A third of plan participants look to their plan sponsor for 401(k) plan investment information, less than a third look to friends and family, and only 14.3% seek out financial advisers, according to a new survey.
"The No. 1 source of information comes from their company newsletters and education program. That's a good thing," said Gary Bakker, vice president of M&I Trust & Investment Management, Milwaukee. M&I sponsored the survey; Advantage Research Inc. conducted it.
"Information from plan sponsors is more unbiased than getting it from a brother-in-law. It's more complete and there's not a lot of hysteria," he said.
But participants' asset allocation techniques are a problem, Mr. Bakker acknowledged.
Once they choose their investments, the survey showed, plan participants are most likely to allocate their 401(k) assets equally among the chosen investment options. The second most popular method of asset allocation among plan participants is using their own judgment, guessing or random selection.
"I would feel better if they had a more rational basis" than dividing equally or guessing, he said.
Industry observers weren't surprised by the findings.
Said Timothy Brown, principal at Torrance, Calif.-based consulting firm Retirement Plan Resources Inc.: "You have (information on) investment options that no one wants to read and, since no one really gives participants advice, your people are left to their own devices. At the same time they are given all these choices."
So when it's time to select options and diversify contributions, participants divide, Mr. Brown said. "You end up with funky mixes."
A study by Shlomo Benartzi, professor at the University of California at Los Angeles' Anderson School, also indicated people spread their contributions evenly across the investment options regardless of what the options are.
This means the array of funds offered strongly influences the investment options plan participants select, Mr. Benartzi concluded.
"This does not mean participants are dumb. They do it because they do not know better," he said.
"I would say the big question is whether we should offer or require advice," said Mr. Benartzi, who is on an advisory committee for TCW Group, Los Angeles that is working on an investment advice strategy.
Not only will participants divide contributions equally among their chosen investment options, but they often will put the most money in whatever investment happens to be offered first, said Trisha Brambley, president of Resources for Retirement Planning Inc., a Newtown, Pa., consulting firm.
"I think what this means is what we intuitively know: Employees need help in making investment choices," Ms. Brambley said.
The problem is that the participants who need investment advice the most will not pay for it, she said.
"I think that plan sponsors have to do more to educate employees," said Margaret-Ann Cole, principal with PwC Kwasha, Fort Lee, N.J.
The third of participants who turn to their employers for information work for firms that take investment education very seriously, she said.
But plan sponsors are still a bit gun shy about including investment advice, she said.
"If plan sponsors could be told that they did not have any fiduciary liability, they would do it," Ms. Cole said. "Employees undoubtedly want advice."
At companies that offer financial planning, only3% to 5% of employees will buy it, she said. "That's not nearly enough."
The same complaint has been leveled by service providers that offer asset allocation funds. For example, according to American Century executives, while 60% of plan sponsors include asset allocation funds in their menu of options, only 16% of participants and 5% of the defined contribution assets under management are invested in those funds.
Even when they use the pre-mixed portfolios, the results are far from satisfactory, the UCLA study said: When investors can supplement mutual funds with diversified portfolios like lifestyle funds, they still divide their contributions equally among them. If investors, instead, are forced to put all of their money in a single lifestyle fund, they are more likely to choose an extreme asset allocation such as all equities, the UCLA study indicated.
Jeff Maggioncalda, president and chief executive officer of Financial Engines Inc, Palo Alto, Calif., said the studies bolster his firm's belief that people need advice and would use it if it were offered.
OPEN TO ADVICE
According to the results of an unreleased survey of participants in Financial Engines' yearlong beta testing, 80% of participants agreed or strongly agreed they would take the advice offered. The same percentage said they would want to use it again. About 90% of the beta test participants indicated they would like advice on assets outside of their 401(k) plans.
Mr. Benartzi said plan sponsors are coping with participant diversification problems by adding investment options. But according to both the UCLA and M&I studies, this strategy might not work. Although the typical plan offers nine options, the M&I study indicated plan participants actually use an average of three investment choices. Moreover, the number of options used decreases as the number offered increases, the results revealed.
The M&I survey also indicated 401(k) plan participation is a "low involvement" activity overall, with just 54% of all participants able to recall the names of any options available in their plans. This percentage increases with education, income and use of the options.