Survey Demonstrates Better Results for 401k Participants Using Advice


A recent study illustrated finds that 401k participants using advice are better diversified and have larger balances. Here are some interesting findings of the survey:

  • Improved Diversification – Participants held 74% more funds in their portfolio (8.67 versus 4.98 funds)
  • Improved Performance – 3 Year Annualized Return was 2.67% better than do-it-yourself investors
  • Larger Balances Seek Advice – Average balance of participants using advice was $107,558 versus $44,178 of do-it-yourself investors

These results are very similar to our experience with 401k investors. We find that participants using advice (or managed accounts) are better diversified and experience better downside protection due to improved risk management. Additionally, the larger the balance, the more likely the participant is to seek advice.

“The numbers tell us that participants with larger account balances are the ones who seek out advice, which helps them continue to move ahead,” said Kelli Send, Senior Vice President, in a press release. “However, the study results argue advice for all will improve diversification and performance.”

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  1. michele varnhagen on February 24, 2011 at 12:33 pm

    doesnt the subject of the pros and cons of investment advice deserve more thoughtful analysis? before “experts” cavalierly promote “advice”, dont they need to be honest about who is qualified to provide investment advice. and make clear that advice for most of the population would be most cost-effective if it primarily recommended the Vanguard or comparable low cost TDF or balanced fund.

  2. Chad Griffeth on February 25, 2011 at 2:28 pm

    The pro’s and con’s of 401k advice…I would love to hear more of your thoughts on the those. I can see con’s if the advice is not delivered under a fiduciary contract, is not effectively monitored by the plan sponsor’s due diligence efforts including the cost of the advice if paid for by the participant or plan sponsor, as they must be deemed reasonable, etc.

    The qualifications you reference are very important, as even though I have been in this niche of the industry for 7 years, I wouldn’t find myself to be qualified to deliver investment advice relative to those that we have actually deliver it. Should the advice come from a CFA? Other qualifications?

    As for your thoughts on Vanguard, we too believe fees are critical, but simply advising the participant into the lowest cost funds in the plan does not necessarily mean they will have a risk appropriate asset allocation. Many other factors must be considered. Thoughts?

  3. Elmer Rich on March 2, 2011 at 10:51 am

    Oh crud, was hoping for independent study. Surprise — the people who did best were the ones who used (paid?) the people who did the study. Hmm. Do we have to explain why these results are suspect?

  4. Ross Marino on March 2, 2011 at 10:52 am

    Fortunately, other studies draw the same conclusion. Advice helps.

  5. Larry Steinberg on March 2, 2011 at 10:57 am

    I would like to know how they define advice and how they determine who has received it? I do the asset allocations for my private clients whose 401k plans I don’t manage. Does that get picked up as advice, or is it only if the employer pays for the advice or allows the employee to buy it through the plan?

  6. Elmer Rich on March 2, 2011 at 10:58 am

    It would be great to see a consortium do an independent study. However, then there is the risks the results won’t say what everyone wants. This happened to us and we had to bury the study!

    So let’s unpack this a bit. Let’s say the dependent variable is 3 year real returns, after fees. ??

    So the equation could look like: age+education/reading level+employment level+wealth+advice yes or no+…what else? (the independent variables)….. = real (inflation adjusted) returns – fees = results.

    We should hit google since some academics have likely done this.

  7. Chad Griffeth on March 2, 2011 at 10:58 am

    Just to clarify some of your questions, I spoke with the firm first hand. They did a 25% random sampling of their clients, comparing those that used their advice versus those that did not. They even used the provider’s performance so to ensure clear returns from a third party. Additionally, to speak to Elmer’s concern, it was a mix of participants for whom either the plan sponsor or participant paid for the advice. It’s not independent, but being an independent participant advice firm, I can tell you no one is calling us to perform such studies. It’s a ‘given’ from the advisors and plans sponsors whom have a working knowledge of their participant base that I interact with that advice is needed badly, as participants are not doing a good job of managing their portfolios. It’s simply a matter of how to deliver that advice. Nor should they, they already have one full time job. I hope this answers everyone’s questions.

  8. Chad Griffeth on March 2, 2011 at 10:59 am

    Good question, Larry. As you might guess, there would be no way of the firm knowing if any participants received and implemented advice received from advisors not affiliated with the 401k. However, the performance of that portfolio could have been included if included in the random sampling.
    For the record, the firm is 100% RIA and serves as a fiduciary to the plan, with no BD affiliation.

  9. Elmer Rich on March 2, 2011 at 11:29 am

    It is very tough to draw conclusions on behavior, interventions and outcomes — in any profession. Doctors and teachers are going through some real soul-searching around this now. “Evidence-based” is the new standard.

