It’s not easy to jump from the near bottom of the list to the very top, but the financial advisory industry did just that in the rates of return its 401(k) plans delivered for its employees.
In 2023, the 401(k) plans of employers in the financial advice industry returned a median of 19.2%, the highest of any industry group, according to the latest Judy Diamond 401(k) Benchmark Report released in April.
That’s a huge turnaround for an industry that just the year before was among the three worst performers for 401(k) rates of return, delivering a median of -17.24%.
“In 2022, they were among the worst performers for rate of return,” said Eric Ryles, vice president of customer solutions at Judy Diamond Associates, a provider of sales, prospecting and sales analysis tools for the employee benefits and retirement industries. “This year they’re the best.”
Ryles speculates that the financial advisory industry’s recent No. 1 ranking for 401(k) returns may be tied to the industry’s more aggressive stance in choosing more than the average number of "growth-style" equity investments for their plans, which he said rewards investors when markets do well but punishes them when markets do poorly.
A greater selection of aggressive investments may have rewarded the financial advisory industry during the bull market of 2023 but may also have hurt it during the bear market of 2022, he said.
Ryles also points to the financial advisory industry’s polar opposite: the banking industry, which is more conservative in the investments they choose for their plan lineups. In 2023, the banking industry finished last for rate of return, delivering 15.79%. In 2022, it was first, with a median -15.21% return.
“They went from first to worst precisely because they are more conservatively invested,” Ryles said of the banking industry.
In his experience working with people in both the banking and financial advisory world, Ryles has found that people drawn to banking tend to be more conservative with their approach to money compared with financial advisers who are more aggressive.
“We’ve seen these guys at the opposite end of the rate-return spectrum for a couple of years now,” he said.
Bill Ryan, partner and defined contribution team leader at NEPC, is skeptical that more aggressive plan menus — or those offering more equity investment choices — played a role in the ranking.
“Despite some industries offering a broader spectrum of investment choices, the number of options doesn’t determine how participants invest,” he said, citing NEPC research that while 74% of employers offer 11 or more core investments, participants choose only three to five.
“A large menu doesn’t necessarily equate to an aggressive plan,” he said, adding that some core menus offer more than 20 equity options.
In Ryan’s view, a more likely explanation for the outperformance of financial advisory firms is that some industries are simply more risk tolerant than others and therefore see greater returns during market upswings.
“Professionals in finance, accounting, law, engineering and medicine tend to exhibit a greater comfort level with the short-term fluctuations inherent in equities,” Ryan said.
The financial advisory industry, however, beat 26 other industries on more than just rates of return. It ranked No. 1 for plan performance overall, surpassing other industries on almost all performance measures.
The benchmark report evaluated 27 industry groups on six metrics of 401(k) plan performance, including account balances, participation rates, and employer and employee contributions.
In addition to posting the highest median rate of return, the financial advisory industry registered the largest employer and employee contributions, drawing a median $4,296 and $11,011, respectively, for the year. It also tied for first with four other industry groups in plan participation, with a 100% participation rate.
Ryles attributes the high performance of 401(k) plans in the financial advisory industry largely to demographics. Workers in the financial advisory business tend to be white collar, highly educated and well-compensated, factors that allow them to contribute more to their 401(k) accounts.
“They’re getting paid enough that they can contribute a healthy portion of their salary,” Ryles said.
In addition, a 6% deferral rate for someone in the financial advisory industry is “going to be worth a lot more than someone say in construction or daycare contributing 6% of their take-home pay,” he said.
Employees in the financial advisory industry also tend to work for small companies, which makes it easier to achieve high participation rates.
Two-thirds of employers in the financial advisory industry have less than 10 employees, so “it’s not tough for them to get a 100% participation rate when you have three people at the company,” Ryles said.
The financial advisory industry tied for first with four other industry groups — certified public accountants, dentists, physicians and lawyers and legal services, all of which have a high concentration of small practices — for plan participation.
The only metric where the financial advice industry lagged other industries was in account balances, where it ranked fourth after physicians (3rd place), certified public accounts (2nd place) and lawyers and legal services (1st place).
Employees in financial advisory firms had median account balances of $111,637 in 2023, up 14% from the year before. Doctors, CPAs and lawyers, in contrast, had median balances of $114,790, $118,010 and $120,575, respectively.
Even with a 4th place finish on account balance, the financial advisory industry still came out way ahead of the pack. The industry ranked first or tied for first on all but one of the six metrics of performance.
Out of a perfect overall score of 6, the plans of financial advisory firms scored 9. Their next nearest rival — certified public accountants — scored 31.
“The idea behind the overall score is that lower is better,” Ryles said. “It’s like golf.”
Ryles explained that if an industry ranks first in each of the six metrics, it would get the perfect score of 6, which none of the industry groups achieved.
The financial advisory industry was just three points shy of the perfect score, making it an especially strong performer.
“There were not only No. 1,” Ryles said. “The were super No. 1.”
