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Participants in 401(k) plans arguably epitomize what it means to be a self-directed investor. After all, Labor Department regulations stipulate that only a registered investment advisor can offer financial, meaning employers are legally obligated to NOT help staffers with their 401(k) allocations and choices.
Alone, that’s confirmation of the need for many participants in employer sponsored plans to consider working with advisors. Then there’s data confirming many workers are too heavily allocated to cash and bonds in their 401(k)’s, meaning they’ve missed out much of the rally in stocks because they’ve been afraid to embrace risk.
But wait. There’s more. A 2022 survey by the Investment Company Institute (ICI) indicates that the average number of options in a 401(k) plan is 28 funds spanning domestic and foreign stocks, bonds and target date funds. That’s a lot for someone that isn’t well-versed in investing to choose from. The need for 401(k) plan participants and advisors to link up doesn’t end there. Read on for some compelling reasons why advisors should target these prospects.
401(k) Participants Know They Need Help
Schwab’s 2024 401(K) Participant Study confirms those tapping employer-sponsored retirement plans are ready to work with advisors.
“Sixty-one percent feel their financial situation warrants advice from a professional, higher than last year (55%). Plus, more workers would be very confident in making the right 401(k) investment decisions with the help of a financial professional (55%, up from 49%), than they would making those decisions on their own (29%, up from 27%),” according to the study.
The study contains other data points that cement the notion 401(k) users are a ripe client base for advisors. Those include the fact that many employees are relying on potentially questionable sources for advice, including artificial intelligence (AI). However, they admit to preferring to work with a human when it comes to financial matters.
“Workers are most likely to say they seek advice directly through their 401(k) plan (39%), followed closely by their financial advisor (35%), family and friends (27%), and their employer (25%),” adds Schwab. “Sixty-one percent are comfortable asking artificial intelligence tools like ChatGPT for help with financial planning, up from 49% in 2023. Still, more say they are very likely to follow human professional advice recommendations (60%) rather than computer-generated recommendations (19%).”
401(k)’s Loom Large for Retirement Income
As advisors, income is paramount in retirement and with the near evaporation of defined benefit pensions in the private sector, many workers will rely heavily on their 401(k) savings as their primary source of retirement income.
“Overall, respondents expect 43% of their retirement income to come from a 401(k), up from 40% last year,” observes Schwab. “They expect Social Security to make up 16% of their retirement income on average, down from 20% last year. Workers who are within 10 years of retirement expect to rely much more on Social Security than those further from retirement. Those who will still be working for at least 11 more years expect to rely more on their 401(k) than those closer to retirement.”
Bottom line: Facing a dizzying array of choices and perhaps being too heavy in cash, 401(k) participants should be working with advisors and that holds true across numerous income brackets. It just might make their lives easier and more prosperous.