The year was 2005 and I was purchasing my first home. It was a small modest ranch with three bedrooms, 1 bathroom and an attached one car garage with a nice fenced in backyard. That fenced in backyard was key because my wife and I, as most newlyweds do, bought our first puppy together, a boxer named Sammy. Sammy being all puppy, loved to run around, so we thought we’d install a doggy door into the garage, which was the entrance to the fenced in backyard, so she could run through the backyard all day and come into the garage when it was too hot or cold outside. My handy brother-in-law came to help me cut the doggy door in the wooden garage door, since it involved using a jig saw, which was something I had little experience doing. We put together the saw; I began cutting and without hesitation I began moving the saw in a manner it was not designed to go, all the while my brother-in-law gently reminding me, “I’m not sure you’re supposed to bend the saw like that, bro”. Eventually, as the cut was being made, the blade of the saw snapped, shot through the air, right past mine and my brother-in-law’s head and lodged itself into the wall… pretty deeply, I might add. My life flashed in front of my eyes. It was in that moment that I realized, sometimes it is better for your health, the health of your family and your own sanity, to hire a professional for tasks you have little desire to do or expertise in.
In the same way, your largest financial asset, other than your home is typically your employer sponsored retirement plan such as a 401(k), 403(b), Deferred Compensation or other retirement asset. This is an asset you may be nervous about managing and investing on your own and thus may want to seek the help of a professional, however most plans do not provide professional guidance and help within the plan. (CHEAT – Skip to the end to learn about how regardless of your plans commitment to help, Whitaker-Myers Wealth Managers can now provide this help to you). According to a recent study by Aon Hewitt, a provider of human capital and management consulting services with 500 offices in 120 different countries, you would be correct that seeking help with your retirement accounts has produced superior results, thus additional money available to you, when you retire. Their study showed that the averaged participant that sought and received help within their retirement plan had an outcome that was 3.32% better, than their peers who sought no help with their investing strategy. Makes sense, right? My time is limited, especially the more demanding my job is, thus someone who has a 24/7 job of managing, reviewing and investing my retirement assets, is probably going to be in better position to help create improved outcomes and performance within my investing strategy.
Their study which was done from 2006 through 2012, studied 14 very large companies defined contribution plans (which basically means, 401(k) plans). Those plans had 723,000 participants who held around $55 billion worth of retirement assets. One question, you might be asking is, “Why do this study?” Perhaps to cater to Financial Advisors? Considering the fact that Aon Hewitt competes with Financial Advisors for many of these large retirement plans, that wouldn’t make sense. Rather, their intention in doing this study was to encourage Plan Sponsors (people who are in charge of retirement plans at these large companies) to provide help to their participants as opposed to forcing them to make retirement investment decisions on their own with no professional help, as many plans unfortunately do. The results were quite incredible.
Before we actually discuss the results, we should quantify what AON meant when they said an employee “received help”. They categorized these 401(k) participants into four basic groups:
Target Date Funds – These are mutual funds with a year within their name. That year quantifies the estimated year of retirement for the client and the investment strategy is managed, to be appropriate for someone retiring in the year of the fund. For a participant in the study to be classified as using target date funds as help, they needed to have 95% or more of their assets invested in the target date fund. Our own Financial Advisor, Griffin Lusk, recently wrote an article about how once you get close to retirement target date funds can provide “negative compound interest” when in a withdrawal mode, thus typically not a good option once you are within 5 years or closer to retirement.
Managed Accounts – This is where a participant would be paying a third-party provider, such as Whitaker-Myers Wealth Managers to manage their account. Essentially, they are outsourcing something they are not good at or have little expertise in, to a professional.
Online Advice – Here participants were able to pay for one time advice on asset allocation and investment strategy within their plan, however the execution was up to the participant. The advice had to have been given to the participant within the last 12 months.
Non-Help Group – Here participants received no help, nor were invested in the target date funds. This group was then compared against the other three groups to try and quantify the value of advice to plan participants.
Results – Performance
The group of participants that received some form of help – target date funds, managed accounts or online advice, outperformed the group that received non-help by an average of 3.32%. The results then broke out the outperformance by age groups, looking at participants in five year increments, starting at 25 – 30 and going all the way through participants in their 70’s and the outperformance ranged from 2.13% to 3.70%.
