independent’, and the age, gender and incomes of employees.

New ways to engage participants are being developed with advice that is category specific, salient, and future-oriented, rather than simply servicing participant-initiated inquiries.

* This paper was prepared for presentation at the Wharton School’s Pension Research Council annual conference, April 2016. It has been presented at the ACFS annual conference (Melbourne, Australia) and the Pensions & Investment East Coast DC Conference (Miami, USA). Support was provided by Oxford’s Fell Fund. Helpful comments and advice were received from Christine Brown, Huu Dong, David Knox, Paul Lajbcygier, Carly Moulang, Deborah Ralston, the late Maria Strydom, John Vaz, Victoria Wyllie de Echeverria, and Dane Rook. Preparation of the paper was aided by Ailsa Allen, Rosanna Bartlett, Seth Collins, and Angela Sidaway and was made possible by data provided by Mercer (Australia).