Study Suggests “Help” Matters Even More in Volatile Markets
September 26, 2011 (PLANSPONSOR.com) - According to a new report from Aon Hewitt and Financial Engines, 401(k) participants who use employer-provided investment help outperform those who do not – and by a gap that has been magnified during recent volatile markets.
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, i
n 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 inefficie
nt 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.