11/11/2011 2:50 PM ET|
401k advice? Workers say no, thanks
An increasing number of plans offer outside help, typically for a fee. But so far, only about 1 in 4 participants offered the expertise is buying in.
Amid volatile markets and concerns about how workers are investing their retirement savings, more 401k plans are offering participants specific investment advice and even automatic account management to make investing decisions easier.
That should be a good thing: Surveys show that formal advice leads investors to increase their savings, diversify their holdings and continue holding stocks even when the market takes a plunge.
But here's the problem: Only about a quarter of the people who have access to advice through their retirement plans actually take advantage of it, according to retirement-plan providers and firms that provide advice services. And most workers who do use advisory services neglect to provide the personal details that would make the advice more valuable.
For many years, 401k and similar plans offered mostly education and "guidance," such as brochures, seminars and worksheets that gave employees generic suggestions about how to manage their accounts. Providing advice goes much further, offering specific recommendations about how much to invest in specific funds in the employer's plan.
It also carries a fiduciary responsibility, or a requirement to put investors' interests first. Because of that, most advice services are offered by companies other than the investment firm that provides the 401k plan's fund offerings.
A recent survey of 820 profit-sharing and 401k 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 hotlines. That was up from 47% of companies 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.
Consultants and advice providers say more retirement plans are offering such services in part because recent market volatility has left many people unsure of what to do. "When times are tough, there's a bigger demand for advice," says Chris Lyon, partner at Rocaton Investment Advisors, a Norwalk, Conn., investment-consulting company.
In addition, as companies shift to 401k plans from pension plans, it has become apparent that many employees are ill-equipped to manage their investments. They may make costly decisions, such as moving out of stocks only after the market has tanked. Many older investors are too heavily invested in stocks or, worse, their own company's stock, while some young workers avoid stocks altogether.
Poor investment decisions aren't tied to specific jobs or salaries, says Sue Walton, senior investment consultant for Towers Watson, a consulting company. She says she's seen manufacturing companies where "some of the folks on the line make more savvy decisions than those in the executive suite."
If you are comfortable studying the various funds in your company plan, assessing the funds' expenses, building a diversified mix of choices and tweaking your choices once a year or so, you probably don't need advice. But for those who are less sure, here's a rundown of what's available:
In most managed accounts, a professional money manager creates and monitors a customized investment portfolio for clients, usually wealthy investors, often for a fee of 1% or more of the assets under management. A managed account for a 401k, by contrast, is limited to the investment options offered in the plan.
Typically, a sophisticated computer program considers your age and pay, expected retirement date, size of your 401k and your contributions and then selects an appropriate allocation. The account is regularly rebalanced and adjusted as you age or when plan choices or market conditions change.
While a few plans pick up the cost of managed accounts, most people will pay fees of 0.2% to 0.6% of assets a year, or $20 to $60 for every $10,000 invested, depending on how much is invested and what the company has negotiated. It's basically the equivalent of a personal trainer or a medically monitored diet for your retirement plan.
Financial Engines, which provides advice to participants of 445 mostly large plans, says that about a half-million plan participants with almost $44 billion in assets use its managed accounts, often those nearing retirement. Morningstar's Investment Management division, which offers advice to about 150,000 plans, many of them small, manages the accounts of about 746,000 people with about $19 billion in assets.
The service is most effective when it is truly customized. To get that, participants are asked to provide data about their investments outside the plan, such as other savings, old 401k plans or IRAs, and a spouse's earnings and retirement accounts. The problem is, most people don't provide all of that detail. And without it, "you're not going to get what you pay for," says Walton.
If you want to manage your own account, you still may have the option of sitting down with an adviser or talking with someone on the phone who will consider your individual situation and help you create a plan. It will be up to you, however, to actually make the changes to your account and monitor it in the future.
TIAA-CREF, which provides plans to 15,000 institutions with 3.7 million participants, offers such counseling at no charge. It has 400 people based in local offices, an additional 200 who visit institutions where it offers plans and about 100 phone reps to provide such guidance.
People who take advantage of that one-on-one help are more likely to make positive changes in their savings or portfolios. Still, says James Nichols, who oversees TIAA-CREF's advice and planning, "one of the challenges is getting people to stay on track," especially as they age and their situations change.
The widely available and free do-it-yourself service, where you plug your information into an online program offered by your plan and get recommendations back, is also the least used, according to a recent study (.pdf file) by Financial Engines and Aon Hewitt, which looked at how participants in eight plans fared between 2006 and 2010. More than twice as many participants in the plans used managed accounts as used online services.
The investors most likely to go online and put in the effort to get recommendations typically had higher earnings, saved a higher percentage of their pay and had larger balances than those who used managed accounts. They also tended to be a bit younger than the managed-account users.
The general lack of interest in taking advantage of easily accessible online services underscores how hard it is to get participants to think about and put some effort into their 401k investments.
"A large portion of participants are reluctant investors," says Christopher Jones, the chief investment officer at Financial Engines. Retirement investing "is down on the priority list -- people don't have the time for it, or the inclination."
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Here's some advice. Take whatever you have left and put it into something that the slime balls on wall street can't get their greedy hands on.
As far as I'm concerned the entire 401 K retirement plan is a huge failure for the millions of Americans that bought into it and now have no chance of retiring. We would have been better of putting our savings in a tin can and bury it in the back yard.
And to make matters worse, we handed those same stinking thieves billions of our hard earned tax dollars to salvage their industry so they can continue to rob us and manipulate the commodities markets.
