Defined contribution participants who used professional financial advice and management assistance had higher returns between 2006 and 2010 than those who didn’t, according to a new report by Aon Hewitt and Financial Engines.
Participants who used “help” — defined in the report as using target-date funds, managed accounts or online financial advice – outperformed those who did not by an annual 292 basis points, said the study which was released Monday.
The study examined records of eight large 401(k) plans that are clients of both Aon Hewitt and Financial Engines. The plans had a total of 425,000 participants and $25 billion in assets.
Financial Engines is a provider of online financial advice and managed accounts. In the DC market, Aon Hewitt provides, among other products and services, record keeping, compliance, plan design and investment monitoring and consulting.
The improved performance of those seeking help was across all age groups and over a range of market conditions, the report said.
The gap in returns between those using help and those investing on their own was the most pronounced during 2009 as the stock market rebounded from the 2008-‘09 financial crisis.
Those who didn’t use any of the forms of help panicked to the point where “it was like reverse market-timing,” Christopher Jones, chief investment officer of Financial Engines, said in an interview. As stock values fell, “they pulled out of equities and went into fixed income. And then they stayed in fixed income during the (stock market) run-up. In effect, they were locking in their losses,” Mr. Jones said.
Mr. Jones said the report’s research showed that people who didn’t seek help made “poor decisions in terms of risk with regard to their time horizons.” Younger participants were often too conservative while older participants were often too aggressive especially in company stock investments, he said.
Thirty percent of participants used some form of help by the end of 2010, compared with 25% that used help at the end of 2008.
The rules defining help are narrowly drawn, Pamela Hess, director of retirement research at Aon Hewitt, said in an interview. To qualify, a plan “has to offer all three (forms of help) and a participant has to use at least one,” she said.
To be considered receiving help, a participant had to be enrolled in a managed account program or have used online advice in the last 12 months. A target-date fund counts as help only if participants were required to have 95% or more of their 401(k) accounts invested in one or two target-date funds.
“We see many participants use target-date funds as investment options rather than as a strategic asset allocation,” she said. Investing in multiple target-date funds or having target-date funds count for a small portion of a participant’s total asset allocation didn’t count as help for the study.
