Why bad 401(k) advice is better than none

By Liz Pulliam Weston

So many investment recommendations these days are tainted, as I wrote in "Can you trust your financial adviser?" And many of the companies that run the nation's 401(k) plans are the same ones who, in the past, paid hundreds of millions of dollars in regulatory fines for:

• Allowing favored big investors, including hedge funds, to trade after hours at the ultimate expense of smaller investors.

• Touting stocks to credulous investors while quietly dumping those same equities at fat profits.

• Pushing high-cost products, such as variable annuities, on vulnerable seniors and others for whom the investments were clearly unsuitable.

Not exactly a track record that inspires confidence.

Yet workers clearly crave personalized, "tell me what to invest in" advice. Too many workers are sitting on the sidelines because they're unsure of how much to contribute and how to invest the money. (See "7 ways to mess up your 401(k).") Consider:

• One in 4 doesn't sign up at all.

• Nearly a quarter of participants don't contribute enough to get the full company match, essentially leaving free money on the table.

• Many take far too little risk -- or way too much. One in 6 doesn't invest anything in stocks, while a third have more than 20% of their money in their company's own stock.

The cost of their confusion is enormous. Here's an illustration: A worker who puts aside $4,000 a year starting at age 25 could have a nest egg worth more than $1 million at 65, assuming 8% average annual returns, which is reasonable given the long-term historical gains from a balanced portfolio of stocks and bonds.

If that worker delays investing for just 10 years -- because she doesn't understand the importance of starting early, or she's confused by investing or by her company's 401(k) choices -- her nest egg is reduced to just $453,000. In other words, her retirement fund is less than half what it could have been.

The perils of making the wrong choices are, of course, quite real. If she starts early but puts all her money in "safe" choices like bonds or cash, she'll be lucky to eke out a 4% average annual return. That reduces her ultimate balance to just $380,000 after 40 years.

If she overdoses on company stock, well, just talk to one of those Enron or WorldCom employees who watched their retirements implode when their company-stock-laden plans went down in flames along with the companies.

The perils of failing to invest, or of getting it so wrong, are high enough that consumer advocate Barbara Roper has speculated aloud that maybe getting conflicted advice is better than getting no advice at all. That speculation caused Roper, director of investor protection for the Consumer Federation of America, no end of grief from her fellow consumer advocates.

Workers need a shove

But Roper said she still believes that the most important thing may be giving American workers the shove they need to start investing seriously for retirement.

"It's reasonable to assume that people's confusion about how to invest their money keeps them from participating or causes them just to stick their money in the cash account, neither of which is a good choice," Roper said. "Advice can help increase participation and help investors make better investment decisions."

Some employers already do offer advice, often using independent counselors or, more commonly, computer programs like those provided by Financial Engines and Morningstar. Many other companies, though, have been worried about workers suing over the advice they received and have been reluctant to offer investment counsel to their workers until Congress provided some protection from liability.

Continued: The kind of advice you might get

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