The emperor has no clothes and reading an article by one of the drinkers of the Koolaid (the Wall Street Journal) isn't really making me feel any more trusting, is it you?
But of course, these are the people that on the one hand will tell you with a straight face that they deserve OBSCENE pay and bonuses because they are much, much smarter than any of you but when the sub-prime s_it hit the fan, what did they tell Congress? "Who could have known?".
Ask yourself how one minute they are masters of the universe and the next minute they are Gomer Pyle ( Well, gooollly!).
I took my company's financial advisors advice and invested a hefty portion of my 401k in a certain capital management company here in the upper midwest, only to find out they were brother-in-laws. It is probably not surprising that they lost me a fair amount of money.
At my lowest point during the 08 crash, my 401K was down 14% from peak value. Today, I am roughly 12 percent above that peak value. Crappy returns, yes... but at least it's on the plus side. Some of my coworkers saw their accounts drop 40%. Those who "stayed the course" as advised are still underwater compared to 2007 values. Even today, one of the "highly recommended" funds (Dodge & Cox) is down more than 30% from 2007.
Needless to say, I'll continue to be my preferred adviser when it comes to my investments.
So employees are failing to contribute to their 401(k)s and aren't interested in advice. Can you really blame them? People are not oblivious to what’s going on around them. They have just recently watched the wild-eyed financial sector drive world markets over a cliff. Wall Street’s reckless business practices have created unprecedented volatility. Meanwhile, Federal regulatory agencies have sat idly by and ignored their responsibilities. It shouldn’t be at all surprising that people are inclined to steer clear of the financial sector and their products.
Age old investment strategies such as portfolio diversification have proven once and for all to be nothing more than academic theories, which have been cleverly used for generations by the financial services industry as an effective way to sell high risk products to an untrained population.
Acting as if this past decade of financial destruction didn’t happen, employer sponsored retirement plans continue pushing stock funds as a rational way to prepare for the future. Really? Who’s managing and making a living off of those investment products? The same financial sector that just pushed world markets to the brink of disaster. The general public’s decision to ignore their 401(k) is based on a lack of trust in the industry that’s offering these products.
Maybe we need to stop blaming the general population, and stop accusing them of being ignorant and irresponsible. It is obvious to them that the financial services industry is unethical and unreliable. They are simply applying common sense when they choose to avoid the friendly neighborhood financial salesmen. Once we stop blaming the public, we can finally begin to address the real underlying problem.
Hackit - it may not be exactly a scam - but the guys managing your money will get theirs even if you lose everything. And - the economy being what it is - it is unlikely anyone would make enough money to retire when the time comes. Not to mention they will most probably lose money in the long run. In fact - teachers in one state were forced into a retirement plan that required them to make their own investments. That got taken advantage of even before the recession and lost money. The recession made it even worse. Those who had been in the plan for 35 years had no where near the amount of money they needed for their future retirement.
US politicians should require all big businesses to set up a retirement fund in which both the worker and the company pay into it. Money - not stock. That fund should be untouchable by anyone - the money in it going to the retired workers at some point. Current workers pay for their own retirement - not the workers that come prior to them. No one wants a handout or a ponzi scheme - just a sensible retirement plan that is safe and works. If the company goes out of business the money in that fund should go to the workers or to their next employer's retirement fund. It is a black mark against past politicians who claimed that they had passed laws that require this kind of retirement plan - obviously they didn't.
What good is the advice? Are they going to tell me how much to invest? I already max out contributions so they can’t suggest I save more which is no doubt their standard opening advice.
Are they going to tell me where to invest? Well, there aren’t many options in a 401k. For me, they have those retirement funds so you can just put it all in Retirement 2020, 2025, 2030, etc if you want… I don’t want. The other option is a short list of mutual funds. I have available 2 large company funds (1 actively managed, 1 S&P 500 index), 2 small company funds (1 actively managed, 1 Russell 2000 index), 2 bond funds (1 actively managed, 1 bond index), 2 international funds (1 actively managed, 1 international index), a money market fund, a science & tech fund, and a company stock fund. It isn’t like I have access to 1000 funds and need help determining which is best for me. I personally use the index funds when available because most of the active funds can’t beat the index given their higher fee on any sort of recurring basis. I know each year some funds will win but what are the odds that fund is in your 401k? Because of the higher fee, they have to beat the index by 1% just to break-even.
So what is left? Allocation? Ok this might be worthwhile for some but I’m not sure if it is worth the price when a Google search will give you plenty of opinions that are all in the same general area based on age and tolerance. I’m young and aggressive so I have 25% in the S&P 500 and Russell 2000, 20% in science & tech (wish this was a NASDAQ index), 15% international, and 5% in the bond, stable value, and company stock.
The other part that is annoying… the fee is based on the value of your account (i.e. 0.5%). The list of mutual funds is the same for everyone and calculating the investment allocation based on age and risk tolerance is the same calculation whether my balance is $1 or $1 million. So why am I charged more? It isn’t any more effort. Charge me a flat $50 or $100 for a yearly check-up and I would consider it.
About 15 years ago, retired friend of mine took advice from a certified financial planner (supposedly a big deal in the financial planning industry). By investing in the stocks he recommended, she lost over 65% of her savings in under a year, nearly $100K. As a 66 year old widow, that was NOT something she could afford.
Thanks, but no thanks. I'd rather keep the $ under MY control.
the 401k is forcing you to gamble with your retirement money we should get a choise
a bank cd is good if you dont wish to risk your life savings. But the powers that be want to
control what you do . land of the free what a joke
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