Data & Research November 30, 2007

Schwab Finds Participants Reap Rewards from 401(k) Advice and Target-Date Funds

Participants using an advice product in 401(k) plans administered by Schwab Corporate&Retirement Services earned an average 3% higher return than those who did not, according to new data.

Reported by

Fred Schneyer

A Schwab news release said its 2006 data showed 401(k) participants using advice services from GuidedChoice, a Schwab offering, earned an average 14.11% 2006 return – compared to an 11.11% average return by participants who were not using advice or target-date funds. Schwab said there was a similar showing in 2005 with 401(k) participants who received GuidedChoice advice earning an average 9.2%, nearly 3% greater than the average 6.6% by those who did not use advice or target-date retirement funds.

“It’s common knowledge that not contributing enough to receive the full 401(k) dollar match from your employer is the same as leaving money on the table, but employees are also potentially missing out on a valuable benefit if they are offered professional advice at no additional cost and do not take advantage of it,” said Jim McCool, executive vice president of Schwab Corporate & Retirement Services, in the news release.

According to the announcement, participants younger than 25 who received plan-sponsored advice earned a 14.06% average return in 2006, nearly 5% better than those in the same age group who did not. By comparison, those in the 56- to 65-year-old age bracket with advice received an average 13.29% while those without advice and not in target-date funds earned an average 10.75%.

There is also a “significant” difference in returns for participants using Schwab Managed Retirement Trust Funds versus participants choosing their own investments without advice or target-date funds, Schwab said.

Employees age 35 and under would have earned a 14.65% average return in 2006 by investing in the Schwab Managed Retirement Trust 2040 Fund, compared to 10.87% for participants in the same age group who did not use a target-date fund or advice. Participants ages 36 to 45 would have earned a 13.42% average rate of return by investing in the Schwab Managed Retirement 2030 Trust Fund, compared to 11.40% for participants in the same age group who did not use a target-date fund or advice.

The 401(k) Company, a Charles Schwab company that focuses on serving very large retirement plans, is seeing similar rate of return results in its risk-based asset allocation models, the announcement said.

More information on the Schwab data can be found here.