Investment Help Pays Off, Study Finds

By Patty Kujawa

Jun. 9, 2010

People who use professional help to manage their 401(k) plans get higher returns than those who try to figure it out themselves. And, retirement plan participants who use help have risk levels and asset allocations that better fit their needs, a recent study shows.

The study—“Help in Defined-Contribution Plans: Is It Working and for Whom?”—focused on three of the fastest-growing types of professional help: target-date funds, managed accounts and online advice. The joint effort by Hewitt Associates and investment advisor Financial Engines showed that participants using help had a median annual return of 1.86 percent more than those who made their own investment choices.

The study examined the behavior of 400,000 participants in seven large plans with more than $20 billion in assets from 2006 to 2008. Only 25.3 percent of these participants used some kind of help.

That’s a lot of people making either too risky or too conservative investment choices on their own, says Pam Hess, Hewitt’s director of retirement research.

“It is amazing how a small shift can have significant meaning,” Hess says.

For example, a 25-year-old investing $10,000 in a retirement plan would see a 103 percent increase to $105,800 by age 65 when using investment help. If this young worker doesn’t use help, he could expect to earn about $52,100, the study reported.

Especially in volatile times, it’s important that participants use the right kind of help according to their needs and age. While younger workers may use target-date funds when entering the workforce, it might be a better idea to switch to managed accounts once workers get to their 40s, Hess says. Many people need help figuring this out.

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During the three years studied, participants with appropriate risk levels underperformed in only one instance—when compared with low-risk partici- pant investors in the bear market of 2008. Otherwise, appropriately risked investors performed better or the same in every other market condition.

The study showed target-date fund users had the shortest work tenure and were on average 38 years old, with a $6,300 account balance. Managed account users had 12½ years of service, were on average 49 years old and had $45,000.

Online users worked fewer years and were younger than managed account users but had higher account balances of nearly $70,000. By comparison, non-help users averaged 45 years old, had similar tenures to online users, but had significantly lower average balance of nearly $43,000.

Employers need to have various kinds of professional investment help available for the different needs of their workforces. Older workers nearing retirement should be given special attention to avoid last-minute mistakes. “Having a personal plan is critical at that point,” Hess says. “If you get it wrong, you can’t retire. There is a big downside.”

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Meanwhile, though it’s unclear why many participants don’t use professional investment advice, the Labor Department is expected to issue soon a proposed regulation on investment advice given to plan participants. Late last year, a Bush administration rule on mutual fund companies giving investment advice was pulled, with the intent of a broader, more plan participant-friendly regulation to be issued early this year.

“I am hopeful sponsors feel more at ease with fiduciary responsibilities around” offering investment advice, Hess says.

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Workforce Management, May 2010, p. 12Subscribe Now!

Patty Kujawa is a freelance writer based in Milwaukee.

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