Most 401(k) Investors Shun Free Advice That Could Boost Their Earnings

Most 401(k) Investors Shun Advice That Could Boost Their EarningsA significant number of 401(k) investors are refusing the free professional help offered by their investment plans, and as a result are missing out on the positive impact that good advice could have on their financial returns. A new study released by Charles Schwab (SCHW) on Wednesday found that accepting 401(k) advice had a positive impact for most plan participants, but it also revealed that although most employees say they want and would use advice if it were offered, very few actually do.

"We've got 74% of employers who are offering advice, but the percentage of employees that actually take advantage of it is very small -- it's less than 10%," says Catherine Golladay, vice president of 401(k) education and advice for Schwab.

Golladay says that as a result, fewer people are allowing their 401(k)s to maximize their earning potential. "The investor outcomes are going to be suboptimal," she says. "They are not going to save as much, they are not going to be as diversified across the asset classes and they are less likely to stay the course."

According to the Schwab survey:
  • 70% of participants receiving 401(k) advice make changes to their deferral rate that double their savings rate on average from 5% to 10%
  • Participants who do not receive advice have portfolios that average less than four asset classes, while those who receive advice have a minimum of eight.
  • Those who received advice were more disciplined, staying fully-invested during the market slide from July 2008 through February 2009 which allowed them to reap the full benefit of the market rebound through the remainder of 2009.
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The survey also revealed that poor investor attitudes kept them from taking advantage of advice. When asked why they didn't use the 401(k) advice even when it came as part of their plan, a remarkable 49% of survey respondents said that they wanted to have more than $100,000 saved before taking the time to get advice. Other reasons for not using the advice included: getting financial advice from sources outside the workplace; having more pressing concerns about day-to-day financial matters; and not believing they'd saved enough to get advice.

To encourage more employees to accept the 401(k) advice, Schwab recommends companies offer advice in a one-on-one setting, which employees say they prefer; show employees that the advice works by letting them see and discuss investment outcomes; and get people motivated with grassroots efforts.

Golladay just encourages plan participants to seek out the advice for their own benefit. "It's a tool that can produce such powerful outcomes," she said.
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