How a Generative AI System Handled a 401(k) Question

A ChatGPT test conversation on a mobile phone

As generative AI continues to be a resource for getting quick answers to questions, it's likely that some clients are leveraging the tool for financial advice.

Generative AI, such as ChatGPT, can provide a broad understanding of investing, helping clients feel more comfortable discussing their options during meetings with their advisors.

However, on its own, generative AI is not a credible source of financial advice or information.

AI chatbots are not capable of replicating the quality of service and personalization advisors offer, making it more of a supplementary tool than a threat.

The financial advice provided by generative AI is an opportunity for advisors to showcase their value by going above and beyond the advice of AI.

To gauge the quality of ChatGPT's counsel, I prompted it to act as a financial advisor and provide feedback geared toward consumers. The advice offered, while fairly general, stands as a good starting point for consumers seeking real-time responses.

QUESTION: Should I invest into a regular 401(k) or Roth 401(k)?

CHATGPT: The decision between a regular 401(k) and a Roth 401(k) depends on your current financial situation, future expectations, and personal preferences.

Here are some key considerations for each:

Regular 401(k):

Tax Deductions: Contributions to a regular 401(k) are made with pre-tax dollars, which means they can reduce your taxable income for the year in which you contribute. This can lead to immediate tax savings.

Tax-Deferred Growth: Your contributions and their earnings grow tax-deferred until you withdraw the money in retirement. You'll pay taxes on withdrawals as ordinary income when you take distributions.

Income Considerations: If you expect to be in a lower tax bracket during retirement, a regular 401(k) may be advantageous, as you would potentially pay less in taxes when you withdraw the funds.

Roth 401(k):

Tax-Free Withdrawals: Contributions to a Roth 401(k) are made with after-tax dollars, so you don't get an immediate tax deduction. However, qualified withdrawals (contributions and earnings) are tax-free in retirement.

Tax Diversification: Having both pre-tax and Roth accounts can provide tax diversification in retirement, giving you flexibility in managing your tax liability.

Future Tax Considerations: If you anticipate being in a higher tax bracket during retirement, or believe that tax rates may increase in the future, a Roth 401(k) could be beneficial.

Ultimately, the decision may involve a combination of both types of accounts, depending on your individual circumstances and goals.

Some individuals choose to contribute to both a regular and a Roth 401(k) to achieve a balance of immediate tax benefits and tax-free withdrawals in retirement.

It's advisable to consult with a financial advisor or tax professional who can analyze your specific situation and provide guidance based on your financial goals and current tax laws.

Grading the AI's Performance

Overall, ChatGPT provided safe, accurate responses by explaining more technical financial products in layman's terms.

The accuracy of the advice is reassuring among previous complaints of chatbots "hallucinating," or making up answers for prompts.

It's also interesting that ChatGPT picked up on the relevance of product diversity when making investment decisions, as that is a bit more nuanced than I expected for an automated response.

Given the highly regulated nature of our profession, it's crucial that clients are aware that not all advice applies to every situation.

With that in mind, it's a good sign that ChatGPT prefaces its answer with "it depends on the situation," which is where a financial advisor comes in.

Using ChatGPT for foundational financial research can streamline the advisement process, so advisors can focus more time on their curated solutions.

Ultimately, encouraging consumers to connect with a financial professional highlights AI's limitations, making it a helpful tool for both advisors and consumers.

By working alongside AI, advisors can spend less time on internal processes and more time focused on their clients.

Credit: Daniel Chetroni/Adobe Stock

Jonathan Kestle, CLU, is a financial planner, president of Ian C. Moyer Insurance Agency, and co-founder of Cascades Financial Solutions, a fintech venture focused on the design and optimization of retirement income withdrawal strategies. He is a 10-year Million Dollar Round Table member.