New research shows that professional help aids – primarily target-date funds, managed accounts and online advice – improve participants’ investment performance. Unfortunately, only about one quarter of participants who had such a tool available to them actually used it. Perseverance pays off, however, as those tools that were in place the longest were the most successful.
Financial Engines and Hewitt Associates collaborated to find out what forms of professional help are ideal, and for whom, by analyzing a population of seven large plan sponsors from diverse industry segments representing more than 400,000 plan participants and roughly $20 billion in plan assets.
Notably, they found that the gap between help users and those who didn’t seek assistance was quite substantial, with a median difference in returns of 1.86% per year from January 2006 to December 2008. Putting this metric into context, if a participant who utilized professional help were to invest a lump sum into their defined contribution plan at age 45 and hold that for 20 years they would have about 47% more wealth over that time period than a non-user of professional help.
The reason for this discrepancy is that a non-user of professional help more often made poor decisions in regards to investment risk. Further, many were investing in allocations that were inefficient.
“The big thing that [plan sponsors] are fighting in terms of investment behavior is inertia. More and more sponsors are defaulting people into one of these types of help and allowing them to opt out if they want to. That seems to work pretty well; typically you’ll see 60% to 70% enrollment rates when you implement solutions in that fashion,” explains Chris Jones, Financial Engines’ Chief Investment Officer. Others are looking into building the selection of help into their open enrollment period.
When the research team investigated which type of participant preferred which professional help method, they found that younger workers – usually shorter tenure, lower balance, and lower salary employees – generally preferred target-date funds. When participants reached age 40, there was a shift toward managed accounts, perhaps appealing to a desire for investments more customized to their unique situation.
This method also tends to be more attractive to reluctant investors, who prefer to delegate the responsibility of managing the account, whereas online advice appeals to more engaged participants. Online advice was also utilized more by younger people, who tend to be more technologically savvy, with higher balances and salaries.
“While target-date funds have been added quite quickly by a lot of plans, there’s more realization that that [particular mode of help] is not going to get every participant where they need to be and that it’s not going to meet everyone’s needs; that there is a broader array of tools needed,” says Pam Hess, Hewitt’s director of retirement research.
“There’s no silver bullet here,” seconds Jones, “there’s no one approach that works for everybody and if you look at the demographic profiles of the different people using these three forms of help, they are quite distinct. That suggests that for plan sponsors to be successful they need to offer a range of different forms of help. You need to be sensitive to your [workplace] population.”
Further, the plan sponsor’s vision of the average participant has undergone a dramatic change: “We used to think that the average participant was an engaged, informed participant who was reading everything the HR department sent them. Now we know that’s not true. The average participant is generally unengaged and uniformed about the plan options and not paying much attention,” says Jones.
Many plan sponsors are wrestling with a new plan design so that the default behavior is likely to create some success.
Also, while many employers still worry about providing access to advice as a potential entanglement in fiduciary responsibility, the status quo in current years has been a perception that by not offering help, the plan sponsor may be taking on more risk by not taking on these methods of help.
Thus, the data suggest, plan sponsors increasingly owe it to their participants to provide access to a gamut of professional help for their defined contribution plan if they hope to uphold their fiduciary responsibility and to help transition their plan participants effectively into retirement.
