A User’s Guide for 401(k) Education v. Advice – What Fits Your Participants?

The past three years of stock market volatility, as well as clarification of the PPA Fiduciary Adviser 401(k) advice proposal, have led many employers to take a hard look at their 401(k) in order to help their participants. Improving the ‘participant experience’ is taking shape. The biggest question becomes, “What will work best with our participants, and how is it best delivered so it is not something we will have to ‘re-do’ in the future?” We have learned the hard way what types of participant services best fit 401(k) plans based on the participants’ stages of accumulation which is largely determined by their account balance. Therefore, it’s not so much the total size of the plan that matters but the average balance of the participants. Different stages and balances equate into the necessity of different services.

Small Balance Participants ($0 – $35,000 ) – Building a Balance
We have learned the hard way that the account balance of a participant will often dictate the level of relevance they feel towards the account. It has been our experience that most investors who are in this ‘getting started’ mode want to make sure they are doing the right thing and do not need anything complicated. Simple points such as getting started and setting a good savings rate to attain at least the match plus an auto-escalation of 1%-2% per year are critical. Investment then becomes the key, and target date/risk-based asset allocation funds work best. Education can serve as the medium to encourage these actions, and 1on1 consultations can be very brief as the objective should be simple:
  1. Get started.
  2. Get the ‘free money’ through the match.
  3. Automatically increase savings.
  4. Instant portfolio through a simple risk or age-based investment option with reasonable fees.
  5. Keep. It. Simple.
  • Education or Advice? Education. Get people started and into the appropriate investment option is the focus.
  • Investment Solution/Participant Services – Target date or risk-based allocation funds. No advice necessary.

Moderate Balance Participants ($35,000 – $50,000+) – Participants Start Paying Attention

It has been our experience that as the participant’s balance grows, so does its relevance to that investor. Thus, they start paying more attention, likely due to the larger hard dollar cost to them from the swings in the market, as that 5% gain/loss is much more noticeable for a $50k account than a $10k account. It’s simply human nature. These types of situations have led to participants ‘diversifying’ their target date/risk fund, with the end result being multiple TDFs (target date funds) and/or other individual investments in the plan, typically top performers over the past one, three or five year period. The investment behavior issue has been observed by such institutions as Vanguard as well (page 54). Participants seem to have a keen understanding that TDFs are a great ‘starter’ solution, but they also understand that they are cookie cutter solutions, not personalized to them as individuals
Education no longer cuts it in this demographic of investors, as these investors have heard all of the ‘401(k) Basics/401(k) is Good for Your Future’ presentations. That is why they stop attending the education and 1on1 sessions. Why hear the same message that no longer applies to them. Thus, this is where we see individualized advice and account management being a desired solution by employers that have been observed these issues for years. Education must step up to include helping protect participants from making potentially ill-informed and emotionally based decisions and it should provide them the ‘answer’ specific to their individual situation.

  • Education or Advice? Both. Education needs to evolve into behavior-based examples articulating how we respond to market movements as well as understanding savings behaviors during market fluctuations.
  • Investment Solution/Participant Services – Target date or target risk funds, Personalized Managed Accounts/Advice

Large Balance Participants ($70,000 – $100,000+ Balance) – Participants Are Concerned and Expect More
It has become very simple in our experience. The larger the balance of the plan, the more desirable individualized advice and account management becomes. The biggest issue is participants’ comfort in managing large sums of money. The market movements cost them a lot now. They want specific advice/management detailed to their individual situation. They want to be kept informed, as the account is extremely relevant to them. The service should be ongoing, conflict-free, easy to understand and trust, cost effective, and high touch. While they may not trust the service at first, they often times will check with their friends that are using it to get comfortable and ‘give it a shot.’

  • Education or Advice? Both. Behavior-based education regarding how we respond to market movements as well as understanding savings behaviors during market fluctuations.
  • Investment Solution/Participant Services – Personalized managed accounts/advice become priority, target date/risk funds for those that want to avoid nominal fee.

This user’s guide is a reflection of our experience, feel free to comment on your experience below.


  1. Lynne McAuley on October 26, 2010 at 8:50 pm


    This article is very helpful. Thanks for sharing your insights.

    Lynne McAuley

  2. Don Davidson on October 27, 2010 at 8:51 pm

    Solid overview, Chad. The topic of advice or education can be a tricky balance.

  3. Tim Cowell on October 27, 2010 at 9:13 pm

    Great Post Chad.

  4. Jeffery Acheson on October 28, 2010 at 3:47 pm

    Very nicely done!!

  5. michele varnhagen on November 3, 2010 at 2:46 pm

    2 challenges — #1 — making sure the employer and the workers understand that smaller and comparable types of balances dont need advice, but rather the target date fund. And #2 — benchmarking all managed accounts against the TDF to make sure the benefits of individualized portfolios actually do outperform TDFS nets of all fees.

  6. Josh on December 8, 2010 at 11:26 am

    I just don’t understand how 401k’s are that beneficial. No liquidity, no control, pay taxes LATER?! I mean I would guess taxes are only going to go up from here, based on the national debt, social security, etc, but I guess that’s just me, because if you are contributing to a 401k, especially over your match, you are in essence betting on taxes going down, because why else would you put them off until later?