Americans saving in a 401(k) plan may have money stashed in a robo-advisor — and they might not even know it.
Robo-advice is basically professional money management guided by an algorithm (a robot, so to speak), largely allowing investors to be hands-off.
Companies offering a retirement benefit are increasingly enrolling employees into 401(k) plans automatically. Most are diverted to some type of robo-advisor.
About 60% of 401(k) plans used auto-enrollment in 2019, up from 42% a decade earlier, according to the Plan Sponsor Council of America. Doing so helps overcome inertia that may prevent a person from saving.
“You get the momentum going,” Keith Gredys, chairman and CEO of The Kidder Company in Clive, Iowa, who works with 401(k) plans and investors, said of automatic enrollment. ”[Employees] go in and tend not to come out.”
TDFs and managed accounts
About 66% of 401(k) plans guide those automatic savings into target-date funds, according to the Council, a trade group representing businesses that offer retirement plans.
TDFs are perhaps the simplest version of a robo-advisor — they automatically toggle savings from aggressive (lots of stocks) to conservative (lots of cash and bonds) according to an investor’s planned age of retirement.
About 5% of 401(k) plans default funds into a “managed account.” In such accounts, algorithms choose one’s asset allocation based on factors beyond just age, such as income, savings rate, employer contributions and amount of non-401(k) savings.
Employers must notify workers that they are being automatically enrolled in a 401(k). But those who don’t pay close attention may not know part of their paycheck is getting invested a robo-advisor.
Robo-advisors have come into vogue over the past 15 years or so, leveraging investor demand for ease and lower-cost investing.
About 80% of 401(k) plans offer target-date funds, for example, up from 64% a decade ago, according to the Plan Sponsor Council of America.
“Most people are terrible investors,” said Philip Chao, a certified financial planner and chief investment officer at Experiential Wealth, based in Cabin John, Maryland.
“They’re diversified [and] professionally managed,” Chao said of target-date funds and managed accounts. “So you don’t have to go find an advisor; it’s done for you.
“And they’re easy to understand, so they become very popular.”
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