Investors who receive employer-provided help investing in their 401(k)s have better returns than those who go it alone, according to a recent study. That provides some support for the Obama administration’s expected proposal, which would make unbiased investment advice available to workers who participate in these types of plans.
For the three years between 2006 and 2008, the median annual return for investors who received employer-provided help was 1.86 percentage points higher (after taking fees into account), on average, than those who did not receive any help, according to the report. The study was conducted by Hewitt Associates and Financial Engines, which builds and manages portfolios for retirement plan participants (and which clearly stands to benefit if more employers hire them to provide advice).
Employer-provided “help” includes the use of target-date funds, whose investment mix becomes more conservative as the it nears its target date; managed accounts, where the 401(k) is professionally managed; and online advice, where investors are given specific online recommendations that they must carry out on their own.
In his State of the Union address on Wednesday, President Obama is expected to propose a series of initiatives that would help middle-class families, including more assistance in saving for retirement. Among other things, the administration said it was reviewing target-date funds, and will require clear disclosures of their risks.
The results of the study aren’t surprising. Many 401(k) participants would probably be better off in a well-constructed target-date fund, for instance, than left to their own devices. The people in the study who didn’t receive help often had portfolios that were inappropriate for their stage in life. For instance, participants who were 55 years or older, and who had the riskiest portfolios, were actually taking on even more risk as they approached retirement (usually by having too much company stock), while some younger 401(k) participants were invested too conservatively.
“They were making poor choices related to their portfolio risk, or they were choosing portfolios that were inefficiently allocated,” said Christopher Jones, chief investment officer at Financial Engines. (The report examined 400,000 participants in seven large plans that collectively held $20 billion in assets. The plans are joint clients of Financial Engines and Hewitt.)
So does that mean everyone needs some sort of 401(k) advice?
I raised this question — about financial advice in general — in a recent column. The answer varies, of course, and largely depends on your specific circumstances.
Yet simply making advice available doesn’t offer any guarantees either. Target-date funds are often misused because investors don’t fully grasp how they work. Other online advice has limits, too. The strength of Mr. Obama’s proposal will be apparent once we know the details. Will employers be required to educate employees? What kind of “advice” will be available? And how much will it cost?
Of the study’s participants who were offered at least one type of help within their 401(k), about a quarter of them used that help in the way it was intended, Mr. Jones said.
The good news is that the more large employers are already providing some type of guidance. About 71 percent of employers now offer target-date funds, up from 52 percent in 2007, according to a separate 2009 Hewitt study. And nearly a third of employers offer online advice, up from 20 percent in 2007. The number of plans offering managed accounts has more than doubled, rising to 26 percent in 2009 from 11 percent in 2007.
The quality of investment options and advice is going to vary across employers. And some may charge more than others for advice. If you’re lucky, your employer offers several inexpensive index funds and target-date funds from reputable providers, along with free online advice and tools.
If your choices are lacking, don’t wait for the government to act. Consider banding together with your co-workers to lobby your human resources department to make some improvements.
What kind of advice does your 401(k) plan offer? Have you used it?