Even at companies with the most bare-bones employee benefits, a traditional 401(k) is usually part of the package. It’s by far the most popular retirement savings plan offered by employers—93 percent of organizations responding to the Society of Human Resources Management 2018 Employee Benefits Survey offer a 401(k)—and for good reason. This retirement savings plan, which came into vogue in the 1980s, allows employees to save pre-tax dollars while they’re working and offers employers a tax benefit as well, in the form of matching contributions.

But it’s not all perks. The complex nature of investing can be a big barrier to employees taking full advantage of their 401(k) plans—or even using them in the first place. Most participants will make savings rate decisions based upon the employer match, how much they think they can afford or some combination of the two. But the problem with that approach is it doesn’t consider retirement date or retirement goals. Add to the mix a confusing menu of investment options, and the uninitiated investor can get confused fast.

Plan participants need trusted advice but getting it from an investment planner is an expensive proposition no matter who’s footing the bill. Enter artificial intelligence, which has enabled “robo-advisors” or digital advisors to bring individualized investment planning to the masses.

These digital advisors use algorithms and artificial intelligence to automatically perform many investment tasks that previously could only have been done by a human, from setting the deferral rate, to choosing investment products and creating the right asset allocation.

“A robo-advisor is a piece of financial technology that uses algorithms to construct portfolios for investors that are aligned with their risk tolerance, long-term goals and other unique factors,” explains this blog post from Slavic401k, a company which manages over $4 billion in 401(k) plan assets and launched its own digital advisory service for 401(k) plan participants two years ago.

Benefits of Using a Robo-Advisor

The biggest advantage of using a robo-advisor is the cost. By eliminating the human element, digital advisors can provide similar services at a fraction of the cost. Slavic’s new Bespoke Portfolio Service is free for the first year, before a nominal service fee kicks in (ranging from .25% to .1%, depending on account size). This is in stark contrast to the typical rate of 1 – 2% charged by a human advisor, notwithstanding commissions.

Digital advisors are also more accessible. They’re available 24/7, provided you have an internet connection, versus the normal business hours of a human. They also have much lower capital requirements. In some cases, unless you have an investment portfolio of at least $100,000, it’s impossible to even engage a financial planner.

They’re also more efficient. What used to require a phone call, a meeting, and lots of paperwork can now be done with a few clicks in front of a computer screen.

There’s another advantage to using a robo-advisor—consistent results. Humans, even the best ones, are prone to making mistakes sometimes. But when using a digital advisor, this room for error disappears. There’s also less room for making knee-jerk reactions to volatile market conditions when using a digital advisor tool. As the Slavic blog post points out, “Investors utilizing robo-advice do not actually decide what (and when) to buy and sell, and instead only adjust their investment profile’s variables. During last month’s sharp selloff, for instance, any nervous investors could have informed the robo-advisor that they have become more risk adverse so that they are eventually shifted into a more conservative portfolio. Panic-selling everything and essentially cashing out, though, would have involved more hurdles, thereby helping many investors avoid making emotional-based trading decisions at a potentially inopportune time.”

Getting used to robo-investing

Hundreds of billions of dollars are now managed by robo-advisers, but many investors are still unfamiliar with these tools. But as online shopping and online banking did before, acceptance will come—it might just take some time.

Slavic’s data show that 43% of employees in plans who offer Bespoke choose the service, with 80% of those being in the Generation X and Millennial cohorts.

In the coming months, XMI clients will have access to Slavic’s digital advisory tool. To prepare for the offering, we encourage you to continue reading up on the ways artificial intelligence can help enhance your 401(k) offering. If you decide to offer it to your employees, XMI can work with you to develop a rollout and implementation plan to help promote employee utilization.

For more information, visit slavic401k.com/bespoke.html.

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