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Is Human 401(k) Advice More Expensive Than Robo Advice? You Might Be Surprised

Eric Droblyen

December 29, 2022


A new development in the small business 401(k) industry is the “robo” 401(k) provider. These providers use a computer algorithm, instead of a flesh and blood financial advisor, to construct investment portfolios for 401(k) participants. They claim technology is a less expensive alternative to human advice.

I disagree.

When you shop for 401(k) 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.

Market returns

Every 401(k) 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 401(k) 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 401(k) advisor

401(k) 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 401(k) 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 401(k) 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 401(k) plan sponsor’s right hand.

What’s the cost of robo advice?

Betterment, the leading 401(k) robo provider, charges 0.60% of plan assets per year. 401(k) 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 $500,000 401(k) plan is $5,050 per year.

Plan assets Base fee Asset-based fee (.60%) Avg Inv Exp (.11%) Total
$500,000 $1,500 $3,000 $550 $5,050

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 401(k) recordkeeper/TPA like Employee Fiduciary.

Plan assets EF fees ($1500+0.08%) Advisor fees (.50%) Avg Inv Exp (.11%) Total
$500,000 $1,900 $2,500 $550 $4,950

While it’s OK for 401(k) 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 401(k) market. I think it’s more reasonable to compare 401(k) robo advice to Target Date Index Funds (TDIFs). Like 401(k) robo advice, TDIFs offer 401(k) 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 401(k) advisors? Check out our advisor directory.