Smaller 401k plans benefit most from advisor assistance and input, while the resources that larger plans can afford diminish the returns financial professionals provide, Morningstar reports.
While the differences associated with 401k plans that had an advisor varied by test, the overall analysis strongly suggests that smaller 401k plans—defined as those with assets from $1 million to $50 million—that have an advisor are doing better than those without,” David Blanchett, Ph.D., CFA, CFP, Head of Retirement Research at Morningstar Investment Management wrote in a report released Wednesday.
His research showed smaller plans with advisors “were more likely to offer a default investment, had a higher portion of their assets in target-date funds, had a higher likelihood of automatically enrolling participants, and were more likely to be demonstrating good fiduciary governance procedures.”
They also were more likely to not to offer employer stock the plan and not use proprietary recordkeeping investments.
Marginal impact
“The marginal impact of the plan advisor declined as assets increased for most domains,” Blanchett added. “Relatively few of the differences were statistically significant for plans with more than $50 million in assets. While we do not know why the advisor impact declined with plan size, our hypothesis is that these larger plans are more likely to have resources specifically dedicated to operating the plan.”
Smaller employers, which tend to have smaller 401k plans, may have to rely more on the plan advisor to ensure the plan is implementing best practices, he concluded. Therefore, “while the advisor may serve as the primary source of information for smaller plans, he or she could be more complementary to existing resources in larger plans.
“Overall, this research provides evidence that smaller 401k plans with an advisor are doing ‘better’ than those without,” but he noted more research is necessary.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
