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.