By Travis Flenniken
Charles Schwab Inc. recently released a study, “The New Rules of Engagement for 401(k) Success,” that looks at the effect that professional investment advice can have on a 401(k) plan’s overall performance. The study used responses from 1,005 Americans who participate in their company’s 401(k) plan, and also integrated analytical data, which was derived from 911 retirement plans with about 750,000 participants.
The study highlighted that more employers are making professional investment advice available for employees participating in the company 401(k); however, only one in 10 employees actually takes advantage of this service. About 75 percent of Schwab’s business clients offer 401(k) participants free access to advisers. This percentage has grown substantially from 2005 when it was 42 percent.
Even though more than half of the survey respondents indicated that they find retirement benefits more con-
fusing than health care benefits, there is a reluctance to receive professional help with a 401(k).
The study reveals that investment advice can make a big difference in how people manage their 401(k). Use of professional advice has a positive impact on diversification, discipline and contribution rates.
Average participants who received professional investment advice were invested in a minimum of eight assets classes, while others invested in less than four. An overwhelming majority (92 percent) of advice-takers stayed the course in their investments within their 401(k)s from July 2008 to February 2009, a time of extreme market volatility.
Most participants double their 401(k) contribution increasing on average from 5 percent to 10 percent of pay after having received investment advice.
Some of the survey respondents said they do not use company-provided professional advice because they prefer to get it elsewhere. Others responded that they have more immediate concerns or don’t think they have saved enough money to warrant taking the time to get help. Approximately half of those surveyed want to have more than $100,000 saved before taking the time to get advice.
Outside professional investment advice would typically come from either a broker or a registered investment adviser.
Getting help from a broker with your 401(k) may present problems because they are not typically compensated to provide advice on an account that is not under their custody. If they were to provide advice for a fee, under SEC rules, they would have to make disclosures to clients that could potentially cause compliance problems within their firms. However, a registered investment adviser can offer 401(k) advice for clients and act in a fiduciary (trusted adviser) capacity.
When participants wait until a certain benchmark is reached, such as $100,000, or a year or two before retirement, it can be too late to maximize the potential savings in a 401(k) plan.
Participants of a 401(k) should ask their employers if they can meet with the advisers providing the 401(k). It is likely that the participants are paying for the advice through service fees debited from their account balance; so they should at least get the benefit of professional advice. If this is not possible, seek outside guidance from a qualified investment professional.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Travis Flenniken, CFA, is vice president of investments with DeMoss Capital – demosscapital.com. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.