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401(k) Robo-Advisor

By Barbara A. Friedberg

Robo-advisors are making a splash in the investing landscape. With automated investing according to your risk tolerance, these new platforms promise rock-bottom fees, market matching returns, annual rebalancing and on occasion, tax-loss harvesting. Based upon proprietary algorithms and in many cases, Nobel prize-winning investment theories, robo-advisors promise to make investing stress-free. In a 2015 research report, “Robo Advisors Capitalizing on a Growing Opportunity” by Deloitte, robo-advisory assets were clocked at over $19 billion and growing rapidly. In spite of their growth and prominence in the investment industry, they are still a tiny percent of the $25+ trillion U.S. retail investment market. Robo-advisors are found in many forms: most commonly, personal finance companies like Wealthfront, Betterment, and Personal Capital, as well as those provided by the large investment brokerage firms such as Vanguard Personal Advisors and Schwab Intelligent Portfolios. Additionally, several firms offer ‘white label’ robo-advisors for use by individual registered investment advisors in their own firms. Human Interest is one of only a few robo-advisors specifically targeted towards 401(k) accounts that offers robo-advising on top of their 401(k) tool and administrative services.

Robo-advisor risk quizzes

Most robo-advisors start with a very short questionnaire, to help investors figure out if you’re going to panic and be tempted to sell when your investments fall during a market downturn. If you’re very squeamish about the ups and downs in value of your investments, then you’d be considered a conservative investor. If you can stomach greater volatility in the value of your stock and bond funds, then you’re considered a more aggressive investor. Not every investor is the same, and this is one of the simplest and most effective ways that robo-advising is utilized.

Robo-advisor investment choices

After the robo-advisor platform understands your risk tolerance level, you will be guided toward a pre-determined investment portfolio. For the more conservative investor, your portfolio will hold a greater percentage of bond-type investments. For those with more aggressive tendencies, there will be a greater percentage of stock funds. The number and type of individual funds will vary based upon the robo-advisor. For example, the Human Interest robo-advisor specifically for 401(k) plans has a well thought out stable of low fee investments. All of their Vanguard mutual funds have management fees ranging from 0.05% to 0.20% per assets under management (AUM). Additionally, their diversified offerings include large, mid and small capitalization U.S. stock index funds. The Human Interest Vanguard offerings also include a real estate investment trust (REIT) fund, and a broad selection of bond funds. See all of the Human Interest investment choices here>>> Individual robo-advisory firms offer distinct investment funds, but in general most of the funds are low fee, allowing more of your investment dollars to go towards investing and less toward fund management.

How you can benefit from a 401(k) robo-advisor

Robo-advisor investing within your 401(k) is a new concept within the retirement arena. There are many reasons why a robo-advisor for your 401(k) is a sound investment choice.
  1. A 401(k) robo-advisor can cut fees and expenses. 401(k) plans rack up many fees, for the firm and the plan participants. These expenses take money away from the actual fund investments, and can’t be recouped. Robo-advisors may also lower both administrative costs as well as underlying fund management fees. Most robo-advisors use low fee mutual or exchange traded index funds. In contrast with the traditional 401(k) firms that might offer higher fee actively managed investment options.
  2. Robo-advisors in a 401(k) can remove the employees’ problem of creating the best investment portfolio for their needs. When Tiffany starts work at an employer with a robo-advisor 401(k) option, she starts out by taking the simple risk quiz. After that, her investment portfolio is created with low fee funds in line with her risk tolerance. She avoids thecumbersome step of having to select her own funds and deciding what percent to invest in each one.
  3. Rebalancing is automated in most robo-advisors. That means, when you invest in a robo-advisor and the recommended fund percentages deviate from your preferred allocation, the platform will rebalance the investment funds back to your preferred allocation. That means, if stocks decline in value over the year and bonds yield better returns, at the end of the year, your 75% stock investments and 25% bond investments might drift towards a 35% bond investments and 65% stocks allocation. The robo will automatically adjust to get your asset allocation back to your preferred 75% stock versus 25% bond investments.

Is a 401(k) robo-advisor right for you?

As with any type of investment, robo-advisors have disadvantages. There are a limited number of pre-determined investment portfolios, with a pre-specified number of funds within each one. If you’re seeking funds that aren’t included in the robo-advisor’s offerings, then you won’t be able to add them to the automated portfolio. If you’re interested in a human financial advisor, you may want to read this article: 401(k) Financial Advisor Checklist For investors who want to tweak their own holdings, add additional mutual funds and actively manage their 401(k) account, a pure robo-advisor 401(k) may not be for you. The robo-advisor feature of Human Interest is optional, so individuals can choose to opt out to choose and manage their own funds. If you’re an employer or employee seeking low fee funds and low administration costs with a passive investment strategy, you may want to consider the 401(k) robo-advisor. Employers, going with a low fee robo-advisor can offer your employees an important benefit, while keeping the plan administration straightforward. Employees, if your employer offers a robo-advisor option, it’s worth a look. The robo-advisor helps estimate your risk tolerance level and the platform algorithms do the rest. Employees benefit because in most cases, you’re not locked in and can change your fund choices whenever you desire. As the robo-advisors continue to grow, you’re likely to see more of these automated platforms in your 401(k) account options.

If you want to set up or switch to an a 401(k) that’s great for employees and employers, let your company know about Human Interest.