Financial advisors can help clients avoid one of the costliest retirement mistakes — sitting in cash for years after a rollover — while also identifying plan fees and pricing structures that might not be obvious, according to a report from a retirement fintech.
"One of the really important values that advisors bring to the table is having the bandwidth to sift through information like this, which sometimes is designed to be well-hidden and obfuscated," Romi Savova, founder and CEO of New York City-based PensionBee, a retirement savings platform. "Ultimately, those clients deserve full transparency, and it's always fantastic when you have a human at the other end who is willing to explain that to you."
The findings of PensionBee's
On a $107,000 IRA balance, "hidden charges" can add up to as much as $1,400 annually, including 0.98% for fund building blocks, 0.30% from the cash sweep spread, 0.25% for an advisory or manager fee, 0.16% from payment for order flow and 0.06% from securities lending, according to the report.
Unlike many consumer products, financial services pricing is often broken into multiple parts rather than presented as a single all-inclusive fee.
"I think arming advisors with that knowledge can be really beneficial for them as they're evaluating investments or as they themselves are onboarding new clients," she said.
Advisors can help clients avoid cash drag and scrutinize fees
Savova cautioned that cash-like money market products often still carry fees. However, because they do yield some return, investing in them is better than leaving assets uninvested, she said.
Some providers automatically place investors into money market funds or similar vehicles — a net positive, since staying in cash for years "can be really detrimental," she said.
Nearly 30% of savers leave their individual retirement accounts in cash for seven years or more after a rollover, according to PensionBee. In cash, investors miss out on earnings while platforms earn on the interest spread.
"The IRA market's growth is largely driven by rollovers, and given that a substantial portion remain in cash for years following a rollover, savers may be particularly susceptible to cash sweep programs," according to PensionBee's report.
Beyond cash drag, advisors can help clients look at retirement accounts for costs that aren't apparent. PensionBee's report found that savers can encounter unexpected fees through trading costs, administrative fees and pricing structures. Reviewing retirement savings options can help investors minimize unnecessary costs and make sure they pay only for the specific level of service and "human support" they need, according to the PensionBee report.
Some advisors say active oversight is especially important when it comes to cash management. Metuchen, New Jersey-based Tenon Financial, founded by Andy Panko, noted in a newsletter that while some custodians automatically sweep idle cash into money market mutual funds automatically, not all do.
"We don't let too much idle cash build up in clients' accounts and will consciously deploy cash to either reinvest into stock or bond positions, or put into a money market fund," the firm wrote.