    Also, as pointed out, there is “many a slip ‘tween” what’s agreed to in a meeting and actual behavior — of both advisor and client.

    For good or ill, the standards for these kinds of studies has gotten much higher. Plus, a fiduciary perspective would suggest that data-based claims of effectiveness be “arms length” from any material benefit.

    For example, there is good research that mutual fund performance is largely luck/random — especially outliers. Many medical procedures are now being revealed to be placebo effects.

    Behavioral econ has also proven that most of our certainty about “givens” are poorly supported by evidence — but they sure feel right, at the moment. Our minds trick us and see what they want to project – “see.” Especially where paying our bills is involved.

    No one will pay for the kind of independent, double-blind and scientifically rigorous studies needed to make these kinds of claims because the results may directly challenge or call into question material benefits of many.

    Truly independent third-parties, without material benefits are best. Usually, that is our government or academics. For example and advisor could team up with an academic, but they may not like the results and if the results contradict accepted wisdom — they will be ignored.

    For example, the top economists studying active vs. passive investing find their results and studies — which are technically very good — routinely ignored and they have been for decades.

    We are not cynical or critical but behavioral econ has taught us to respect our brain’s default modes for dealing with information and facts that contradict what we already believe — and get paid for.

    It would be fun to construct a controlled experiment — but no one will fund or likely pay any attention to the results unless they confirm the status quo. Status quo bias always rules.

    Suppose one could say we need to apply fiduciary standards to the industry research as well.

  10. Chad Griffeth on March 2, 2011 at 11:30 am

    Great points. I would not pretend to understand all of the variables that would need to be controlled for such a study, and I also understand agree with your points regarding the behavioral bias and funding limitations for such efforts.

    However, I also find that many people scratch their heads saying “someone paid money to find that out?” Myself included. I completely appreciate the challenging of precedents that are wrongly assumed to be true. However, the need to confirm with 100% certainty that participants are not as effective at building portfolios over professionals, especially those with CFAs, can seem a bit tedious in my mind. Instead, simply using some samplings of a company’s 401k plan to determine whether the portfolios of their participants make any sense can often give the person researching quite a bit of evidence.

    I guess that’s the question: Should a plan fiduciary use practicality when assessing their participant’s usage of tools and abilities to effectively manage their retirement?

  11. Elmer Rich on March 2, 2011 at 1:13 pm

    This is a good discussion. No, there will never be “perfect” information and certainty. Nor is there ever complete fiduciary independence. As pointed out — day by day we are forced by circumstances to do the best we can.

    Standards of evidence have increased along with the importance of claims and professional actions.

    What we seem to be seeing, however, is increased seriousness in addressing these matters and trying to do our best work. Reasons include:
    – The Meltdown taught us how harmful bad actions can be and how pervasive are our brain’s mistakes in thought and action
    – The large and growing balances in peoples retirement accounts, and intergenerational implications. Beneficiaries are more litigious.
    – The largest, healthiest and longest-lived generation in history reaching retirement — around the globe
    – Dramatically increased transparency and technological communications and tools for addressing issues. For example, we say the best incentive for fiduciary practices is that if you don’t, it will likely be revealed and sent around the web — in seconds!

    We professionals stand in the center of the whirlwind with all asking us for guidance. That’s a very tough role. Also rewarding.

    We teach our clients that they aren’t expected to always be right, but for being experts and bringing an expert process for getting close to “right” (or “better”) for specific problems clients face. A lot of that is critical thinking and helping clients identify and avoid their own thinking-acting mistakes — sometimes.

    It is a very dynamic process with new targets popping up all the time and all targets moving around — a lot.

    Bottom line — we all need an independent, evidence-basis for our professional behaviors. Not perfect but the best we can find, understand and communicate.

    The fiduciary standard is,as we have been taught, is for a prudent “man” – not scientist, academic or “expert.”

  12. Chad Griffeth on March 2, 2011 at 1:22 pm

    I agree with your bottom line, understanding that we can only examine the data that is available. I think the analysis and questioning can naturally lead fiduciaries to review their participants’ abilities and behaviors with a very simple concise review of their portfolios. When the plan sponsor then does its due diligence of advice solutions, they can make their own process-based decision…as fiduciaries with the ultimate goal of providing their participants the tools they need to be successful.

  13. Elmer Rich on March 2, 2011 at 2:00 pm

    We are very strong proponents for getting the people on the front lines MUCH more support and resources — mainly plan sponsors and advisors. Advisors and sponsors are treated like mushrooms.

    We also propose that professionals and sponsors not either promise nor be held responsible for outcomes – but are responsible for putting in place and managing professional processes and systems….and be quality control experts on tools.

    Both advisors and plan sponsors are unfairly picked-on and demonized. It’s like blaming doctors because people get sick.