Do Advisors Improve 401(k) Plans?

Abstract

Research on the impact of 401(k) plan advisors has focused predominately on the investment menu or participant-level allocation decisions. This research takes a more holistic perspective and reviews the differences between advised plans across a variety of domains with the use of data from 5500 Employee Benefits Security Administration filings from 2016. Advised plans with assets from $1 million to $50 million were clearly performing “better” than those without, and the advisor impact generally declined as plan assets increased. Although this research suggests advisors are adding value, correlation is not causation, and additional research on the actual impact of 401(k) advisors is warranted.

TOPICS: Retirement, manager selection, performance measurement

Key Findings

• ▪ Operating a “best-in-class” 401(k) requires a level of knowledge that many plan sponsors may not have; therefore, hiring an advisor or consultant is one way an plan sponsor can attempt to run a more effective 401(k) plan.

• ▪ Existing research on the potential impact of 401(k) advisors has generally focused on investment-related outcomes, this paper takes a more holistic approach, exploring differences in advised plans by default investment availability and usage, plan governance, the adoption of automatic enrollment, the inclusion of employer securities, and fund diversity, in addition to the more typical investment-related analysis.

• ▪ The analysis suggests that 401(k) plans with advisors, especially smaller plans, are much “better” than those without. The marginal impact of the plan advisor declined, though, as assets increased for most domains considered. While correlation isn’t causation, overall, this research suggests plan advisors do improve 401(k) plans.