Investment advice vs. investment education

People (usually our plan participants) often ask us the difference between investment advice and education. We’re glad they do, because we really don’t want anyone to confuse the two. Because of the frequency of the question, we thought we’d address it here.

When a company like UBT is asked to administer an employer’s 401(k) or other retirement plan, various services come with it. One of the most important services is an education program that is tailored to fit your company's retirement plan(s) and your employees' specific needs. Typically, this refers to various aspects of retirement plans and planning.

For example, retirement plan education for company X may include:

• Plan information: If a company offers a contribution match (an amount, per dollar, that an employer contributes to complement its employees’ contributions), that would be included in plan information. Also included would be specifics on Roth and traditional IRAs (individual retirement accounts), pre-tax contribution types, and rollover and distribution options.
• Plan’s investment alternatives: This would include the menu of investment options that an employee could choose from to build their own portfolio or a life cycle “target date” fund option (if that’s offered) and how it all works.
• General financial alternatives
• Awareness on increasing savings to meet certain goals
• Interactive tools showing progress toward retirement savings goals
• Asset allocation models: charts for hypothetical participants, showing examples of goals and what it takes to get there
• Information and coaching on estimating future retirement income needs

Now, one role of a Retirement Plan Educator is to go over the plan’s investment options, answering an employee’s questions about specific contribution investments the employee would like to make. Choosing investments is typically the responsibility of the employee and can seem daunting. One often-asked question when it comes to selecting investments in your retirement plan is, “Can someone just tell me which investments to choose?” The answer to that is yes, but that “someone” is probably not going to be your Retirement Plan Educator, because while they offer many valuable services to you when it comes to your retirement plan, their job is to inform, arming you with the knowledge to make your own decisions (or to know when to take it a step further). There is a real difference between “investment advice” and “investment education.”

What is investment advice?

Investment advice refers to any recommendations regarding an investor's portfolio. There are many folks who offer this service, which is often fee-based. These professionals might be financial planners, financial advisors, or brokers. They’ll provide investors with advice specific to their short- and long-term financial goals, generally over all your accounts and investments. (Investopedia)

Examples of what financial advice might sound like include:

• “Given your financial circumstances, you should invest in a target date fund."
• “A large cap growth fund would be appropriate for you."
• “I believe, based on your age and financial goals, you should be invested like this.”

A financial advisor is paid to give advice and could, to a degree, be held responsible for your portfolio's performance based on their guidance. Assuming the financial or fiduciary responsibility is a risk that the professional “advice-giver” takes, typically in exchange for a fee. Education and credentials in this field vary greatly.

What is investment education?

An investment educator’s goal, on the other hand, is to bring clarity to a plan participant’s options so they can make an informed decision that’s best for their objectives. By showing them how to use all the tools in their retirement plan toolbox, an educator is putting the employee in control. It’s a very important distinction. 

Examples of financial education might include:

• “A target date fund might be an option for you. Here is what those are and how they work.”
• “A large cap growth fund works like this, and this is how it might fit into a portfolio.”
• “Based on what you have told me, here are some options to look at.”

If your company offers education and you wish to learn more about your company’s retirement plan, including how to make investment decisions for yourself, take advantage of all the education your company may provide. If investment advice is what you’re after, you may have to look outside of the education program for a licensed professional to provide that very service. However, your Retirement Plan Educator can provide you with basic knowledge, which is a great place to start.