Employers rushing to automatically enroll workers in retirement plans and directing the money to one-stop life-cycle funds are leaving old-fashioned investment advice behind in a cloud of so much dust.
That may be a mistake, say advice providers, who are trotting out performance figures that seem to make the case for giving workers access to more advice, not less.
While about half of workplace retirement plans offer advice and an equal number automatically enroll workers into a default investment option, the default system is the one with all the momentum, said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago.
"Companies are moving beyond advice and offering a default solution because advice alone hasn't resulted in action,'' Wray said. "Face-to-face advice is expensive, harder to control and it's harder to make sure all employees get the same, consistent experience.''
Among the 45 percent of employers offering advice, only a quarter of those employees are accessing that advice, and even fewer carry out the advice, according to the council, an association of about 1,200 company plans.
"Ten years ago we all thought [traditional advisory services] would be big, but employers can't get people to use it,'' said Pamela Hess, research director for Hewitt Associates, a Lincolnshire provider of retirement-plan services. "It's all very subjective and hard to measure.''
That's because it comes in so many forms. While a small number of employers offer individualized counseling with independent financial experts, many others offer some version of an asset allocation derived from a computer model.
Typically, the model is provided by a third party, but the results and consultation are delivered by the investment company providing many of the funds in the plan.
The 2006 Pension Protection Act appeared to open the floodgates, particularly on the computerized-advice model, by essentially allowing more types of advisers to provide guidance. It can be provided through a fiduciary arrangement, meaning the provider must put the investor's interests ahead of his own, or through a third-party allocation model that uses generally accepted investment theories to achieve long-term appreciation.
"The PPA has been a big, green light for plan sponsors,'' said Dean Kohmann, vice president of corporate and retirement services for Charles Schwab Corp. "We've seen greater interest than ever."
But the Labor Department is still working on formal guidelines that will lay out the specifics (expected later this year), and detractors fear the rules will create new and dangerous conflicts of interest inside 401(k) plans.
All that said, there's still a place for providing investment advice in a company plan, experts said.
"So many employees are making suboptimal choices in their plans," said Hess. "People who do use the advice tend to do better."
Hewitt is studying performance results of workers who took advantage of advice programs within the plans it oversees, as have a handful of others. The upshot: Returns tend to improve if a worker accesses and takes the advice given out.
Schwab recently studied performance results among the plans it operates. Participants who used the advisory service Schwab provides to its workplace plans had an average return of 14.1 percent in 2006, while those that didn't earned 11.1 percent.
Financial Engines Inc., a Palo Alto, Calif., provider of investment advice to company plans, also is working on a study of performance results. Early analysis shows improved results for advice takers, company officials said.
Of course, moving workers away from heavy concentrations in company stock and stable-value funds (common choices in self-directed 401(k) plans) can make for nice comparisons. It will be more interesting to see how customized portfolios compete over long periods of time with the life-cycle and target-date retirement funds.
Until then, it makes sense to listen to the advice that comes with your plan and use it to customize a retirement road map for your situation, experts said. A life-cycle fund option alone, for example, can't help a worker who has substantial outside assets she is trying to balance with the company plan.
Just watch out for the conflicts and compare recommended mutual funds with the others in the plan on factors, including performance and fees.
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