Defined contribution plan participants get higher returns when they use professional investment help, according to new research from Hewitt Associates and Financial Engines.
The research, released today, shows that participants using target-date funds, managed accounts or online investment advice enjoyed a median annual return of 1.86% greater than those going it alone. The improved return takes into account fund-management, expense and managed account fees.
Participants who didn't seek help “often made mistakes in risk with their portfolios — either too much or too little,” Christopher L. Jones, chief investment officer for Financial Engines, said in an interview.
The companies' research found that only 23.3% of participants surveyed used at least one form of professional help. The research covered 400,000 participants in DC plans at seven unidentified companies. Among those plans, participants' interest in the help sources ranged from 15% to 35%.
“Age was the key differential” in choosing a help source, Pamela Hess, director of retirement research at Hewitt, said in an interview.
Target-date funds had the most attraction for younger employees who had shorter tenures and lower account balances, according to the research. The average target-date fund investor was age 38.
The average age for people using online investment advice was 41, but they had higher account balances, salaries and contribution rates than target-date fund investors, the report said.
The average age for managed account users was 49. They had longer tenures, but their account balances fell between the online-investment advice and target-date fund groups.
“Generally, they're not saving enough,” said Mr. Jones, referring to all plan participants. “Their portfolios are not efficient given their time horizons and goals.”
The companies based their findings by analyzing investment behavior and portfolio risks among plan participants from 2006 through 2008. Hewitt and Financial Engines' participant data, financial technology and portfolio analytics were used for the study.