Participants Who Utilize Professional Help Reach Better Retirement Outcomes

Today, more than ever, Americans are relying on their employer-sponsored defined contribution plan as a primary source of retirement income. It has become clear that retirement plan participants are investors who benefit from retirement help. In a landmark report entitled Help in Defined Contribution Plans: Is It Working and for Whom?, Hewitt Associates and Financial Engines collaboratively examined the topic of employer-sponsored professional help in 401(k) plans. The two companies explored answers to questions such as, “Which kind of help do participants use?” and “What was the benefit of using ‘help?’”

On average, across seven large plans with more than 400,000 participants and more than $20 billion in plan assets, approximately one-quarter (25.3%) of participants currently use at least one of the types of help offered within their retirement plans, while three quarters (74.7%) do not use help. The study covered a three-year period from January 1, 2006 through December 31, 2008—a unique time in American financial market history and thus a good ”stress test” for determining the benefit of help in a variety of market conditions. Given the widely divergent market returns over the three-year study period, Hewitt Associates and Financial Engines concluded that the median (50th percentile) annual return for “help participants” was almost 2% (186 basis points) higher than for “non-help participants,” net of fees. In addition, “help participants” experienced lower variability in their portfolios, which reduced risk.

General Board Offers ‘Help’

The General Board offers help to participants through its LifeStage Investment Management Service (LifeStage). This program is a convenient, one-step investment approach for managing retirement accounts. LifeStage develops a customized investment mix based on participant age and information in their Personal Investment Profile, such as risk tolerance and whether or not they will qualify to receive Social Security. To attain a target investment mix, LifeStage allocates account balances among five of the General Board’s investment funds.

Throughout their career and retirement, LifeStage continues to work for participants. It adjusts the investment mix as participants age or make changes to their Personal Investment Profiles. In addition, LifeStage periodically rebalances investment portfolios as necessary to maintain a target investment mix. These adjustments to the customized investment mix help to maintain an appropriate balance between equity (stocks) and fixed income (bonds) investments.

In addition, the General Board offers Ernst & Young Financial Planning Services at no cost to:

• active participants with an account balance,
• surviving spouses with an account balance, and
• terminated and retired participants with an account balance of at least $10,000.

To take advantage of this valuable resource, participants should call Ernst & Young directly at 1-800-360-2539 Monday through Friday between 9:00 a.m. and 8:00 p.m., Eastern time.

Study Finds Generational Differences

Both LifeStage and Ernst & Young’s advisory services are important resources for participants and represent two different types of help available. If we examine the Hewitt/Financial Engines findings in detail, having different types of help available was important. The type of help used by participants varied by age:

• Target-Date Fund users tend to be younger, with lower tenures and with significantly lower account balances, salaries and contribution rates.
• Managed Account users tend to be older and with longer tenures than participants using target-date funds or online advice, or those receiving no help at all.
• Online Advice users tend to be younger but with higher account balances, salaries, and contribution rates.

A key take away from this study is that participants may need to use different types of help at different ages. As participants age and grow their portfolios, their help preferences may change. For example, a 55-year-old with $40,000 is three times as likely to use managed accounts over target-date funds or online advice. This suggests that participants may need to re-evaluate their help choices as their lives and financial circumstances change.

Participants Using Help Are Better Off

In the Hewitt/Financial Engines study, “help participants” significantly outperformed “non-help participants” across all horizons in the data sample. On average, the median (50th percentile) annual returns for “help participants” were nearly 2% (186 basis points) higher than “non-help participants” across the three-year study period. The difference can have a material impact on a participant’s wealth accumulation. To illustrate the impact, compare the potential outcome of a “help participant” with a “non-help participant” after 20 years where each invests a single lump sum of $10,000 beginning at age 45. Assuming each receives the median returns identified in the chart below, 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).

“Non-Help Participants” Experience Higher Risk

Managing risk is an equally important component in investing. Comparing median risk levels among participants by age, “help participants” clearly followed an appropriate glide path in which risk started out higher early in their careers and “glided” downward as they approach retirement. In contrast, “non-help participants” almost always had higher risk levels and a minimal reduction in risk as they approached retirement. “Non-help participants” frequently had portfolios with inappropriate risk levels that negatively impacted returns. For example, they often were far too conservative early in their careers or took too much risk near retirement. For any given risk level, “non-help participants” frequently had inefficient portfolios, made poor asset class selections or selected poor asset combinations.

Predicting the Type of Help Used

According to the study, participants tended to be more likely to use target-date funds versus either managed accounts or online advice up to age 35. Starting at age 50, participants began to be far more likely to enroll in managed accounts. At the General Board, participants don’t have to choose—they can use both types of help in combination, at any age. Participants may enroll in the General Board’s managed account offering, LifeStage, for professional account management, as well as seek advice through Ernst & Young. Both of these options are customized to the individual, while target-date funds are not.

General Board Offers Customized Retirement Planning

Hewitt and Financial Engines’ findings acknowledge how participants can benefit from different types of retirement investment help throughout their careers. For example, at age 25, most participant risk preferences and life situations are relatively similar, making it easier to combine them into a single cohort based solely on age, as is the case with target-date funds. However, as participants age, their life situations naturally grow more dissimilar, requiring greater flexibility via customization. Among soon-to-be-retirees there is substantially greater difference in risk preferences due to an array of life factors. All in all, a customizable solution such as LifeStage, combined with professional advice from Ernst & Young, is an effective way to address these differences.