Does Your 401(k) Need Help?

Instead of a 5% annual return on your 401(k) would you like to get an 8% return? That's the advantage employees earn for getting help with their 401(k) instead of figuring it out themselves, according to a new report by Financial Engines Financial Engines and Aon Aon Hewitt.

The report looks at how 723,000 workers at 14 large U.S. employers handled their 401(k)s between 2006 and 2012 and found that those who used target date funds, enrolled in managed accounts or accessed online advice through Financial Engines had median annual investment returns that were 332 basis points higher (net of fees) than workers who didn't use one of those three methods of help.

What difference does 332 basis points make? If you started investing at age 45, it would translate into 79% more wealth at age 65. In other words, say you put $10,000 in your 401(k) at age 45. For the worker who took the hand-holding approach that $10,000 could grow to $58,700 at age 65 compared to only $32,800 for the worker who shunned help.

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If your goal is a fat 401(k) and you're afraid you can't get there on your own, go for help. (Photo credit: Wikipedia)

All 14 companies in the report offer all three kinds of help, but just because an employer plan offers help doesn't mean employees use it. The study broke down what percentage of employees use each type of help: 16.9% of employees used target-date funds, 12.1% used managed accounts, and 5.4% used online advice.

But measuring by assets shows a different story: 9 out of 10 401(k) dollars impacted by help were in managed accounts or online advice. Managed account users had an average contribution rate of 7.5% and median account balance of $44,216. Online advice users had the highest average contribution rates (9% of salary), the highest account balances ($72,732 median balance) and the highest salaries.

Target-date fund users tended to be younger, probably because they are being put in the funds by default when automatically enrolled in their workplace retirement savings plan. The target-date-fund help participants (those who had at least 95% of their 401(k) in no more than two target-date funds) had an average age of 38 and a median balance of only $3,972. They had the lowest average salary deferral rate – 4.4% — of any group including non-help users who stashed away 6.6% of their salaries into their accounts.

Many employees aren't using target-date funds as one-stop investments as designed. More than 60% of employees with target-date funds held only part of their money in target-date funds, with the average allocation a mere 35%. "These aren't near misses on usage," says Wei-Yin Hu, vice president of financial research at Financial Engines.

This matters in terms of investment returns. Employees who were only partially allocating to target-date funds (from 2010 to 2012) earned median annual returns more than 2% lower (net of fees) than employees using help appropriately.

Another troubling finding: Near retirees (workers 50-plus) had the widest variability in risk levels, with some having risk levels above that of the S&P 500 Index (100% in large cap stocks). "They're pulling the goalie, trying for a desperation move," says Rob Austin, director of retirement research at Aon Hewitt.

The safer approach: start investing early and don't be afraid to ask for help.