Study: 401(k) advisement is worth it

If you thought your 401(k) investments were a no-brainer--just pick a few funds and forget about it--think again.

A new study from Aon Hewitt and Financial Engines has found that people who sought advice on their 401(k) savings accounts had a median annual return of almost 3 percent higher than does who didn't consult an expert. That's including the fees they paid for the advice.

Three percent may not sound like much, but according to the Wall Street Journal, it adds up. An investor who put $10,000 into her 401(k) savings account at the age of 45 would have $71,400 after 20 years if they sought advice. Those who invested the same amount but made all their own decisions on the appropriate risk levels and other factors would have just $42,100.

Aon Hewitt and Financial Engines are in the business of making money by offering 401(k) investments advice, of course, but their findings are difficult to dispute. The study examined eight large 401(k) plans with more than 400,000 participants over a five-year period, and those who enrolled in a managed account or whose investments included a plan-managed target date funds--both considered looking for help--made fewer mistakes that would affect the overall performance of their 401(k) retirement savings account.

Mistakes people make

According to the Wall Street Journal, people who don't seek advice tend to stay in the same risky investments they made when they were younger. When you're 30, your portfolio can tolerate aggressive investing because if you lose money you still have many years to rebuild your savings accounts. But those who don't seek advice tend to stay in risky investments into their 60s, long after they should have retreated to safer investments that protect their nest egg.

The Journal also noted that unschooled investors will panic when the market drops and miss out when the market recovers.

According to the Associated Press, this type of behavior was exhibited in 2008, when the Standard & Poor's 500 index fell nearly 40 percent. Many 401(k) investors pulled out of stocks at that time, suffered damaging losses, and didn't returned to investing in time for the 26 percent recovery in 2009.

The help they need

Target date funds are accounts where investments--and the level of risk--is determined by how close the investor is to retirement. As a target date fund account holder gets older, more and more of her money is put into less-risky investments because that person would have fewer years of work and saving to recoup losses before reaching retirement age.

Some employers automatically enroll workers in target date funds.

The study also looked at managed accounts, in which a professional makes the investment decisions. Older investors were more likely to get this type of personalized help, and these types of accounts perform better than the other two types of assistance--target-date funds and online savings account advice, the study found.

The study also revealed that many older workers tend to hold too much of the stock offered by the company they work for, which puts them in risk of losing their job as well as their savings if the company goes belly up.

What's the moral of the story? Well, according to the advice-givers, the secret is to get advice.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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