The study looks at several forms of investing help that 401(k) plan
sponsors provide to employees, and the news is encouraging. Workers
who use target date funds (TDFs), professional account management or
online advice get 3.32 percent better returns - even after the cost
of those services - than those who go it alone. That may not sound
like a lot, but it adds up: The researchers calculate that it could
translate to a 79 percent account balance gain for someone age 45
today at age 65.
The study was conducted by Aon Hewitt, the employee benefit
consulting firm, and Financial Engines, a key provider of 401(k)
advice services. It examines the performance of 723,000 participants
in 14 large 401(k) plans that used all three forms of help from 2006
to 2012. Even though both firms have an ax to grind arguing for
professional plan services, the findings are striking, especially
since a growing number of 401(k) plans are adding automation and
advice options. Aon Hewitt reports that 86 percent of 401(k) plans
offer TDFs, up from 33 percent in 2005.
"The upshot for the typical investor is to recognize that investing
is hard to do well," says Wei-Yin Hu, vice president for financial
research at Financial Engines. "If your employer offers a form of
help, use it, and choose whatever type of help best fits your needs.
Chances are good that you'll do better than you would investing on
But the findings on TDFs should set off alarm bells for plan
participants and sponsors alike. These funds are designed as
one-stop investment solutions that automatically keep your account
balanced between stocks and fixed-income investments to an
age-appropriate level; as retirement gets closer, the amount of
riskier equities is reduced. The idea is to put all, or nearly all,
of your account balance into the TDF and let it ride.
Only 37.8 percent of participants investing in TDFs were using them
as a "one-stop" investment, however, according to the study. Among
those who split their investments with other mutual funds, only 35
percent was invested in the TDF, on average. Even more worrisome, 42
percent of investors who had 50 to 95 percent of their portfolios in
TDFs had 90 percent of the remaining portion of their portfolios
invested in the stock of their own companies - a potential
over-concentration that can make the portfolio significantly more
risky than necessary.
This partial target date usage had a negative impact on returns.
Median annual returns for 2010 to 2012 were 2.44 percent lower than
for participants who used help of all kinds, after fees.
Hu thinks one indirect culprit is another automation trend -
auto-enrollment of new workers in 401(k) plans. Most auto-enroll
features use TDFs as the default investment choice for 100 percent
of contributed funds. But as account balances grow, workers tend to
start diversifying their investments, Hu says.
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"If people have gotten any investment education, the first thing
they probably learned is not to put all their eggs in one basket,"
he says. "But they don't always understand that TDFs are one of the
few exceptions to that rule."
Still, the trend is promising. The study found that 34 percent of
workers in the 14 plans use some form of help, compared with 30
percent in 2011, the last time this study was conducted. The trend
toward advice is especially positive when employers find a way to
integrate it without driving up overall plan costs. Financial
Engines charges a managed account quarterly fee of 60 basis points
or less to help participants select mutual funds from the plan's
menu, which are added to the expenses of the underlying funds. Most
often, it recommends low-cost index mutual funds, which creates
breathing space to add financial advice without driving overall
costs to excessive levels.
The next step for plan providers and third-party advisory firms
should be integration of more holistic financial planning help.
Financial Engines plans to take a step in that direction this year,
when it rolls out a service for 401(k) participants aimed at helping
them make optimal Social Security filing decisions.
For more from Mark Miller, see http://link.reuters.com/qyk97s
(The writer is a Reuters columnist. The opinions expressed are his
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Douglas Royalty)
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