Do You Spend More Time Researching Your Phone or 401(k)?
A recent survey commissioned by Charles Schwab (SCHW) of 1,000 workers with 401(k)s found that workers greatly value having a 401(k) plan at work, but many do not take full advantage of the benefits being offered. Schwab says that many companies and many employees accept the default mode of investing -- choosing target-based funds that are based solely on one factor: your age. If you're 35 now, you might select a target-dated fund that "expires" in 2055, about the time you might choose to retire. But Steve Anderson, president of Schwab Retirement Plan Services, calls that "a one-size fits all approach."
Instead, Schwab is advocating services -- not surprisingly, like the one it offers -- that provide workers with more options and more personalized investment advice. "Managed account services take advantage of all the information we have: age, salary, account balance, state of residency (important because of tax consequences), Social Security projections, if you have another retirement plan," according to Anderson. "All of those factors can help build out a personalized portfolio."
More Time Usually Spent Planning Vacations, Buying Cars
Schwab's survey found that only 11 percent of respondents say they had spent as much as five hours trying to evaluate their 401(k) investment options. By comparison, 39 percent spent at least that much time planning their next vacation and more than half invested that much time researching their next car purchase. "I was not surprised by that," said Anderson. "It validates what we know. If people are not comfortable managing their assets, they'll shy away from it."
He says it comes down to behavioral economics. "When employers build in automated decisions, employees can override, but they usually don't." That's one reason that target dated funds are so popular. They're easy. You can make a choice and forget about it, but it may not be the best choice for your long-term financial success. Even when professional advice is offered, only 23 percent of the survey respondents took the opportunity to use it. That's why Schwab says workers would benefit if more plans had an automated feature to provide managed account services for employees contributing to the 401(k) plan.
"When someone goes through that encounter of getting professional advice, they're more confident and have greater staying power when the market is in turmoil," said Anderson. He notes that a lot of people did not get professional advice back in 2008 and 2009, when the recession was in full swing. Those people often sold at a loss, when the market was already sharply lower, and they were too scared to get back into stocks. As a result, they've missed out on most of the bull market that is now 5 years old. "If you have a planner there with you," says Anderson, "you may not make a knee-jerk reaction."
Schwab administers more than 1,200 retirement plans, representing more than $100 billion in assets and 1.3 million plan participants.