Bigger isn’t always better, especially when it comes to companies that provide 401(k) plans to their employees.
A new survey by Judy Diamond Associates finds that smallest 401(k) plans outperform the largest plans when both investment returns and participant engagement are factored in. One thing sets them apart: education.
On Judy Diamond’s 100-point rating scale, plans with 10 or fewer participants had an average score of 63.8, whereas the plans with 100 or more participants scored 52.3.
Judy Diamond, a research firm that provides 401(k) plan data for advisors, scored the plans using an algorithm that compares each plan to similar plans nationwide on measures like investment returns, plan participation rates, contribution levels and certain signs of distress.
The giant plans, with 500 or more participants, covered 73.4% of all participants, but they only represent 2.9% of plans. Micro plans with 1 to 10 participants comprised 1.4% of participants but include 37% of all plans. The numbers basically show that the smaller groups have access to stronger plans.
Is this a revelation? Not to Jay Wells, an accredited investment fiduciary at Foresight Wealth Management who has been an advisor for the past seven years. “The results don’t surprise me at all, and the reason is because education is the biggest factor on how well an employee does on a plan,” Wells tells ThinkAdvisor. “With a larger plan, it’s hard to manage that; in small company you’re able to sit with the employees one-on-one.
“Too many people get hung up on quality of investments and fees, and while important, education is a big part of the success,” Wells adds.
Advisors to the biggest plans need to keep looking for ways to improve performance, said Eric Ryles, managing director of Judy Diamond Associates, in a press release. “By increasing automatic enrollment, restructuring their company match, and increasing participant education, a small portion of large plan sponsors can have a huge impact on the way we save for retirement,” he said.
JDA provides data for advisors, and Ryles says that many advisors question the best way to educate people. He believes that technology is a useful tool, but personal advice is still best. “To have someone on site, at least once a year who can be available to speak with helps it becomes more cost prohibitive,” he said.