Employees with 401(k) or other defined contribution plans are showing less interest in managing their investments, and more interest in having professionals do it for them, new data from Vanguard shows. But the trend isn’t likely to benefit financial advisors, at least in the short run.
In its recently released annual report, How America Saves 2012, Vanguard said that last year 33 percent of participants in its 3.4 million defined contribution plans were invested in professionally managed allocation programs, up from just 9 percent at the end of 2005.
Target date funds—baskets of securities whose asset allocation is built around the expected date of the owners’ retirement—are leading the growth; 24 percent of people in DC plans were in a single target date fund, while 6 percent were in a single balanced fund, and 3 percent were in a managed account advisory program.
Part of the reason for why managed solutions have grown so sharply over six years is the growing practice among employers to automatically enroll new workers into 401(k)s. TDFs have largely become the investment option of choice for plan sponsors when they put workers into those plans.
Some observers view the growth of TDFs as a positive response to a long-standing criticism of 401(k)s—they force investment decisions on people who may lack the expertise to do it well.
The hunger for advice is manifesting itself in other venues. Fidelity Investments said that last year it saw a 45 percent increase in the number of employees in 401(k)s who used online webinars on investing; the number of participants who attended workplace workshops was up 20 percent, it added.
The share of plans that offer managed account advice is low—just 14 percent at Vanguard. And that advice already is offered through Vanguard financial planners or through Financial Engines, the third-party advisor founded by Nobel laureate Bill Sharpe.
And plan sponsors sometimes are loathe to bring in outside advisors, since the sponsors are required to vet the people who provide such advice because they have a fiduciary responsibility for the retirement plan.
But advice matters, Financial Engines says in a report last fall that it prepared with human resource consultant Aon Hewitt. Investors in 401(k) plans who obtained help—either by investing in TDFs, or using managed accounts or online advice—on average realized returns of nearly 3 percentage points greater than those who didn’t, net of fees, the report said. It reviewed workers at eight companies over a five-year period, through 2010.
D2 Capital Management offers 401(k) review consultations for individuals with defined contribution plans.
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