As Americans live longer, the challenge of safeguarding the financial well-being of older and vulnerable populations — particularly those facing cognitive decline — has grown more urgent.
For retirees who have spent decades contributing to pension plans or hoping to manage their financial futures via 401(k) plans, the golden years should provide peace of mind. However, without proper protections in place, some of these people may be at risk of losing their financial security at the most vulnerable stage of life.
As the recently published Mercer CFA Institute Global Pension Index highlights, the financial landscape facing retirees is increasingly complex. A shift from defined benefit (DB) to defined contribution (DC) pension plans has placed greater responsibility on individuals to make key decisions about contributions, investments and income strategies. Cognitive decline can become a critical factor in later years, making it nearly impossible for many older individuals to continue making sound financial decisions on their own. Policymakers and the financial services profession must take meaningful steps to address this growing issue.
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Research by Rand highlighted that cognitive abilities decline significantly with age, making it unreasonable to expect individuals in their 80s and 90s to continue making complex financial decisions. Yet many DC plans still require retirees to make decisions about their portfolios, even in advanced age. This creates a significant risk of financial mismanagement, fraud and exploitation, particularly for those experiencing cognitive decline.
A need for flexibility in early years of retirement
To mitigate these risks, policy must shift toward offering retirees more stable and predictable income solutions as they age. National actuarial bodies have suggested that pension systems develop products that provide flexibility in the early years of retirement, while transitioning to more structured lifetime income payments in later years providing income security while offsetting sequence of returns risk. This would help ensure that retirees do not outlive their savings, while protecting them from the potential dangers of making complex financial decisions as their cognitive abilities wane — or simply running out of money.
The role of financial advisers in safeguarding the interests of older and vulnerable populations remains crucial. Yet, in the U.S., the regulatory framework for financial advice is fragmented. Advisers can serve clients as fiduciaries in one capacity and as best-interest brokers in another, creating confusion for clients and compromising the quality of advice. This dual standard would benefit from reform.
Policymakers should implement clearer guidelines that require financial advisers to act in their clients' best interests at all times — particularly when working with older or vulnerable clients.
The financial advice sector could also do more to raise the bar in terms of both technical and behavioral competency. Advisers need the skills to navigate complex retirement planning scenarios and the empathy to understand the unique challenges their older clients face, especially those with cognitive decline.
Here are five recommendations for policymakers and the financial advice sector:
1. Develop default income solutions
Policymakers and product providers should consider developing plans that offer default income streams that transition to stable, lifetime payments in later years. These products would minimize the need for ongoing decision-making, reducing the risk of financial mismanagement due to cognitive decline.
2. Strengthen fiduciary standards
Financial advisers should be held to a single, unified fiduciary standard, ensuring that they always act in their clients' best interests. This is particularly important for vulnerable clients who may not be able to discern between different standards of care.
3. Enhance adviser competency
Financial advisers need to have both the technical expertise and the behavioral skills to serve older clients effectively. The complexity of managing retirement assets requires sophisticated thinking across tax, investment and legal domains, coupled with a deep understanding of the behavioral challenges and diverse retirement scenarios faced by older clients.
4. Leverage AI and digital tools
The financial advice profession should embrace AI (artificial intelligence) and other digital tools to support routine financial management tasks, while allowing human advisers to focus on complex, high-value services. This hybrid model would improve efficiency and elevate the overall quality of advice.
5. Promote diversity in financial services
The financial advice industry must prioritize diversity in talent acquisition to better reflect the client base and improve decision-making outcomes. A more diverse workforce would ensure that the financial services sector is better equipped to meet the needs of all clients, including those from underserved communities.
As the percentage of the retirement-aged population continues to grow, and the need for retirement security becomes more pressing, the financial advice sector and policymakers must collaborate to create a safer, more supportive environment for older and vulnerable individuals. By implementing these recommendations, we can protect the financial futures of millions of retirees and ensure they live out their later years with dignity and security.
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