Retirement Plan “Help” Helps

May 13, 2014 ( – Retirement plan participants using certain help offered with their plans continue to earn considerably higher returns than those not using help.

A study from Financial Engines and Aon Hewitt defines “Help” as access to target-date funds, managed accounts and online advice, and finds across all age ranges and a wide range of market conditions, participants using Help (Help Participants) earned higher median annual returns than those not using Help (Non-Help Participants).

The annual investment performance gap between Help Participants’ and Non-Help Participants’ median returns was 3.32%, net of fees over the period from 2006 to 2012. For a 45-year old Help Participant, it could translate to 79% more wealth at age 65, according to the report, “Help in Defined Contribution Plans: 2006 through 2012.”

For the first time in the study, Financial Engines and Aon Hewitt conducted a comparative performance analysis between managed account portfolios and target-date fund portfolios. As expected, there was only a modest difference in median annual returns, with managed account portfolios outperforming target-date fund portfolios by 0.50% (50 basis points), net of fees, says Wei-Yin Hu, Financial Engines’ VP of Financial Research.

The study found 60.5% of Non-Help Participants had inappropriate risk levels. Of those, approximately two-thirds were taking on too much risk, and about one-third were taking on too little risk, jeopardizing these participants’ ability to accumulate sufficient retirement wealth. Individuals who are at least 50 years old had the widest variability in risk levels, with some in this age group having risk levels above that of the S&P 500 index (a diversified 100% equity portfolio).

Help usage by participants increased to 34.4% from 30% in the prior edition of the study. On an asset basis, Help users accounted for 30.3% of the account balances in the plan sample.

Although the usage of Help by assets is similar to Help usage by participants, there are dramatic differences in usage by type of Help. Measured on a participant basis, target-date funds accounted for nearly half (49.2%) of total Help usage. However, when measured by assets, target-date funds only accounted for 12.3% of Help usage, with managed accounts and online advice accounting for 87.7% of Help usage. That is, about nine out of 10 dollars impacted by professional Help were in managed accounts or held by users of online advice.

Target-date fund usage led the Help category, with 16.9% of all participants investing at least 95% of their assets in a target-date fund. Target-date fund Help Participants accounted for only 3.7% of plan assets, as most had small balances. The growth in target-date fund usage is largely attributable to the fact it is the default investment option in 12 of the 14 plans with automatic enrollment in the study. Where the data was available, the study found 88.6% of target-date fund users were defaulted into the fund. Across plans, target-date fund usage ranged from a high of 35.8% to a low of 1.1% of participants.

Managed accounts were the second most prevalent form of Help, with 12.1% of all participants using managed accounts. On an asset-weighted basis, managed account users represented 15.2% of plan assets. Managed accounts usage also varied by plan, from a high of 49.0% to a low of 2.9% of participants. One plan’s re-enrollment of all existing participants into managed accounts was the driving factor behind the highest (49.0%) managed account usage, once again showing the importance of defaults in Help usage.

Online advice Help usage was 5.4% across all plans, ranging from a high of 13.7% to a low of 0.7% of participants. Online advice users accounted for 11.4% of plan assets, with most users having significantly higher than average balances than participants using any other form of Help.

Help Participants in managed accounts were significantly more likely to stay with Help than target-date fund participants. Managed account Help Participants’ five-year retention rate was 87% compared to 56.8% for target-date fund Help Participants.

The study found many participants were not using target-date funds as designed. Only 37.8% of participants investing in target-date funds were using them as a “one-stop” investment (see “Participants Sabotaging Help TDFs Give Them”). The study shows defaulting into target-date funds is working only for new employees, but over time they are leaving the funds, Hu told PLANSPONSOR.

Plan sponsors not offering all three types of Help are likely to underserve significant population segments, the report says. Younger participants with smaller balances were most likely to use target-date funds, while younger participants with larger balances were most likely to use online advice. Older participants, including near-retirees, were most likely to use managed accounts.

Automatic enrollment of new hires into target-date funds created high Help usage among the youngest groups of participants. Among Help Participants, 88.2% of those younger than age 25 and 68.5% of those between ages 25 and 35, used target-date funds. Target-date fund Help Participants had an average age of 38 years and a median 401(k) account balance of $3,972.

The majority (54.0%) of Help Participants age 55 and older use managed accounts. For Help Participants with account balances greater than $15,000, managed accounts were the most widely used form of Help, with the highest usage among participants with account balances between $50,000 and $250,000. Managed account users had an average age of 48 years and a median 401(k) account balance of $44,216

“Help works, so plan sponsors should consider adding as many forms of help as they can,” Rob Austin, Aon Hewitt’s Director of Retirement Research, told PLANSPONSOR. “Maybe they don’t because of cost, maybe think it will make plan seem more complicated, maybe it is because they don’t know how much value it will provide. That is why we did this study.”

“What we’re seeing is everyone’s needs are different—for some target-date funds work well, for some managed accounts work better—so the key for employers is to offer all three forms of help and make sure they’re used correctly,” Hu adds. “This will ensure participants earn the highest returns available.”

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