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Participants in 401(k)-type defined contribution plans who used professionally managed investment vehicles and investment help provided by their employer—such as target-date funds, managed accounts and online advice—experienced better returns on their retirement investments than those who did not. That's the key finding from a joint study by consultancy Hewitt Associates and independent investment advisor Financial Engines, as relayed in the study report Help in Defined Contribution Plans: Is it Working and for Whom?
The study looked at participant behavior and retirement portfolio risks and returns during the volatile period from Jan. 1, 2006, through Dec. 31, 2008. The study used a data set of seven large plans representing more than 400,000 individual participants and over $20 billion in plan assets. The main findings include:
• Participants using help are better off. On average, participants using help experienced higher median returns and lower variability in risk than participants going it alone. The median annual return for all participants using help was 1.86 percent higher than for those who did not. • Age is the key driver of help usage.A participant's age is the key predictor of the type of help used, with new hires and young participants more likely to use target-date funds, and older, more-tenured participants (especially near- and post-retirees) more likely to use managed accounts, when available. While not as strong a predictor as age, account balance also influenced the type of help participants chose, with young but higher-balance participants more likely to use online advice.• Near-retirees need more help. Retirees and near-retirees not using help showed the greatest variability in risk. The biggest mistake these participants make is taking too much risk near retirement.
• Participants using help are better off. On average, participants using help experienced higher median returns and lower variability in risk than participants going it alone. The median annual return for all participants using help was 1.86 percent higher than for those who did not.
• Age is the key driver of help usage.A participant's age is the key predictor of the type of help used, with new hires and young participants more likely to use target-date funds, and older, more-tenured participants (especially near- and post-retirees) more likely to use managed accounts, when available. While not as strong a predictor as age, account balance also influenced the type of help participants chose, with young but higher-balance participants more likely to use online advice.
• Near-retirees need more help. Retirees and near-retirees not using help showed the greatest variability in risk. The biggest mistake these participants make is taking too much risk near retirement.
"These findings trended the way we expected," says Pam Hess, director of retirement research at Hewitt. "Younger workers are more likely to use target-date funds, since their financial needs generally are simpler and similar to others’ in their age group. On the other hand, enrollment in managed accounts increases as workers near retirement because these employees have more complex and individualized needs."
Help Proved Helpful
On average, the median annual return for participants using investment help was almost 2 percent (186 basis points, net of fees) higher than those who did not. According to the study, a 45-year-old who uses professional investment help will have saved 47 percent more by age 65 than if he or she had not used help, assuming the almost 2 percent higher median annual return is maintained over the 20-year period.
The difference becomes even more dramatic if the initial investment is made at a younger age. A 25-year-old who uses professional investment help when investing $10,000 could have $105,800 by age 65 compared with just $52,100 had he or she not used help—a 103 percent increase, again assuming that the higher median annual return is maintained over the entire period, the study found.
"Employers offer workers investment help like target-date funds, online advice and managed accounts because they help participants make smart investment decisions with minimal effort or expertise," Hess says. "Our new research shows that these features can really pay off for participants—simply taking advantage of them can equate to thousands of dollars in additional retirement savings over time."
More Widely Available
Hewitt research shows that investment help increasingly is becoming standard with 401(k) plans. In 2009, 50 percent of companies offered their employees some type of 401(k) investment advice, compared with just 17 percent a decade ago.
DOL Issues New Proposed Investment Advice Rule
On Feb. 26, 2010, the U.S. Department of Labor (DOL) announced its long-awaited proposed rule on investment advice for workers covered by 401(k) plans and other retirement arrangements. Under the proposed rule, Investment Advice—Participants and Beneficiaries, seeks to ensure that workers receive unbiased advice. Similar to a Bush-administration investment advice rule that the DOL withdrew in November 2009, the new proposed rule allows investment advice to be given under the Pension Protections Act's statutory exemption in two ways:
• Through the use of a computer model certified as unbiased.
• Through an advisor compensated on a "level-fee" basis (i.e., fees do not vary based on investments selected by the participant).
To learn more, see DOL Issues Proposed Rule on Investment Advice.
According to the Society for Human Resource Management's (SHRM) 2009Employee Benefits report, 38 percent of SHRM respondents said their firms offered individual investment advice to participants in 2009. Related benefits provided by SHRM members included retirement planning services (35 percent), financial planning services (28 percent) and financial literacy programs (12 percent). Moreover, 39 percent reported that their organizations provided target-date retirement funds within defined contribution plans. (SHRM's survey did not ask about offering professionally managed accounts.)
Less Help, Higher Risk
According to Hewitt's study, participants who use professional investment help follow a more appropriate glide path, where risk starts out high early in their careers and "glides" downward as they approach retirement. Also, their portfolio allocations were invested more efficiently.
In contrast, those not using help have higher risk levels, on average, and a minimal reduction in risk as they approach retirement. This was most apparent in near-retirees' and retirees' portfolio performance. The study found that participants 55 and older not using help had risk levels that actually increased with age, indicating that they are taking on more risk as they approach retirement.
"When left to their own devices, participants are making mistakes that harm their prospects for a secure retirement," says Christopher Jones, Financial Engines’ chief investment officer. "For the 401(k) to succeed as an adequate retirement savings vehicle, different kinds of help need to be available to every participant in the plan."
Stephen Miller is an online editor/manager for SHRM.
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