This amount of out performance creates a very large difference over your working lifetime, perhaps meaning the difference between retiring early and retiring later. The study gave an example of someone receiving help at age 45. If they were to retire by 65, the standard retirement age because of Medicare health insurance eligibility, the participant receiving the help would have had 79% more than the participant that would not have received help.
Here is another example to ponder. Let’s say you graduate college at age 25 and begin working with a salary of $50,000 and decide to contribute 15% of your income, with a 4% match from your employer to retirement, all the way until age 65. Additionally, as Dave Ramsey says, let’s assume this person is a loser. A loser in the sense that they never get a raise over their lifetime thus their savings rate of 15% of $50,000 ($7,500) never changes. At an average rate of 7% the participant would have approx. $1.5 million by age 65. The person that received help, according to the AON study earning about 3% better, would have generated a 10% return, which would have netted them approx. $3.7 million by retirement. That’s an incredible $2.2 million improvement AND the person getting help, just as my example with our doggy door, saved themselves the time and hassle of something they didn’t have passion for nor had an expertise in. Bonus, they probably built a great friendship and relationship with their Financial Advisor, as many of us do, with our clients.
The number one reason why a participant would see improved performance within their portfolio with the help of an experienced and knowledgeable advisor is a result of asset allocation. Participants in 401(k) plans tend to chase the returns of a few mutual funds in their portfolio, that have the largest amount of performance, which tends to be the lowest performer over the next group of years because of mean reversion, which is to say, the best becomes the worst and the worst becomes the best. That is why, when we manage a 401(k) plan, we break things out into the four basic categories Dave would recommend, Growth, Growth & Income, Aggressive Growth & International. Then from there we allocate capital to the best performers in each category, knowing that some categories, such as Aggressive Growth and International can even have subcategories you should be allocating dollars to. We never let near term underperformance, shift us out of a certain category because just about the time you do, the market will punish you for that decision.
Results – Risk
Participants that did not seek help also struggled to have appropriate amounts of risk within their portfolio. The risk distribution was the most inappropriate for those near retirement, which is scary considering the fact that those participants had the least amount of time to fix problems, if the additional risk created volatility issues, they were ill prepared to handle. According to the study about 60.5% of non-help participants had inappropriate levels of risk with about 2/3 of those individuals caring too much risk and 1/3 caring too little risk. The appropriate amount of risk was determined by using the applicable target date fund for their age and baselining their portfolio against the target date fund.
Results – Help Usage is Growing
During this study, of the 723,000 participants, about 1/3 of them were using some form of help, as outlined above, which was an improvement over the last time AON ran this study. 16.9% of the help given was through target date funds, 12.1% was through managed accounts and 5.4% was given through online advice. When viewing usage through the amount of assets dedicated to each level of help an interesting stat emerged. Only about 3.7% of assets were provided help through target date funds, while 15.2% were provided help through managed accounts and 11.4% through online advice. This basically showed, the more in assets that a participant had, the more complex their situation was and they were more likely to seek out help.
Whitaker-Myers Wealth Managers 401(k) Managed Account
My purpose for writing this article is twofold. First, just as I nearly twenty years ago, almost created a disastrous outcome for my brother-in-law and myself by trying to do something I was ill-prepared to manage myself, Whitaker-Myers Wealth Managers wants to ensure we consistently educate you on the ways your financial future can become more secure. Our firm mission statement says that we, “strive to have the heart of a teacher, so that we can empower and equip people with the knowledge and tools they need to be able to achieve their goals and feel confident about their financial future.”
Second purpose being, in March of 2022, we rolled our ability to help our clients manage their 401(k) plans, regardless of where they’re held, through a third-party technology firm, that provides us compliant access to your company held plan, for investment management purposes only! Want us to change your beneficiary, contribution rate, personal information or Roth vs. per-tax allocations on the plan? We can’t do that. However, if you’d like us to be able to make changes to your investment strategy, use our technology firms risk management software to daily watch the portfolio for drift within the investment strategy, be notified when your plan makes investment changes and rebalance the portfolio on a consistent basis, which has proven to manage risk and add return, this service is for you. Reach out to your Whitaker-Myers Financial Advisor today to learn more and begin allowing us to service your 401(k) account.
Watch this video of my friend Dave Ramsey discussing what the number one mistake people make, when hiring a Financial Advisor.
Making it better – every day!
AON HEWITT STUDY: 401(K) PARTICIPANTS RECEIVING HELP IMPROVED PERFORMANCE BY 3.32%
March 28, 2022
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