401(k) Tip: Do Less, Earn 2 Percentage Points More

Don't take this too personally, but the less you are involved with investment decisions for your 401(k) the better off you may be.

A new study of more than 400,000 401(k) participants in seven corporate plans found that the median return earned by individuals who sought out help in managing their 401(k) was 1.86 percentage points more than participants who made their own allocation/investment decisions.

The Help Line The study, a joint effort by benefit consulting firm Hewitt Associates and retirement advice firm Financial Engines, looked at participant use of three different forms of professional investment help:

  • Use of a Target Date Fund
  • Use of a Managed Account
  • Use of Online Advice
Only one-quarter of the participants studied in fact made use of one or more types of investment between January 1, 2006 and December 31, 2008. But that small minority outperformed the returns of the 75 percent that opted to go it alone. And the gap can have a significant impact on the eventual size of a nest egg:
"To illustrate the impact, compare the potential outcome of a Help Participant versus a Non-Help Participant after 20 years, where each invests a lump sum of $10,000 at age 45. Assuming each receives the median returns identified in this report, the Help Participant could have 47% more money at age 65 ($33,000) than the Non-Help Participant ($22,500)...The difference becomes even more dramatic if the initial investment is made at age 25. In this scenario, the Help Participant could have 103% more money at age 65 ($105,800) than the Non-Help Participant ($52,100)."
The Help advantage held up across all age brackets:

Source: Financial Engines & Hewitt Consulting




A Less-Risky Proposition
The big advantage for the Help-seekers: they had lower-risk portfolios and made better use of asset allocation across the available investment choices. One quibble I have is that the study doesn't seem to account for the fact that there is typically a cost to the managed account option, but that said, the cost would be far below two percentage points, so even those folks likely still came out ahead.

And while it is absolutely true that Financial Engines has a huge dog in this hunt-its business model is to provide said advice to 401(k) plan participants-the study confirms a lot of what has long been identified as problems with the 401(k). Namely, it's no easy feat ascertaining the right mix of assets for a specific investment horizon. And even if you do manage to master that step, sticking with a strategy through a volatile market (the study captures the run up to the October '07 market high and then the crushing bear market of 2008) is another high hurdle. A lot of the advantage of getting professional help is to provide discipline to stay the course and rebalance.

If you are a do-it-yourselfer, this study should at least encourage you to compare your investment choices against any free online allocation advice provided by your plan. If there's a wide divergence between what you're doing and what the advice tool spits out, you owe it to your future retirement security to question your allocation. That's cheap advice that could help boost your returns by a few percentage points.