The report, Help in Defined Contribution Plans: 2006 through 2010, looked at the impact of professional investment help, defined as target-date funds, managed accounts, and online advice, in eight large employer-sponsored defined contribution plans, representing more than 400,000 individual participants with $25 billion in plan assets.
According to the report, Aon Hewitt and Financial Engines were able to measure how participant behavior affected portfolio risk and returns between January 1, 2006 and December 31, 2010, found that workers who used this investment “help” between 2006 and 2010 experienced annual returns nearly 3% higher (292 basis points, net of fees) than those managing their 401(k)s on their own in those programs – and that was up from a 1.86% gap identified in the last such report (see Study Says Investment “Help” Makes a Difference).
“Exacerbated by continued market volatility, workers not using Help are clearly making significant investment mistakes,” explained Christopher Jones, chief investment officer at Financial Engines. “Their inefficient portfolios and skewed risk taking is hurting results, and as the numbers show, the cost is very high.”
According to the firms, poor portfolio diversification and inappropriate risk choices contributed to the widening performance gap between participants using professional help and those not doing so, particularly in 2009. Additionally, the firms note that some participants also reacted to the market volatility, moving to cash or bonds, and then missed out on the market rally in 2009. Aon Hewitt/Financial Engines claims that, overall, 38% of what they termed “non-Help” participants have risk levels that are excessive, while 18% of that group have risk levels deemed too low. Participants not using any of the three types of Help and those using one of the types of Help but failing to use it appropriately were categorized in the Non-Help group.
Aon Hewitt/Financial Engines’ report found that nearly one-third (30%) of 401(k) participants used professional “help” by the end of 2010, up from 25% in 2009. Plan design—and specifically the use of automatic enrollment into qualified default investment alternatives (QDIAs)—can have a significant impact on the use of that “help”, as well as overall plan health, according to the report.
According to the report, younger participants with smaller balances were most likely to use target-date funds, while younger participants with larger account balances preferred online advice. Near-retirees are most likely to use managed accounts.
“Near” and Dear
While Baby Boomers used professional investment help the most (44% of boomers did so, according to the report), older participants not using that professional “help” often made investing mistakes, potentially putting their retirements at risk. According to the report, non-Help participants of all ages had higher risk levels that those using it, while those over age 50 not using “help” often have what Aon Hewitt/Financial Engines said were inappropriate risk levels, with some having risk levels well above that of the S&P 500 index. Additionally, near-retirees not using investment help showed the highest incidence of panic during the 2008 downturn, cashing out of equities during the decline, which ultimately hurt their investment performance in 2009, according to their report.
“Due to their proximity to retirement and their lack of time to make up sudden losses, older participants have the most to lose during times of volatility,” explained Pamela Hess, director of retirement research for Aon Hewitt. “They clearly need additional help not only to protect their ability to retire, but to also generate reliable retirement income once they reach retirement.”