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Behavioral finance research has shown that many participants in defined contribution (DC) retirement plans lack the financial planning skills, time, or interest to make appropriate investment decisions. Good investment advice can help them achieve retirement security.
DC plan sponsors and fiduciaries concerned about their participants’ investment acumen should consider whether to offer advice to participants. Our regulatory brief reviews the evolution of participant investment advice, provides an overview of the Department of Labor (DOL) rules governing advice, and outlines Vanguard’s advice offerings.
The DOL encourages the adoption of advice for participants
The DOL has reviewed five types of participant investment errors that good advice may help prevent. Those errors include:
- Paying inefficiently high investment fees.
- Executing poor trading strategies.
- Diversifying inadequately (for example, by holding a high concentration of company stock).
- Assuming inappropriate risk.
- Paying excess taxes because of a misalignment between investments and tax strategies.
Recent Vanguard research found that 50% of participants age 55 and older haven’t implemented a professionally managed allocation (that is, they weren’t invested in a pure target-date fund or another balanced fund, or they weren’t enrolled in an advice service). As the chart illustrates, older participants with professionally managed allocations had equity exposures between 40% and 80%, but those who constructed their own portfolios had a wide dispersion of equity allocations, somewhat evenly distributed from 0% to 100%.
