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Professional 401(k) Advice: Worth the Cost?


In recent years, 401(k) participants have embraced products and services that include professional investment advice. Among the most popular options: Target-date funds, online advisory services, and managed accounts, which allow participants to hand the management of their 401(k)s to professionals. As of January, 2011, some 30% of 401(k) participants were using one of these services, up from 25% in 2009.

Given that participants pay extra for these services, is the advice worth it?

According to a report published today, the answer is yes. Sponsored by 401(k) administrator Aon Hewitt and managed accounts provider Financial Engines, the report concludes that between Jan. 1, 2006 and Dec. 31, 2010, those enrolled in target-date funds, managed accounts, or online advisory services earned an annual average of 2.92 percentage points more, net of fees, than those left to their own devices. (As a provider of managed accounts, Financial Engines has an obvious bias in favor of managed accounts. Aon Hewitt, however, has nothing to gain from 401(k) participants’ use of target-date funds, managed accounts, or online advice.)

“Most people, when left to their own devices, are not doing a good job of managing risk and return,” says Chris Jones, chief investment officer at Financial Engines. “Getting help can make a substantial difference in retirement outcomes.”

“Across all age groups and a range of market conditions, participants using help experienced higher returns with lower risk than those not using help,” says the report.

In 2009, when Aon Hewitt and Financial Engines first conducted this analysis, the companies found that target-date funds, managed accounts, and online advisory services added 1.86 percentage points per year, after fees, to the returns of 401(k) participants. That analysis was limited to 2006 to 2008.

Since then, those receiving help have fared even better. The reason: Unlike those who panicked and fled stocks in 2008, those who stuck with their long-term asset allocation plans were able to benefit from the S&P 500’s 26.5% gain in 2009 and its 15.1% rise in 2010. Moreover, their portfolios were less likely to become overloaded with company stock, which can be risky, given that single stocks tend to be more volatile than diversified portfolios.

“Those getting help maintained the type of diversified portfolios that were appropriate for their time horizons,” says Pamela Hess, director of retirement research at Aon Hewitt.

For those near retirement, the advantages of using help were particularly pronounced. “Near-retirees not using help showed the highest incidence of panic during the 2008 downturn, with trading activity that led to significantly worse investment performance results in 2009,” says the report.

According to an Aon Hewitt survey of over 500 employers with 401(k) plans, 81% are currently using target-date funds, up from 52% in 2007. About 30% offer managed accounts, up from 11% in 2007.

Which type of 401(k) help is the best? “The differences (in returns) are very small,” says Mr. Jones.

According to the study, younger 401(k) participants tend to favor target-date funds, which allow investors to pick a fund with a target date that matches their projected retirement year. Over time, these portfolios become more conservative as the manager reduces stock holdings and increases bond and cash positions. Older workers, on the other hand, tend to gravitate towards managed accounts, which allow for a somewhat more customized approach. Online advice typically appeals to do-it-yourselfers.

The survey included data from eight large 401(k) plans, with more than 425,000 participants and $25 billion in assets.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.