Is Human 401k Advice More Expensive Than Robo Advice? You Might Be Surprised
A new development in the small business 401k industry is the “robo” 401k provider. These providers use a computer algorithm, instead of a flesh and blood financial advisor, to construct investment portfolios for 401k participants. They claim technology is a less expensive alternative to human advice.
When you shop for 401k investment services on an apples-to-apples basis, human advice can regularly be found at the same price (or less) as robo advice – while often offering superior value! How so? Human advisors tend to offer more services that are valuable to plan participants.
Every 401k investment fund has one of two primary investment objectives – to track the market or outperform it. Passively-managed funds, like index funds or Exchange Traded Funds (ETFs), are designed to match the returns of a market benchmark, while actively-managed funds try to outperform a benchmark. Generally speaking, passively-managed funds are less expensive than actively-managed funds.
Every robo 401k provider I know uses passively-managed investments. That said, the cost of robo investment advice should be compared to fiduciary-grade human advice using similar funds. Too often, it’s not – it’s compared to non-fiduciary advice using more expensive actively-managed funds.
The value of a human 401k advisor
401k investing decisions make a lot of people anxious – they are important and people don’t want to make a bad move. Sometimes, this anxiety can result in “analysis-paralysis,” causing a person to not enroll in their 401k plan at all.
That’s obviously a bad outcome. Workers need to save early and often to give themselves the best chance for a comfortable retirement. A skilled human advisor is often better able to overcome a person’s 401k anxiety than a computer – making it more likely that the person will make appropriate enrollment choices.
Most human advisors don’t just offer investment services either. They offer value-added, non-investment related services, including:
In short, many human advisors become a 401k plan sponsor’s right hand.
What’s the cost of robo advice?
Betterment, the leading 401k robo provider, charges 0.60% of plan assets per year. 401k plans with less than $1M in plan assets pay an additional $1,500 base fee per year. The average investment expense of their fund lineup adds another 0.11%.
Betterment’s “all-in” fee for a $500,000 401k plan is $5,050 per year.
|Plan assets||Base fee||Asset-based fee (.60%)||Avg Inv Exp (.11%)||Total|
How about human advice?
When a human advisor charges 0.50% of plan assets per year for their services, they can beat Betterment’s all-in fee by using a low cost 401k recordkeeper/TPA like Employee Fiduciary.
|Plan assets||EF fees ($1500+0.08%)||Advisor fees (.50%)||Avg Inv Exp (.11%)||Total|
While it’s OK for 401k fiduciaries to pay more for more valuable advisor services, they should understand the robo’s marketing rhetoric is not always operative - human advice can compare on a pure cost-basis.
Is a comparison even appropriate?
I read a lot of articles comparing robo and human investment advice, but I don’t know this comparison is fair in the 401k market. I think it’s more reasonable to compare 401k robo advice to Target Date Index Funds (TDIFs). Like 401k robo advice, TDIFs offer 401k participants professional portfolio management and market returns. The difference? They cost a lot less – with investment expenses often below 0.20% year.
I’d consider a human advisor an upgrade because they generally offer more services than portfolio management.
Don’t believe the hype!
Robo advice is not always less expensive than human advice. The kicker? Human advisors often offer more value for their fee. Don’t know where to find top human 401k advisors? Check out our advisor directory.
About Eric Droblyen
Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.