401(k) savers who get advice get higher returns
People who sought help earned 3% more: study
written by Andrea Coombes
SAN FRANCISCO (MarketWatch) — Retirement savers who sought investing advice through their 401(k) plan enjoyed a median annual return almost 3% higher than those who didn’t — even after the fees they paid for that advice, according to a new study.
Investors who looked for help online at their 401(k) plan website, enrolled in a managed account, or had at least 95% of their savings invested in a target-date fund were categorized as “seeking help,” according to the study of eight large 401(k) plans with more than 425,000 participants and $25 billion in assets, by Aon Hewitt, a consulting firm, and Financial Engines, an investment advisory firm.
That 3% difference adds up over time. Based on the median annual returns noted in the study, a 45-year-old who sought help on how to invest his $10,000 would have $71,400 after 20 years — versus just $42,100 for the person who invested the same amount but didn’t seek help.
The portfolios of people who didn’t get help suffered from “inappropriate risk levels and inefficient portfolios,” according to the report. While people who asked for help were likelier to move into less-risky investments as they aged, people who didn’t seek help were likelier to increase the risk level in their portfolio when they were in their 30s, and to stick with riskier investments even into their 60s, according to the report.
People who didn’t seek help made other mistakes, too, said Wei Hu, director of financial research at Financial Engines. For instance, they were “trying to market-time, panicking at the end of 2008 and then missing the recovery of 2009,” he said.
All of the employer plans studied offer participants access to all three forms of help, and all of the employers are clients of both Aon Hewitt and Financial Engines. The study covered the period 2006 through 2010.
More seek help — but 70%don’t
Thirty percent of 401(k) participants tapped into one of the three forms of advice, up from 25% in 2009 — but that increase is at least partly due to more employers automatically enrolling workers into target-date funds.
And that means 70% of people aren’t looking for advice through their plan.
Keep in mind, too, that one of the forms of help in the study is defined as having the bulk of your 401(k) savings in a target-date fund — but some of those products were roundly criticized after the 2008 downturn for maintaining relatively large stock allocations even for people on the verge of retirement.
Target-date funds work well for younger participants, said Pamela Hess, director of retirement research at Aon Hewitt. “But I do worry as folks get closer to retirement, there’s no way a target-date fund can work for everyone [because] they’re so different. Is their spouse working? Do they have a pension plan? When will they retire?”
The study found that managed accounts — where a professional adviser makes the investment decisions — performed slightly better than the other two types of advice, even after the fees charged for that help, but Hu cautioned that the 18 basis-point difference in median return for the managed accounts versus the median return for all three types of help together was not statistically significant.
“We did have enough data to say that managed accounts ... versus all help together, did slightly better over this time period,” Hu said. “But these are fairly imprecise calculations, and these are different forms of help that ultimately serve different people.”
The type of help sought varied by age, with younger participants with smaller account balances gravitating towards target-date funds (and, at some companies, automatically enrolled in those funds), while people closer to retirement were likelier to seek more personalized investment advice through a managed account.
Younger participants with large account balances preferred getting their advice via online tips and tools, according to the study.
More savers are getting access to advice in their 401(k) plan, especially those who work at large companies: 81% of such companies offer target-date funds, up from 71% in 2009; 37% offer online advice, up from 32% in 2009; and 29% offer managed accounts, up from 11% in 2007, according to a separate Aon Hewitt study of 500 employers.
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