Brian Gendreau, investment strategist with ING and one of the editors of the report, said: "Participants simply don't rebalance. Those that put money in asset allocation or balanced funds, did better. It's because (asset allocation funds) are professionally managed and they rebalance."
"The most important conclusion (of this report) is that when individuals are left to their own devices, they don't make good decisions," he said.
Shiv Mehta, senior vice president and head of ING Investment Management's asset allocation business who died last month, was an author of the report.
The report found that 34% of all participants used a balanced or asset allocation fund within their portfolio, as part of their overall portfolio. These options are often used as an anchor for diversification and are beneficial as part of an overall portfolio.
ING's results showing participants' returns improving with more investment options comes at a time when many plan sponsors are reducing the number of options their plans offer.
The findings were observed over a full market cycle where one-year returns at the end of 2004 were of a buoyant equity market and the three- and five-year returns had periods of negative equity returns, he said.
ING's report found that the evidence persisted; that diversification into higher numbers of funds appeared to have correlated with better returns in strong and weak equity markets.
ING hypothesized that the outperformance was because of the diversification factor — most participants use three or four funds. But three or four funds do not provide enough diversification. To be able to buy an optimally balanced portfolio, you need to use between four and six strategies — to have assets invested in fixed income, large-cap, small and midcap, international, growth and value, according to the report. The average number of options used in this study was 4.1.
Michael Francis, president of Francis Investment Counsel, Hartland, Wis., said the results are not surprising; participants need to be diversified properly to achieve the best results.
The study's results also debunked the prevalent view of gender bias in DC plan investing, with men's investments outperforming those of women. ING found that men and women achieved very similar returns in their 401(k) portfolios.
Through December 2004, 44% of male DC participants beat the S&P 500 over one year, compared with 45% of women. For the five-year period, 60% of men beat the market, compared with 61% of women.
Maybe it's because the data came from a single vendor and they spend a lot of time and effort educating and communicating to both men and women, said Mr. Gendreau.