Study Says Investment “Help” Makes a Difference

January 25, 2010 (PLANSPONSOR.com) – It is a long-accepted tenet that most retirement plan participants want – and need - help to make good investment decisions, and a new study suggests that it makes a difference.

The new report – a collaboration between Hewitt Associates and Financial Engines - titled “Help in Defined Contribution Plans: Is It Working and for Whom?” – comes to the unsurprising conclusion that participants who get (investment) “help” - defined in the report as target-date funds, managed accounts, or online advice - are better off than those who do not, in all but the most extreme circumstances (in 2008, the most conservative allocations, no matter how undiversified or age-inappropriate, did better than more diversified portfolios, according to the report).  On average, the median annual return for Help Participants was almost 2% (186 basis points) higher than for Non-Help Participants, net of fees, according to the report.       

Additionally, those participants using “Help” have portfolios with risk levels that the survey’s authors suggest are both “more appropriate for their retirement horizons and more efficiently allocated among the options in their plan”.  Factors contributing to that risk “gap” were the tendency of “non-helped” participants to make no adjustments in their portfolio (or risk level), and a gravitation toward larger holdings in company stock over time.  In fact, the survey noted a particular concern - in view of a more limited time to recover from mistakes – that the greatest variability in observed portfolio risk levels was found among retirees and near-retirees not using “Help”.    

The report looked at participant behavior, portfolio risks and returns during a particularly volatile period in the markets - January 1, 2006 and December 31, 2008 – across a dataset of seven large plans representing more than 400,000 individual participants and over $20 billion in plan assets.        

Who’s Getting HELP?       

On average, across the more than 400,000 plan participants represented in the report, about a quarter use at least one of the types of Help offered within their 401(k) plans.  However, average usage of Help overall varied across the seven plans in the sampling, from a low of 15% to a high of more than 35%.     

Of the quarter of participants using Help, 9.8% are invested appropriately in target-date funds (e.g. 95% or more of their balance in that offering – as an interesting side note, of the 75% not using “Help”, 43% have allocated some money to target-dates, but less than 95%.  The average portfolio allocation among those participants was 36%), while 9.7% were enrolled in managed accounts, and 5.8% use online advice.