401(k) Investors Who Use Professional Help Outperform Those Who Don't

Investors who relied on professional help in the form of managed accounts and advice earned nearly three percentage points more than those that did not, according to an analysis of eight large defined contribution plans between 2006 and 2010 by Aon Hewitt and Financial Engines. The plans covered 400,000 participants with a total of $25 billion in assets.

The study found that in those five years, workers who received some form of professional advice experienced higher returns, averaging 2.92 percentage points, net of fees, than those individuals who managed their 401(k) on their own. According to Aon Hewitt and Financial Engines’ projections, a 45-year-old participant who invests $10,000 and receives professional help will have a portfolio valued at $71,400 at age 65, compared to $42,100 for someone who doesn’t get any help.

The study also found that 30 percent of participants were using help in 2010, up from 25 percent in 2009. It also found that younger investors with smaller balances were the most likely to use target-date funds (ouch - the most expensive and worst performing funds offered in plans - usually), and younger investors with larger balances preferred online advice. For those nearing retirement, managed accounts are the favored investment vehicle.

“This research shows the concrete value of professional retirement help during a variety of market conditions, and across age groups,” said Christopher Jones, chief investment officer at Financial Engines. “The help that employers have made available is having the desired effect of keeping participants in diversified portfolios and avoiding costly mistakes.”

The study also found that 38 percent of do it yourself participants have excessive risk levels, and 18 percent have risk levels that are too low. In contract, participants using professional help maintained more diversified allocations with appropriate risk levels, and also employed a rebalancing strategy.

“Exacerbated by continued market volatility, workers not using help are clearly making significant investment mistakes,” Jones added. “Their inefficient portfolios and skewed risk-taking is hurting results—and as the numbers show, the cost is very high.” Indeed very high! High enough to make a significant difference in how you live during your retirement.

CBlakely CFP, CTFA    09/30/11
Source: excerpted from  a recent article from Money Management Executive

Recession Par Deux?

Are we slipping back into recession? The answer may be yes and while it may last awhile, there is no evidence to support that this recession will be as catastrophic as the last one that began in 2007. Unemployment remains stubbornly high. Actually, it feels as if the new normal in HR jargon is increased productivity not new jobs. The 5-year Treasury rate is less than 1 percent, which is a recessionary signal. Real gross domestic product - the output of goods and services produced by labor and property located in the United States - increased at an annual rate of 1.3 percent in the second quarter of 2011, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent. The "second" estimate for the second quarter, based on more complete data, will be released on August 26, 2011. July economic numbers looked ok, but consumer confidence and retail sales are trending lower. Stock markets have been routed in August.



While both gold and Treasury securities have more room to run, buyers should hold off at current prices as both are overdue for a pullback. The ten-year Treasury yields about 2 percent currently. If you believe in mean reversion (I do) then the overnight funds to ten-year treasury rate spread currently at 2 percent, should fall to the long-term mean of 125 basis points. Since overnight rates are effectively zero that means there is room for the ten-year to rally.


There's no reason to be completely out of equities, but prudence suggests underweighting the amount of equities relative to what you would own in a cyclical bull market, which this assuredly is not (this mirrors recent suggestions regarding stock weightings in the portfolios we're managing).


For the DIY type, the equities you do own ought to be defensive in nature, not cyclical, they should have good earnings visibility and growing dividends and a decent dividend yield. These screens are readily available to retail investors.


The government, which has little in the coffers to provide a multiplier impact, could consider energy policy, which may be one of the last policy bullets available. A natural gas infrastructure build-out for example would put thousands upon thousands of Americans to work and could eventually lead to much lower energy prices for consumers (think of it like a tax cut) leading to a higher amount of disposable income.


Let’s hope we get a narrative from Washington or the private sector that trends this economy upward and to the right (that’s demand curve not political view).


CBlakely CFP®, CTFA 08-2011


Source: Bureau of Economic Analysis