SAN FRANCISCO Participants who used investment advice and target-date funds saw significantly higher returns than those who didnt in 2006, according to a study by Schwab Corporate & Retirement Services Inc.
And Schwab executives were shocked at just how well participants did.
While its not surprising that participants who get investment help do better, but its very surprising just how big a difference there was, said Clare Berquist, director of 401(k) strategies at Schwab.
The firm used data from 7,000 plan participants using Schwab Personal Retirement Planning, an investment advice service provided through GuidedChoice Inc., La Jolla, Calif.
Participants who used the advice earned an average 14.1% return in 2006, compared with 11.1% for participants who did not use the service.
Schwab saw similar results in 2005, with 401(k) participants who received advice, earning an average return of 9.2%, compared with 6.6% for those who did not use advice. Schwab has offered investment advice for six years, Ms. Berquist said.
Some of the most significant findings came from data collected from younger employees, she said. Participants younger than 25 who received advice earned a 14% average return in 2006, nearly five percentage points better than those in the same age group who elected not to receive advice.
There is significant growth in the number of participants that use these services, as those that do are seeing very positive returns, said Ms. Berquist.
More than 60% of Schwabs plan sponsor clients offer investment advice, up from 42% in 2006, and more than 65% of plan sponsors offer target-date funds, up from 54% in 2005, she said.
Plan sponsors recognize that participants need help, so they are offering these services. And participants are taking advantage of that help, she said.
It has been a similar success story for target-date funds, she said.
For participants 35 and younger, if they invested in the Schwab 2040 Fund, they would have earned a 14.6% average rate of return on that fund in 2006, compared with 10.8% for participants in the same age group who did not use the target-date fund. Participants aged 36-45 would have earned 13.4% if invested in the 2030 Fund, compared with 11.4% for participants who did not use the fund.
Ms. Berquist said the number of plan sponsors offering target-date funds will continue to soar now that the funds have been approved as a qualified default investment alternative by the Department of Labor.
With the passage of the QDIA regs, Uncle Sam has ratified these options as an appropriate default. That is a huge endorsement, she said.
The data analyzed by Schwab should encourage plan executives who have held out on offering target-date funds, she said.
Since the Pension Protection Act, people are interested in all sorts of automatic features. Plan sponsors are still digesting some of it, but a lot of sponsors that have held out from offering auto features are taking a look at their plans right now, Ms. Berquist said.
The investment advice service offered by Schwab provides specific recommendations to the investment fund choices in a participants retirement plan. Other services include the automatic rebalancing of participant accounts to maintain appropriate asset allocations, she said.