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Future retirees beware: Biased investment advice

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TEXT OF INTERVIEW

Tess Vigeland: If we've said it once, we've said it a bajillion times, if you have a 401(k) retirement account at work, use it! But there's a catch. A new report from the Government Accountability Office warns employees to look out for biased investment advice from the companies running the plans.

Michelle Singletary wrote about this in her Washington Post column and she joins us now. Welcome to the program.

Michelle Singletary: Thank you, so good to be here.

Vigeland: Let's start with an explanation of what we mean when we're talking about the financial advice coming from the company running your 401(k). That would be, what, Fidelity, Vanguard?

SINGLETARY: That's exactly right. You know, it's interesting, lots of people don't realize that there was layers to how their 401(k) is set up. So essentially, your employer says, "I want to offer 401(k) to my employees." Then, typically, they will hire a company to run the program. Now that company can contract out or do it themselves to give employees advice. Most of them, what they will do is set up so that you can call and get general advice. And it's really important what that means so that, say, you were about to put money into your 401(k) and you really have to no clue what to do. You could call up an 800 number or go online and put in some general information about how old you are and when you expect to retire and get a "model asset allocation" run down. Now, some companies may hire or pay for the company to sit down with you, go over everything that you have to come up with an individualized plan for you.

Vigeland: Well then, what did the GAO find this time?

SINGLETARY: Well, what they found was that basically employees don't know the difference. Sometimes, when they're supposed to be giving you just general advice, they may be guiding you towards their mutual funds. Because, it seems, that there's some other deals going on where they get more money, if you put money in certain mutual funds.

Vigeland: How does that then affect your potential returns?

SINGLETARY: Well, you know, the more you pay for your fund, that directly impacts your return. So you want to try to find funds or advice or whatever that is the least expensive.

Vigeland: And is it possible for the average investor to figure this out on their own?

Singletary laughs

SINGLETARY: I'm laughing, because the answer is...

Vigeland: That's a resound NO!

SINGLETARY: It's sort of a catty no. You know, listen, the fact of the matter is you're gonna have to try to figure it out. It's the best way that you can. I generally advise people, if your company has set up system where you can get some general advice or even individual advice, you should take it, because most people don't know where to go. If you're savvy, you can go out and find someone and hire someone yourself. For example, I hired someone that has helped me figure out my ratios. And it worked out great, because it turned out I was far too conservative for my age -- because, you know, I'm very young.

Vigeland: Well, what really struck me was this line from your column. You wrote, "How many more of these conflict of interest warnings can individual investors take before they just give up?" And you're right. These warnings come out over and over again, and you do have to wonder, should we give up and not take advice from these companies?

SINGLETARY: You know, don't give up. The fact of the matter is, you have to save for whatever you can save. These reports come out and it scares people, and they think, "Oh what the heck, I can't trust anybody, I'm going to put it under my mattress or in a CD." Well, here's the problem, the biggest threat to your retirement is inflation. You don't save or invest in a way that at least keeps pace with inflation, what you bought today, you will not be able to buy in the future. So, do get advice if it's offered in your employer, but just know that you have to be prudent about what you're being told. Check everything out. If someone says, "You should be in this fund," say, "Do you get any compensation for telling me that? Are you making any money if I put money into this fund?" So as long as you are in the know, you can make a better informed decision. Because, the fact of the matter is, financial companies have to make money, advisers advise you, they get money. But you should know what they get, so that you understand whether the information is biased or not biased.

Vigeland: Any responsibility on the part of employers in all this?

SINGLETARY: Absolutely. I think whenever they're hiring companies, they ought to be clear to the company and to the employees what type of advice they're getting -- is it the generalized advice? And if that's so, it ought to be just that. They shouldn't be steering people to funds that may pay them more. Increasingly, employers are adding that advice to the offerings to employees, and I think that's a good thing.

Vigeland: Michelle Singletary is the personal finance columnist for the Washington Post. Thanks so much Michelle.

SINGLETARY: You are so welcome!

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.

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