Do employees want investment advice or not?

By Felix Salmon
September 15, 2010
This Charles Schwab survey is fascinating. People want investment advice when it comes to their 401(k) plans, especially if they can get it for free. And when they take investment advice, they change their savings habits significantly. But it turns out that even when companies do provided free investment advice for their employees, the employees don't take it.

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This Charles Schwab survey is fascinating. People want investment advice when it comes to their 401(k) plans, especially if they can get it for free. And when they take investment advice, they change their savings habits significantly. But it turns out that even when companies do provide free investment advice for their employees, the employees don’t take it.

Here are the numbers:

  • On average, someone who receives 401(k) investment advice increases their monthly deferrals by a huge amount: 5.4 percentage points.
  • Approximately 70% of participants that receive and implement 401(k) advice make a change to their deferral rates.
  • People who change their savings rate as a result of getting investment advice nearly double the amount of money they put away each month, from approximately 5% to 10% of pay.
  • 74% of Schwab plan sponsor clients make advice available to their participants at no additional cost.
  • 55% of people surveyed say if free advice was available they would use it.
  • BUT the reality is that less than 10% of participants actively use investment advice available to them.

It’s rare for a survey to show such a blatant difference between what people say they would do, and what they actually do in reality. You can lead your employees to water, and your employees will tell you that if you lead them to water, they will drink. And employees who drink do end up the better for it. But still your employees don’t drink.

My feeling is that the main reason here is the simple distinction between opt-in and opt-out, which governs so much retirement-saving behavior. Employees save much more in opt-out plans than they do in opt-in plans. And for much the same reason as they don’t opt in to 401(k) plans, they don’t opt in to taking investment advice, either.

Would it help to make investment advice opt-out? It would be hard to structure, but essentially firms would automatically schedule a retirement-planning session for all their employees, who would then have to actively cancel it if they didn’t want it. That would surely improve employees’ retirement savings. But would it take paternalism too far? And how many companies are qualified to pick genuinely good financial advisers for their employees, in any case?

Update: My commenters are pretty unanimous that free advice is worth less than you pay for it. And I’m sympathetic: whenever I’ve received “free” investment advice, I’ve been unimpressed. But the fact is that I’m not representative of the financial sophistication of the average 401(k) participant, and neither are the kind of people who comment on this blog.

And while it’s true that many investment advisors are just going to end up putting you into too many funds carrying excess fees, it’s also true that by far the single most important determinant of how much you get out of your 401(k) is how much you put in. And the really important investment advice which is given out by nearly all investment advisers is, simply, “save more money”. It’s simple, but it’s powerful.

The advisers are, naturally, going to go further than that, and start recommending places to put your money. Smart people might well take issue with their asset-allocation strategies. But so long as you end up saving more, you’ll also, almost certainly, end up with more money at retirement. Which is the main goal here.


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I have a fair amount of money from past jobs in Fidelity 401Ks. I’ve always thought that promotions for their advice were too sales-oriented. Coincidentally, they are doing an open house for a new investment center next week less than a mile from my house. I actually wanted to attend, but am on business travel.

So my take is that the investment advice is really a sales pitch, and even when they invite me to something in person, it’s inconvenient.

Posted by Curmudgeon | Report as abusive

I am currently studying for the Level III CFA exam and just read about this topic this weekend in the behavioral finance section.

Participant education is quite interesting. It seems that even with opt-out retirement savings plans many people just stay in the default fund, which often times is a money market. So even though there is savings effect it would be hard to call it much of a retirement savings plan if it sits in a money market.

The EBRI 2003 “Retirement Confidence Survey Summary of Findings” found that nearly half of U.S. workers with an employment related plan have beeen provided with educational material or seminars about retirement planning and saving.

Posted by david3 | Report as abusive

It is absolutely true that right now, ‘investment advice is really a sales pitch.’ That’s because right now that advice comes from Schwab or Fido, and they’re not giving it away. They need to sell to make it pay. If, however, plan sponsors hired some good CFPs to give every 401k-eligible employee an annual consultation on his schedule, that would change. Even a seminar setting would be better than nothing.

Posted by wcw | Report as abusive

Allianz did a series of studies on retirement choice analysis. You can find it at ry/MarketInsights/Pages/BehavioralFinanc eandthePost-RetirementCrisis.aspx

In particular, those studies do have information about opt-in versus opt-out in 401(k) investment.

Posted by jamesagain | Report as abusive

I’m wondering if the survey means anything at all, or whether it is hopelessly bogged down by confounders?

If I were a naive young employee in my 20s with a little excess cash flow, ready to start saving for retirement, then I would likely sit down with that 401k representative and get something started. In the survey I would be counted as “receiving advice” and “changing deferral rates”, but it would be a stretch to attribute the “changed deferral rate” to the advice. My readiness to begin saving initiated the process.

Having initiated a deferral plan, I might then continue that plan for MANY years without feeling the need to meet with the salesman again. So in those subsequent years I might be “not receiving advice” and “not increasing deferrals”.

As it happened, I did meet with a 403(b) “variable annuity” salesman once early on. He tried to sell me a product with annual fees approaching 2%, so I took the time to figure it out myself. As others have stated, the “free advice” is often worth less than you pay for it.

Posted by TFF | Report as abusive

The first words of Andrew Tobias’s classic TOIGYEN are “Trust no one.” That is the only investment advice that can ever make a difference. If you start there, you have at least a fighting chance in this world.

Posted by maynardGkeynes | Report as abusive

Regarding your update . . . so what you’re saying is that the ideal is to be unsophisticated enough to accept free (sales) advice, but sophisticated enough to accept only the “save more money” part. (couldn’t resist)

@maynard – I discovered Andrew Tobias’s books just out of college, knowing nothing of the subject, and their information and advice have largely guided me to this day.

Posted by Curmudgeon | Report as abusive