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401(k) robo-advisers: Press 1 for investment advice

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in Office Management,Payroll Management

It’s becoming increasingly hard to find a human to talk to when you pick up the phone. It was inevitable that automated advisers—called robo-advisers—would seep into the 401(k) arena. According to the Securities and Exchange Commission (SEC), millennials, who live on their smartphones, are the most comfortable with this approach, but it’s catching on with older employees, too. The SEC recently issued guidance on robo-advisers. (IM Guidance Update 2017-02)

The menu options have changed. A 401(k) plan usually picks up the tab for financial advisers who are available to employees. But they’re expensive. One way to cut costs is to use robo-advisers. Robo-advisers typically collect information regarding employees’ financial goals, investment horizon, income and other assets and risk tolerances by asking them to complete online questionnaires. Based on that information, they create and manage investment portfolios.

If you’re thinking of switching to a robo-adviser platform, the SEC advises you to consider how comfortable employees will be with this new approach. The level of human interaction available, even with a robo-adviser platform, can run the gamut from providing employees with the option of contacting an investment adviser, to only making technical support staff available.

Your ultimate answer may depend on how financially literate your employees are.

You should also inquire into how often employees will be able to contact the robo-adviser. Consider: How often the robo-adviser follows up with employees to confirm any changes that affect investment choices and whether employees must contact the robo-adviser when their finances change.

More cogent issues. Robo-advisers may be cheaper to employ than people, but they’re not free. Two key issues are compensation for providers of robo-adviser services and whether the compensation model creates conflicts of interest with the plan. For example, are robo-adviser providers paid to offer a wide array of products, or do they offer only products with which they are affiliated (e.g., mutual funds sponsored by the robo-advisers or their affiliates). In addition you should consider the following:

  • The robo-advisers’ approach to investing; different robo-advisers have different approaches to investing, including different investment styles and products
  • How robo-advisers handle volatility (e.g., whether they can freeze sales)
  • How often robo-advisers rebalance employees’ accounts.

FIDUCIARY DUTIES: Investment advisers are plan fiduciaries. The SEC has clarified that most providers of robo-adviser services are registered investment advisers, so they also owe a fiduciary duty to your plan.

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