As the performance of equities markets pushes employee confidence up, financial advisors need to make sure they still wave the caution sign when it comes to their clients goals, according to Bank of America Merrill Lynch.
The firms quarterly scorecard of 401(k) activity in its own plans shows that quarter-over-quarter trends show positive growth. The firm reported more adoption of automatic increases to employees rate of savings into those plans. That number of plans using this feature grew to 207 from 189, or 9.5%, while the number of employees allowing their savings rate to automatically grow grew by 9.3%. Automatic employee enrollment continues to show more than 90% adoption by employees, with 26,000 employees automatically enrolled in the quarter.
But despite those positive participation rates and the steady market performance in recent months, financial advisors should still be having tough conversations with clients who are participating in 401(k) plans, said Michael Liersch, director of behavioral finance at the firm.
Theres a temptation to do things like go into all equity portfolios regardless of ones time horizon or goals or try to chase performance and be reactive, Liersch said. What really an advisor can think about or an employee can think about is what are they really trying to accomplish and does an all equity portfolio accomplish that?
Advisors and investors both need to beware that a bear market correction could affect their retirement goals, even if they are as much as 20 years away. Despite the risks, the participation rates in these plans show that it is possible to nudge employees towards healthy savings behavior and habits, according to Liersch.
Weve seen a positive trend in the markets now for a number of years, Liersch said.
The firm also reported positive growth in its health savings accountswhich like 401(k)s also fall within the firms health benefits solutions businessthis quarter. Bank of Americas plans grew 48% from January 2012 to January 2013. The average balances have also climbed to $2,093 this year, up from $2,029 in 2012 and $1,741 in 2011.
Those increases came from both new relationships and increased participation from existing clients. The growth is expected to continue going forward with the Affordable Care Act, which requires everyone to have insurance, will lead to the adoption of more high deductible health plans once the law goes into effect, according to Bob Kaiser, head of health savings solutions at Bank of America Merrill Lynch.
Health savings accounts overall rose to $15.5 billion in assets as of the end of last year, Kaiser said, and are projected to double to almost $27 billion by 2015. For advisors, that means an investment opportunity that they need to communicate to clients.
Health savings accounts offer tax advantages for the contributions, interest earned and money spent from those accounts. The balances of those accounts also roll over from year to year and has no required minimum distribution, according to Kaiser, which can enable clients to hold $80,000, $90,000 or $100,000 in these accounts.
This money that you need for your health care long term can continue to grow free, Kaiser said. Thats a real competitive advantage if youre a financial advisor trying to get people to think long term and take advantage of the tax [incentives] of the HSA program.