Why So Many Unwisely Turn Down Free 401(k) Advice

Free advice on how to manage your 401(k) is widely available and routinely ignored. Here's why you should give it a try.

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Here’s another sign of how much ordinary people distrust Wall Street: workers routinely decline the free investment advice that comes with participation in their company’s 401(k) plan.

The attitude seems to be that free investment advice is worth what you pay for it – nothing. Why? The assumption may be that online and helpline advice is too general to be of much use, or that any advice from a financial firm is designed to lead you into products that are profitable to that firm.

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These are reasonable concerns. But they are largely misplaced. Many plan sponsors offer free one-on-one advice; it is employees’ reluctance to share detailed information that hampers specific recommendations. Meanwhile, fees and profit motive should always be top of mind, but understand that most 401(k) plan advisers have a fiduciary duty to place your interests first. The firm offering advice typically is not the same one that manages the plan’s investment offerings.

More importantly, studies show that those who take advice wind up in a better place. According to a Schwab survey:

  • 70% of participants who receive 401(k) advice make changes to their deferral rates, and their savings rates nearly double as a result, on average jumping from 5% to 10% of pay.
  • The average participant who receives professional advice is more diversified – in eight asset classes vs. four for those who do not get advice.
  • The vast majority (92%) of those who get advice stay the course in their 401(k) portfolios during downturns and benefit from the eventual recovery. Those who do not get advice are more prone to panic selling at the bottom.

The Wall Street Journal reports that unbiased 401(k) plan advice is becoming more widely available:

“A recent survey of 820 profit-sharing and 401(k) plans by the nonprofit Plan Sponsor Council of America found that 58% offered investment advice in 2010, most commonly online services, one-on-one counseling and telephone hot lines. That was up from 47% of firms surveyed in 2005. Just over a third of the plans offered professional account management, up from 24% in 2005. Among large companies, 74% now offer advice or managed accounts to plan participants, up from 50% in 2009, says benefits consultant Aon Hewitt.”

Yet relatively few are taking advantage of this benefit – just 25%, according to the Journal and just 10% according to the Schwab survey.

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There may be an issue that goes beyond trust. Call it inertia. It’s been widely documented that workers have a higher participation rate in plans where they are automatically enrolled, and must opt out if not interested, as opposed to plans where they must take the initiative to sign up. The same force may be at work with free advice. Perhaps if workers were automatically assigned a yearly appointment with an adviser, and had to cancel if not interested, they’d be more inclined show up and listen.