Workers with 401(k) plans these days do a lot more than to merely leave their plans alone while they work and contribute over the years. These days, there are such a range of products and services that they take advantage of to make the most of their retirement accounts. Roughly one out of three owners of 401(k) accounts use at least one of these services. They use target date funds, managed accounts and they use one of the most popular options around – professional 401(k) advice. So basically, this is what you want to know – is it worth it?
Well, a study put out by two major providers of these services does find strongly in favor of professional 401(k) management. The study finds that on average, you make 3% more on your 401(k) account when you accept professional advice. The belief is that apparently, people left to their own resources often do considerably worse managing risk and earning a return.
And it isn't merely over the long term that they gain the full benefit of the advice. Even those who are a mere five years away from retirement, the study tries to establish, can do far better with 401(k) advice from a professional. One possible reason why this is so, it is noted, is that those who are close to retirement, if let to their own devices, often panic over how far they have left to go, and they make some hasty decisions over how to manage their investments.
With professional 401(k) advice the other hand, they learn to put together a custom-made group of investments to go with how long they have left to work. These days, the younger 401(k) participants as a rule gravitate towards target date funds. This is where they get to put down the date they will retire so that the retirement fund manager will start with a risky (but high profit) investment plan, but will slowly switch to a more conservative one as the retirement day draws close. With people who have perhaps just seven or eight years left to retirement, managed accounts that offer a customized and conservative management policy offer the best value.
But not every provider of professional 401(k) advice charges something substantial. A study by Charles Schwab found that 401(k) participants often reject free professional 401(k) advice that they receive online – advice that could really make a difference. For instance, employers often offer free advice. But only about one in ten employees actually takes the advice.
According to Ms. Charles Schwab, perhaps companies should make their advice look more appealing – by offering them in proper one-on-one settings.
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