Study: 3 Effortless Ways to Get Higher 401(k) Returns

A new study examines the role employer guidance plays in investment returns

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401(k) participants who use target-date funds, managed accounts, or online advice get better returns on their retirement investments than those who do not, according to a Hewitt Associates and Financial Engines study released today. The median annual return for 401(k) account holders using any of these forms of investing assistance was 1.86 percent higher than among investors who choose their own investments with no guidance from their employer, the study of 400,000 401(k) plan participants at 7 companies between 2006 and 2008 found. The improved return takes into account fees paid on the investments.

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Retirement savers not receiving investing assistance from their employer tended to take on more risk in their portfolios and failed to shift to more conservative investments as they approached retirement, the study found. About a quarter of the study participants used at least one type of investment advice offered through their 401(k) plan.

“Employers offer workers investment help like target date funds, online advice, and managed accounts because they help participants make smart investment decisions with minimal effort or expertise,” says Pam Hess, director of retirement research at Hewitt. “Simply taking advantage of them can equate to thousands of dollars in additional retirement savings over time.”

The researchers didn’t find statistically significant differences between the three types of investment advice studied. But they did discover that employee preferences for various types of investment help tended to vary by age. “To really help a participant do better they really have to offer multiple forms of help and people can transition to the help they need for that part of their lives,” says Chris Jones, chief investment officer of Financial Engines. Here is who tended to use each type of investment assistance.

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Target-date funds. Target-date funds were largely used by younger 401(k) participants with shorter job tenures, lower account balances, and smaller salaries and contribution rates. The typical participant with 95 percent or more of their retirement account balance invested in a target-date fund was 38 years old, had been at their current job about 4 years, and had a 401(k) balance of $6,295, the study found. Target-date funds are a common default investment for companies that automatically sign up their workers for 401(k) plans. “About half of the people in the target-date fund pool were defaulted by their employers,” says Hess.

Managed accounts. Retirement savers who chose managed accounts tended to have the longest job tenure and were the closest to retirement. The average age of workers investing in managed accounts was 49 and they had an account balance of $45,816.

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Online advice. The average retirement saver who sought investment information online was 41, had about 9 years of job tenure, and an average balance of $69,057. “As people get older their life circumstances become more complex and that’s where online advice can be helpful because there is a higher degree of personalization,” says Jones.

The study didn’t examine the investment returns of retirement savers who met with a financial adviser in person. “It’s just not cost affective [for employers providing investment advice] to have a sit down with someone who has a $50,000 account,” says Jones.