Thanks but No Thanks on 401(k) Advice

Excerpted from: Karen Blumenthal, Wall Street Journal

Amid volatile markets and concerns about how workers are investing their retirement savings, more 401(k) plans are offering participants specific investment advice and even automatic account management to make investing decisions easier.

That should be a good thing: Survey after survey shows that formal advice leads investors to increase their savings, diversify their holdings and continue holding stocks even when the market takes a plunge.

But here's the catch: Only about a quarter of the people who have access to advice through their retirement plans actually take advantage of it, according to retirement-plan providers and firms that provide advice services. And most of those who do use advisory services neglect to provide the personal details that would make the advice more valuable.

For many years, 401(k) and similar plans offered mostly education and "guidance," such as brochures, seminars and worksheets that gave employees generic suggestions about how to manage their accounts. Providing advice goes much further, offering specific recommendations about how much to invest in specific funds in your plan.

It also carries a fiduciary responsibility, or a requirement to put investors' interests first. Because of that, most advice services are offered by a company other than the investment firm that provides the 401(k) plan's fund offerings.

A recent survey of 820 profit-sharing and 401(k) plans by the nonprofit Plan Sponsor Council of America found that 58% offered investment advice in 2010, most commonly online services, one-on-one counseling and telephone hot lines. That was up from 47% of firms surveyed in 2005. Just over a third of the plans offered professional account management, up from 24% in 2005.

Among large companies, 74% now offer advice or managed accounts to plan participants, up from 50% in 2009, says benefits consultant Aon Hewitt.

In addition, as companies continue to shift to 401(k) plans from pension plans, it has become more apparent that many employees are ill-equipped to manage their own money. They may make costly decisions, such as moving out of stocks only after the market has tanked. Many older investors are too heavily invested in stocks or worse, their own company's stock, while some young workers avoid stocks altogether.