Professional Advisors Prove Their Worth in 401(k) Plans

A recent study shows that plan participants could substantially improve their odds of investing success and their assets by making one key move: following professional advice.

The January 2010 Hewitt/Financial Engines study shows that investors who received investing education from a professional source improved their returns by nearly 2% after fees were paid. (Source: Help in Defined Contribution Plans: Is it Working and for Whom? , January 25, 2010, by Hewitt Associates and Financial Engines)

The study, which analyzed the returns of some 400,000 participants’ accounts, determined that investment help such as target date funds, online advice, and the offering of managed accounts enabled participants to make investment decisions with minimal effort or expertise. The study concluded that by simply taking advantage of such opportunities, a participant may add thousands of dollars in additional retirement savings over time.

The findings of this study affirm those of a Charles Schwab study which arrived at a similar conclusion — professional advice is well worth the incrementally higher expense and pays for itself in spades for plan participants.

The 2007 Schwab study showed that 401(k) participants who received professional assistance or advice in allocating their 401(k) assets earned a significantly higher rate of return than those who did not receive assistance. Individuals who availed themselves of financial advice or plan-sponsored asset allocation models received substantially greater returns than those who chose to go it alone. The returns differential in the Schwab study was even more compelling, with an additional almost 3% to 5% increase in returns in exchange for professional advice. (Source: Schwab press release dated Nov. 28, 2007, titled “New Schwab Data indicates Use of Advice and Professionally-Managed Portfolios Results in Higher Rate of Return for 401(k) Participants”)

"It's not surprising that people using advice are more likely to earn higher returns, but it is remarkable to see how much better they are doing," said Jim McCool, Executive Vice President of Schwab Corporate & Retirement Services.